In Ted Butler's Archive


Nowadays, when precious metals commentators speak about gold, they often include silver as part of the discussion. There’s a good reason for that – on just about every level of comparison, silver is superior to gold as a long term investment. These precious metals have many remarkable similarities. Both are relatively rare. Each is recognized by virtually everyone on earth. Each has been highly valued and served as money and jewelry. To this day, many people hold gold and silver as insurance against currency and financial distress. Each can be held as an asset without counterparty risk. It would be impossible to find two more similar elements that spanned 5,000 years of human history than gold and silver.

However, it is the differences between gold and silver that make the compelling case for favoring silver over gold. Aside from color, the biggest visible difference is the price of each – the price of gold is more than 60 times the price of silver. For centuries, gold has been more expensive than silver. It was 16 times more expensive when world governments set the price of each for monetary purposes. In the last hundred years it ranged from 15 times more expensive than silver to 100 times more expensive.
The longer a price relationship persists, the more accepted as normal it becomes. Because the price of gold has always been many times the price of silver, the world’s investors have come to conclude there is much more silver in the world than there is gold. They tend to assume that there is 60 times more silver in the world. This is absolutely wrong. It was true at one time, but no longer. If this erroneous opinion gets attention there will be a massive upward adjustment in the price of silver.

For many centuries, up until a hundred years ago, both gold and silver served the same purpose. Because silver had been mined at a rate 6 to 10 times greater than gold’s, the world accumulated much more silver than gold. As of 1940, there were at least 10 billion ounces of silver in the world compared to 2 billion ounces of gold. At this point, gold was rarer than silver. But something developed over the past 100 years. Around 1900, it was discovered that silver possessed many superior physical and chemical properties compared to other materials. It began to be consumed industrially in ways never contemplated.

Because silver is the best conductor of electricity, the best transfer agent for heat, the most reflective of light, the best general biocide and has chemical properties that enabled photography, it was consumed in prodigious quantities. Silver consumption was so great that production could not keep pace with soaring demand. From 1940 thru 2006, close to 9 billion ounces of silver were taken from existing inventories to supplement mine production. This depleted inventories to one billion ounces, a reduction of 90%.

In that same time period, world gold inventories grew from 2 billion ounces to 5.5 billion ounces. Gold is not consumed industrially anywhere close to silver. Thus, gold inventories grew, while silver inventories shrank. So, over the course of half a century, gold became 5 times more plentiful than silver. Gold went from being rarer than silver to silver being rarer than gold. The punchline is that the relative price of each has remained unchanged at 60 to 1. World opinion has failed to recognize this dramatic turnabout. This sets up an investment opportunity of unusual proportions.

But what about current mine production? Doesn’t the world still mine 8 times more silver than gold? Annual gold mining production is around 100 million ounces, while silver production is around 800 million ounces. However, so much new silver mine production is earmarked for use by industry, that only a small percentage (10%) of total current silver production is available for investment. This contrasts sharply with the situation in gold, where most new gold is available for jewelry and investment.

100 million ounces of gold equals about $130 billion, while 100 million ounces of silver equals $2 billion. It is easier to come up with the $2 billion or more required to propel silver prices higher. That’s the key to precious metals prices – investment demand. Silver requires a much smaller amount of investment dollars to ignite prices than gold.

Heavy demand for silver has set the stage for a supply shortage. At some point silver users and investors will clash. There has never been a commodity shortage that hasn’t sent prices soaring. Gold seems unlikely to experience the shortage looming in silver. Gold can go up, but not due to strong industrial demand. For many reasons, silver seems poised to vastly outperform gold on a long term basis.

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