Silver Fundamentals And Rational For Increasing Value

January 6, 2014

There is a dying amount of square hectares of accessible mineable ground in the modern world. From the Rocky Mountains to Zacateca or the Antamina mines to Northern Ontario there remains precious little raw real estate which has not been searched with all possible care for silver bullion.  Prospectors' holes dot the mountains and the barren landscapes of almost every major country and upon each formation that can possibly be thought argentiferous are the marks of gunpowder, shovel heads, drill holes and finger prints; and some might even suggest tears of failure. As a result of an unremitting millennia or more of mining, future production of silver bullion will come predominantly from mines or districts of the world now known.

However, not only are many of these production areas, including those among the richest, exhausted; but the ones still productive must henceforth be worked at a rapidly increasing price owing to increasing mining costs. In other words mines have been skinned and close to surface supplies of silver taken. As a result it is now widely known that some 70 percent or more of silver coming from the ground is coming as a result of mining for other metals. Not the wonderfully shimmering metal silver itself.

Today, with modern mining methods, the majority of all ore that runs less than 40 ounces per ton is usually classed as low grade. All ores running over 100 ounces are high-grade ores. All but universally silver ores grow poorer as the mines go deeper. As a result silver ore that runs up to 5 ounces per ton may be considered good, especially if other metals supply credits with it. Unfortunately most of the richest silver ore bodies have been worked out. 

If you want to understand mining better please see the reference base known as “Wikipedia”.  It is a bastion of knowledge and will give you a good primer on many mining related topics.  However for this essay I would like to focus more so on the here and now when it comes to my favourite precious and, as I see it, treasurable metal silver.

To understand what the laymen, novice or professional silver investor has in store for himself you must first understand that bullion is a rudimentary commodity traded in the precious metals market. By adding bullion in general, and silver in particular, to a portfolio of stocks, bonds and mutual funds, an investor is introducing a tangible or real asset to the asset mix. This increases the degree of diversification and protects the portfolio against instabilities in value of any one asset type.  In silver, it also gives an investor a real opportunity to own an undervalued, underappreciated, maltreated and misunderstood asset that is set to flourish well beyond even the next decade.

Silver, more than other precious metals, has significant demand rooted in sectors as diverse as imaging, electronics, jewelry, military, coinage, superconductivity and energy and water purification. For this reason, silver is no longer known as just a precious metal, a store of value, a work of art or an industrial metal. It is all of these. Today silver is not just indispensable it is obligatory, working all around us to improve the quality of our lives.  But it is not without its fair share of controversy.

When Guildhall Wealth Management (The firm where I work) opened its doors in 2002 silver averaged about $4.50 per ounce.  Although I did not join the firm until 2004, the silver market had already been well on its way to being publicly criticized for having unfair trading patterns. It was also censured, and to this day continues to be, for a having a cast full of sordid quasi villains and institutions at the helm overseeing what many have considered a profoundly manipulated market just like gold, silver’s big brother. 

When I began to look over near-term historical data it was clear, even back then, that the silver market was incredibly paper leveraged, controlled ultimately by very few people or institutions and would represent the chance of a lifetime if you were smart enough to recognize what was beginning to happen. 

There are many controversies in the silver market.  I am not here to shed light on all of them or dispute all of them but I have witnessed a couple.  Cheating longs out of call option premiums on silver, options which have and continue, on occasion, to expire worthless due to avalanches of naked shorting is one that I have witnessed.  Aggressive cash premiums being paid to settle in lieu of delivery of a contract is another.  And the rip-off of silver by-product of polymetallic and gold miners with the buyers getting hundreds of millions of ounces per annum at theft rates have been just a few of the most public problems that have plagued silver investors today.

Despite all of this I have witnessed a market which has had no less than four major peaks; peaks which have taken the shiny metal as high as $49 per ounce in 2011.  These peaks have been followed by long drawn out periods of consolidation. Where loose leaves have been shaken from the trees leaving a very large number of investors, disinterested, embittered or lacking the quintessential “brass balls” to get off the fence.  This is where, at the tail end of 2013, we currently find ourselves.

I do not want to have a long drawn out discussion about the intrinsic worth of silver.  You can read the likes of Ted Butler, David Morgan, John Embry, Eric Sprott, Doug Casey and many other of my pseudo-colleagues in the analysis field to get a better understanding of what has transpired historically, why it has happened and what their machinations are on what the future holds for silver pricing.

I would rather attempt to shed some light on a couple of factors that I feel offer a better explanation to the laymen investor who has been day dreaming about joining the physical bullion investment ranks but lacks the necessary motivation to do so. 

Four Fundamentals to Drive Silver Prices Higher

As a nine year analyst of this market, as of this month, I believe there are no less than four major fundamentals at work that can explain the precious metals markets and in particular silver the best. I would like to discuss them briefly but focus more so on the fourth one.  Each has had an unequivocal impact on pricing thus far in this secular bull market for precious metals and each fundamental can be argued alone or as a group.

The first fundamental is US long-term fiat dollar depreciation and fiat currency depreciation all over the world.  It is happening folks.  The purchasing power of the US dollar, both domestically and abroad has dropped ominously since the last century.

Central banks and the world’s largest institutions of power know it.  For this reason silver can act as an insurance policy in the event it gets too overheated in the global economy.  Remember the lower the value of the currency the easier the time a country will have paying its debt.  Without getting to far into the discussion silver has followed gold’s lead in this area on numerous profitable occasions as the US dollar index has traversed lower in a secular bear market.

The second fundamental is a wave of inflation that I expect to hit markets with a vengeance because of the fiat paper being recklessly printed during this unprecedented phase of currency depreciation.  I might not go as far as using the term “hyper-inflation” but none the less a wave of inflation which is here now and growing quickly. (Please see John Williams of for more on the subject of inflation and the true rate of inflation at street level).  Leading up to an inflationary event bullion has historically performed extremely well.  Look back at the 1970’s when each precious metal rose dramatically as the fear of inflation also rose.

The third fundamental is a repetitive wave of geo-political instability in the form of regime overthrow, regional instability from economic fallout, poorly diversified countries, and yes good old war.  I suggest repetitive because this particular fundamental rears its ugly head time and time again.  Simply think back to the 1970’s Russia and Afghanistan war and the Iran Hostage situation to name a couple.  These are reasons that whole countries and geographical regions identify with assets such as gold and silver and their central banks change policy to acquire in a net sense as much as they can.  This has generally been the case now with many central bank buyers of gold since at least 2009.  Look at Iran, Germany, Venezuela and many others for more insight on the topic of central bank buying and the repatriation of gold by countries. 

Lastly, and most importantly, supply and demand for which I will deal more so with demand.  Some of the greatest writers in bullion field have already laid the foundation for understanding how much above ground silver there really is.  Look no further than Ted Butler or Eric Sprott, both of which have used compelling arguments to state categorically where all of the above ground silver has gone. In short it has been used and abused at very low prices prior to the last decade for more than 3 decades.  In the case of Butler his arguments have been so compelling that he makes a case for there actually being less above ground silver than gold.

The last time we had a bull market in the 1970’s in precious metals there was a hell of a lot more above ground silver than we have now.  In fact there were billions of ounces in January of 1980 when silver reached its all-time historical high of $52 per ounce.  Fast forward to 2013 and it is said that there is now less than 900 million above ground ounces available not just for applications and critical industrial uses but for all of the world’s total demand. 

Amuse me for just a second if you will.  Nine hundred million ounces at today’s price of approximately $19.50 per ounce would be valued at about $17.5 billion dollars.  That could be purchased by diverting only one month’s total of all FED bond purchases used in the Quantitative Easing program currently.  Yes that is correct. It is a miniscule amount.  One investor could literally turn the market on its head.  (Store this little tidbit and recall it when you have already purchased bullion and you are trying to convince others to do the same.)

So why has an investor or investors not come along and bought a huge amount of silver?  Believe me it is a thought I toil with every waking day I spend in this market.  However as I alleged from the onset of this essay strange things have taken place that have alluded the general knowledge base when it comes to the way silver behaves on a day to day basis.  I am certain my colleagues are more than well aware of this situation and they have reported on it at length.  Perhaps it is the insiders that know the reasons.  Perhaps it is merely the fact that it doesn’t actually exist. Either way I am simply not sure at this point.

In any event form your own conclusions and while I am mentioning the topic of insiders try to figure out why once the world’s richest man, and not far off from it today, Warren Buffet bought a reported 130 million ounces of the shiny metal between $4.50 per ounce and $6 per ounce.  According to Silver Monthly he held this from 1996 up to about 2007.

At Berkshire’s annual shareholder meeting, Buffett was asked about the fund’s silver investment.  He said, “We had a lot of silver once, but we don’t have it now, and we didn’t make much on our prior holdings.  I bought early and sold early.”  Although silver trades near $19.50 an ounce today, Buffett sold his position near $7.50 an ounce.  There is heavy speculation as to why Buffett sold his position, but the underlying reasons for holding silver have not changed.  In fact many of the worlds richest continue to own silver in some form, be it paper or physical.  Please make special note also that Buffet is a man who perennially defecates on gold as an investment in the public arena several times a year.  In other words what did he see back in 1996 that the rest of the world did not when it came to silver?  And why buy so much if he didn’t think it would rise?  Perhaps it simply didn’t happen fast enough.

Only he knows but if I were to venture a guess it would have to have been the extreme change in the demand fundamentals in the past 15-20 years.

Silver’s Non-Monitory Uses

Silver was once thought of, and still to this day in a majority of households around the world, as a metal good for little other than photography, jewellery, coinage and silverware.  I often find myself sitting with a potential client talking about silver and he will remind me that it can be found in numerous pieces his wife our perhaps daughter wears.  This is the most common perception of silver as a metal.  But silver’s strength, malleability, reflectivity, conductivity and anti-bacterial properties make it an extremely useful metal around the globe for so many more reasons.

Silver is used in everything from automobiles to alternative energy needs.   A fully-equipped automobile may have over 40 silver-tipped switches to start the engine, activate power steering, brakes, windows, mirrors, locks and other electrical accessories.  According to The Silver Institute, over 36 million ounces of silver are used annually in automobiles. 

Alternative energy sources also have a prerequisite for silver.  Silver paste is used in 90 percent of all crystalline silicon photovoltaic cells, which are the most common type of solar cell.  Over 100 million ounces of silver are projected to be used on these solar cells by 2015 alone. 

Getting back to Warren Buffett for a moment, not only is he known for driving himself everywhere, but he has invested this decade in solar energy.  Despite not having Berkshire Hathaway invested in silver at the moment even the Oracle of Omaha should be able to appreciate these uses for silver.

Silver also has a variety of medical uses.  It can be found in high end medical appliances as an antiseptic and disinfectant.  Physicians use dressings containing silver sulfadiazine or silver nano-materials to treat external infections because silver kills bacteria in external wounds.  Silver is even used in breathing tubes, catheters, X-ray machines and more recently in over-the-shelf band aids which are again said to promote a faster recovery. 

More recently, researchers from the University of Leeds published results that showed silver compounds are as effective at killing certain cancer cells as a leading chemotherapy drug, Cisplatin.  The silver compounds were also found to have fewer side effects.

It can be found in water purification.  This is a growing trend which I have discussed on my weekly radio show.  It is also an increasing trend in millions of on-the-counter and under-the-counter water purifiers that are sold each year in the world to rid drinking water of bacteria, trihalomethanes, lead, chlorine, and odor.

In water purification it is used to avert the buildup of bacteria and algae in filters. Of the billions of dollars spent yearly in North America alone for drinking water purification systems, over half make advantageous use of the bactericidal properties of silver.  New research has even shown that the catalytic action of silver, in concert with oxygen, provides a powerful sanitizer, virtually eliminating the need for the use of corrosive chlorine.

Silver can also be found in applications for wood preservation, medical photography, socks and other various articles of clothing as an anti-bacterial agent, washing machines, military applications in warheads, all of the traditional uses and more.  The list simply goes on and on. However of all the trivial and not so trivial usages, which basically dwarfs all of its other precious metal cousins combined, one usage, that of electronics, makes me stand up and shout “show me the money” for this area of usage alone is one which every man women or child can understand and relate.

Do you own an iPad or iPod or iPhone?  How about a smart phone or a Blackberry? (Don’t worry I won’t tell anyone if you do own the latter) What about a big screen TV?  Maybe you own a laptop like the machine I am using now?  You guessed it silver is in every one of these electronic devices and the best news of all for investors might just be that a fraction, as low as single digit percentage, is getting recycled.  Humour me for a moment if you will.  I know you have been patient thus far but let me make a closing point.

My Conclusion

Look around you.  We are in arguably the worst period of economic existence we have seen in our lifetimes.  It is not up to me at this point to shed more light on what is happening needless to say look up my blog “yours to the penny” where I write my weekly musings on the topics discussed here within and you will get a little further insight if you so desire.  But look around and see the unemployment.  See the droves of foreclosed homes and the bankrupt cities like Detroit.  Take a look at the people on food stamps in the US and the amount of debt owed by each man woman and child (Now approaching $55,000 per person at last check).  Research who is buying new and resale homes (Blackrock-$6 billion dollar bet), because it sure isn’t the middle class jumping back in.

Look at the participation rates dropping for those in the US job force and the number of those on social assistance and when you do you should have little trouble coming to the sobering conclusion that I have already found.  Things are not rosy. 

There may well be the odd green shoot here and there but believe me there have been way more incredible attempts to broaden the truth then to state the facts when it comes to our financial media.  Literally 5 years of printing more and more money and the US has since 2008 alone increased its monetary base faster than in any other time in history yet the most recent taper still leaves $75 billion worth of quantitative easing on the table each month.  It is simply not getting better just yet.  There will be more “bail-ins”, more lending, failure and white collar crime to come.  It is only a matter of time.

Why do I point these seemingly obvious subtleties out?  Because throughout all of it “Joe Public” is finding a way not only to maintain his love affair with gadgets and electronics but he is finding a way to spend more than ever on silver without even knowing it despite being more in debt than ever.  And remember this because when the economy turns it will matter not what the price of silver becomes. 

Its usages, for the most part, require in the parts per million.  Sellers will simply up their price and buyers will keep buying.  In other words silver is by far and large price inelastic.  If we are managing to use record amounts of silver now when the world’s largest economy is terrible imagine what will happen to silver demand when the economy improves?  Now you are thinking outside of the box as a contrarian. 

Moving forward I am not a big fan of silver making a comeback as a monetary metal.  Let its bigger brother gold handle that role.  I do not see big stockpiles coming to light anytime in the near future nor do I see any major discoveries.  But what I do see is an insatiable appetite growing within the masses for electronics that have silver in them.

Not only in places we already know but in places that are burgeoning faster than ever like India, China, Russia, Brazil and other countries where there is a growing population that is becoming more and more inured to a Western lifestyle filled with the best of everything all the time, and a middle class or better lifestyle.

This bodes so well for silver long-term.  Remember gold is trading right now for more than $1200 per ounce. Platinum is trading for more than $1300 per ounce and Palladium for more than $700 an ounce.  And then there is little old silver at a mere fraction of the cost yet it remains the most heavily used and arguably fastest shrinking of the four.

When you recognize these facts as I have written, it quickly becomes overwhelmingly apparent that one should run, not walk, to their nearest bullion dealer to add some physical silver to their portfolio today.  Be it for fun, protection or insurance, for gain or simply for speculation all of these reasons will seem so obvious when the fireworks take silver higher than ever before.  I for one think that day is about to come.

Yours to the penny,

Darren V. Long is Senior Analyst with Guildhall Wealth Management Inc.  Darren is a speaker, writer and financial commentator on gold, silver and the economy. He can be heard weekly on “The Real Money Show” on 640 and 740 am radio in Toronto discussing all facets of the precious metals markets. Listen to replays of all shows on iTunes. 1.866.274.9570 and or email at:

During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.

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