The Real Silver Deficit (SLV)

Silver is rarer than gold. Period. There is less silver in the world, above ground than there is gold. That is easy to document. Since I have been harping on this point, no one has been able to refute it.

Even though there are five ounces of gold in the world now for every one ounce of silver, this 5 to 1 ratio will expand as newly mined gold is added to above ground supplies… This should get your juices flowing. It should drive you to buy silver… Silver is more rare than gold, and rarer still is someone who knows this fact. You should act accordingly.

-Ted Butler

Where has Ted Butler so easily documented his claim that silver is more rare than gold? I don’t recall ever reading his proof text. If one does happen to exist, I would appreciate someone sending it to me.

As far as I know, Ted Butler is dead wrong in all of his above pronouncements. It was comments like those above that mislead me into writing my first ever Gold-Eagle essay entitled “Silver: A Rare Opportunity”, an essay which emphasized the very ‘facts’ that I’m now attempting to refute.

Now, I realize I’ll probably be making some enemies by calling Ted Butler a liar, but I believe this is an important issue to come to terms with. If our investment decisions are founded upon fictions, then we are prone to failure. That being said, I do truly enjoy Ted’s writings, after all, he was one of the few writers who really piqued my interest in silver over the years. But nevertheless, I don’t want the average person to be misled by the above claims he has frequently made.

So here are my opposing claims:

1. Silver is not rarer than Gold.

2. The gold to silver rarity ratio is about 1 to 5, not 5 to 1.

3. Finally, there is nothing factual about the statement that silver is rarer than gold, UNLESS you qualify it with the condition that you are only referring to market accessible silver in the form of bullion.

But this is an unfair comparison, because you are including all gold in jewelry form while excluding all silver in jewelry, sterlingware, and privately held bullion/coin forms. Granted, the market price of silver will need to rise a greater percentage than the market price of gold before either its jewelry, silverware, or privately hoarded coin forms become available to the market in large quantities, but the fact still remains that this form of silver is available at some price*.

(We’ll deal more with this ‘price’ in an upcoming essay. For now one would be advised to read “Hidden Silver About to Surface?” But a word of caution, at this time I believe Gene Arensberg’s estimate of how much silver is held in private hoards, if only dealing with silver in coin and bullion form, is too high.)

The Real Silver Deficit

Let us begin by reading a very telling quote from pg. 1046 of the 1954 Minerals Yearbook:

According to the Bureau of the Mint, the world output of silver from 1493 through 1954 was 20,039,4621 troy ounces, valued at $17,278,499,800. Of this total yield, North America produced 62 percent and South America 20 percent. Mexico contributed 35 percent of the total, the United States , Bolivia 9, Peru 9, and Canada 4. It has been estimated that about one-third of the total world production of silver is in circulation as coinage or held by governments for monetary purposes; one-third, including that hoarded, is privately owned; and one-third has been misplaced or dissipated.

Since silver mine production from 3000BC to-1492AD was equal to about 7.6B ounces (Part 1), we must add to this the 20.0B ounces mined from 1492-1954 to arrive at a total of 27.6B ounces of worldwide silver production from 3000BC to 1954AD.

If only two-thirds of those 27.6B ounces remained, then in 1954 there were roughly 18.4B ounces of silver in existence, mostly in the form of coinage, government bullion, private bullion, jewelry, and silverware/sterlingware.

From the following information we can begin to determine the world’s silver supply/demand deficit for the period 1955-2005:

- Worldwide mine production from 1955-2005 was about 19.5B ounces.
- Free-World industrial demand (I.D.) from 1955-2005 was 19.4B ounces.
- I.D. from transitional economies from 1955-2005 is estimated at 3.7B ounces.

(Transitional Economies supplied roughly 16% of the mine supply during this period, so I will also assume that they contributed 16% of the overall industrial demand.)

- I.D from ‘other countries’ from 1977-2005 is estimated at 0.378B ounces.

(Assumes that of the total industrial and arts demand of 630.2M ounces, 60% was used in industrial applications. Data for the period 1955-1976 is missing, but this is relatively insignificant.)

From the above, we discover that the aggregate world demand for the period 1955-2005 was 23.48B ounces (19.4B + 3.7B + .378B = 23.48B ounces)/

If we subtract this number from the cumulative mine supply during this same period (19.5B ounces), we are left with a massive deficit of 3.98B ounces.

(Interestingly enough, in 1941 the total world monetary stocks of silver were about 4.5B ounces (see: Minerals Yearbook 1941 pp. 55-56). When considering that the above deficit of 3.98B ounces does not account for the period of 1942-1954, it becomes crystal clear that there is very little cheap silver remaining.)

But we have yet to factor in old scrap supply, which CPM Group, in their 2003 Silver Survey, defines as:

Scrapped fabricated objects, old coins, old jewelry, decorative objects, household objects, a host of industrial waste, spent ethylene oxide catalysts, old electronic scrap, old sterlingware, old silverware and finally, photographic chemicals, films, and papers [emphasis mine].

Since the vast majority of old scrap supply has come from spent photographic materials (est. 80% in 2000) and catalysts (est. 10% in 2000) [see: http://pubs.usgs.gov/circ/c1196n/], we will assume that 90% of the old scrap that comes to market had its origin in industry as opposed to the arts (i.e. jewelry, sterlingware, decorative objects, etc.). We will then subtract this additional supply from the deficit to arrive at an accurate estimate of how much silver remains.

- Estimated scrap supply from 1955-2005 was 5.45B ounces though due to a deficiency of old scrap supply data for the years 1955-1959, some approximations had to be made based upon known ratios of industrial demand vs. old scrap supply in the neighboring years.

Since we are assuming that 90% of the old scrap came from industrial sources we have:

(-3.98B ounce deficit) + (5.45B ounce scrap supply x 0.90) = 1.47B ounce surplus for the period 1955-2005.

One other factor to consider is a loss of silver content in coinage due to abrasion. For the years 1955-2005, coinage demand was 2.73B ounces. Since the vast majority of this demand was realized between 1955 and 1970 (1.83B ounces worth), I will assume that the loss due to abrasion was 15% of the total in the ensuing 35 years.

- 1.83B x 0.15 = 0.27B ounces lost to abrasion of the coinage.

I’m confident this estimate is conservative for the following reasons:

1. Obviously these newly minted coins were not the only coins in existence during this period, and if we were to include all the coinage that was undergoing abrasion, the above 15% figure would shrink relative to the context of what it described (e.g. 15% loss due to abrasion of 1B ounces worth of coinage is only 7.5% loss due to abrasion of 2B ounces worth of coinage).

2. Large amounts of coins were melted down in the late 1970s, contributing considerably to the surge in old scrap supply during those years. Therefore, my previous assumption that 90% of old scrap had its origin in industrial recycling is probably over-estimated by at least 10-30% during the period 1975-1981, since all of those coins that were melted down would have in effect undergone a 100% loss due to abrasion while simultaneously contributing to the overall old scrap supply.

3. I’m assuming that the other 900M ounces of silver coinage minted between 1971 and 2005 underwent no abrasion at all.

For reasons that I will expound upon in a future essay dealing with the topic of abrasion prior to the 20th century, I feel that the above estimate of silver lost to abrasion should be several orders of magnitude higher. But for the sake of conservatism, I will work with the above number of 0.27B ounces.

• 1.47B ounce surplus - 0.27B ounces lost due to abrasion = 1.2B ounce surplus for the years 1955-2005.

Thus, at year-end 1954 we begin with 18.4B ounces of silver existing in all forms, and through the period 1955-2005 which witnessed the rise of the electronic age, it appears we only increased the overall supply of silver by 1.2B ounces, even though we mined almost 20B ounces from the ground! This leaves us with a total of just 19.6B ounces of silver left in existence!

Now, there will likely be some misgivings about the weight I have attributed to the statement from the 1954 Minerals Yearbook, which said, “one-third [of total silver production] has been misplaced or dissipated.”

One might well wonder what exactly is meant by ‘misplaced’?

In order to error towards overstating the amount of silver that remains, so as to avoid as much skepticism as possible, let us assume that 20% of the misplaced silver referred to in the Minerals Yearbook dated 1954 has since been found. This would then leave us with 7.36B ounces of ‘lost’ silver during the period 3000BC-1954AD, instead of the previously stated 9.2 billion ounce loss. All in all, this has the effect of raising the amount of silver left in existence by 1.84B ounces. Thus, our conservative total now stands at 19.6B+1.84B = 21.44B ounces.

Now to compare our findings with those of the CRA Report published in 1992.

From the CRA Report
(Year-end 1991)

CRA estimates that from 1921 through 1990, 10 billion ounces were irrecoverably lost in North America alone, and 12.6 billion ounces for the entire world.

Note: The above estimate is fairly close to the one made in the 1954 Minerals Yearbook.

Before evaluating the CRA Report’s findings, let’s make use of the above statement to make one more estimate of how much silver remains.

1. According to my data, the world produced a total of 45.38B ounces of silver from 3000BC-2005AD.

45.38B -12.6B (silver “irrecoverably lost in North America”) = 32.78B ounces of silver left in existence when accounting for silver lost during the period 1921-1990.

2. From 3000BC to 1920 the world produced about 22.17B ounces, and of this total I estimate that 25% was lost to abrasion (vast majority), shipwreck, or even buried as treasure (including silver buried in tombs).

32.78B – (22.17B x 0.25) = 27.24B ounces of silver left in existence when accounting for silver lost during the period 3000BC –1990AD.

3. From 1991-2005, the world’s industrial demand for silver was 8.63B ounces.
During this same period the world supplied only 2.5B ounces of old scrap.
Assuming that 90% of the old scrap had its origin in recycled industrial materials as before, we are left with:

27.24B ounces – (8.63B – (2.5B x 0.90)) = 20.86B ounces of silver left in existence when accounting for all the silver lost from 3000BC – 2005AD.

This number varies by less than 3% of our previous 21.44B ounce estimate.

Back to the CRA Report and what it had to say about how much silver remained in 1992:

- Total Silver that remains above-ground (all forms): 19.06 billion ounces
- Total Silver contained in silverware and art forms: 16.48 billion ounces
- Total Silver contained in bullion form: 1.40 billion ounces
- Total Silver contained in coin and medallion form: 1.18 billion ounces

Updating the CRA Numbers

During the period 1992-1994: World mine production of silver totaled 1.373 billion ounces (Minerals Yearbooks).

During the period 1995-2004: World mine production of silver totaled 5.639 billion ounces (The Silver Institute).

During 2005 (Partial): World mine production of silver in 2005 totaled 527.3 million ounces (CPM Group – Silver Survey 2005).

Total World Mine Production from 1992 to 2005 = 7.54 billion ounces

Combining this number with the CRA Report’s estimated total above-ground supply of 19.06 billion ounces, we arrive at 26.6 billion ounces of silver remaining above ground.

Since 1992, the world has used nearly 8.1B ounces of silver industrially, but has only returned 2.4B ounces as old scrap. Assuming that 90% of the old scrap had its origin in recycled industrial materials, this leaves us with a total of just 20.66B ounces [26.6 – (8.1B – (2.4 x 0.90)] remaining above ground.

This number is strikingly similar to our 2 other separate findings of 21.44B ounces and 20.86B ounces.

By taking the average of all three, we arrive at 20.99B ounces of silver remaining in the world in all forms (mostly jewelry and silverware).

But in order to temper our enthusiasm in discovering what would actually be a relative rarity ratio between gold and silver of less than 1 to 5 based upon the above numbers, let us further assume that a maximum of 4 billion ounces of silver could be recycled from existing industrial (not including jewelry or sterlingware) materials if the price were right (say $50-$100/ounce). Including this additional potential supply, 24.99B ounces of silver would remain in all forms.

Here then is our new gold to silver ratio based solely upon relative rarity, buffered for the sake of being conservative with that extra 4 billion ounces. Again, I hope the inclusion of this additional 4 billion ounces will be a more than sufficient compromise to account for my inevitable bias towards silver.

The new gold to silver ratio is 24.99 billion ounces Ag/ 4.25 billion ounces Au (see Part 1)/ = 1 to 5.88 (Gold vs. Silver)

This means that based solely upon relative abundance, silver should be trading at about $110.50/ounce (using a gold price of $650.0).

Patience, it seems, is destined to pay some incredible dividends.

Conclusion

Clearly, silver is not more rare than gold, but a 1 to 5.78 rarity ratio is indicative of the incredible leverage to be found in all silver related investments since the current ratio stands at roughly 1 to 54. Will it ever reach the ‘magical’ 1 to 5 ratio insisted upon by Bunker Hunt over 30 years ago? That remains to be seen. But at least now we know for certain that such an idea isn’t nearly as far-fetched as it might have otherwise seemed.

Sources, Updates, and Validation

Sources for calculations in this article:

1. CPM Group’s Silver Survey 2003 & 2005 (www.cpmgroup.com)
2. US Geological Survey (USGS)
3. http://minerals.usgs.gov/ds/2005/140/
4. http://pubs.usgs.gov/of/2004/1251/2004-1251.pdf
5. http://minerals.usgs.gov/minerals/pubs/commodity/silver/
6. Minerals Yearbooks 1932-2004
7. The Silver Institute (www.silverinstitute.org)
8. Stocks of Silver Around the World (Charles River Associates, 1992)

Further Validation of the 60+ Year Structural Silver Deficit

Since 1946 the industrialized nations [i.e. the free-world] of the world have consumed more silver than they have mined, to meet growing demand…

-Sarnoff, Paul. Silver Bulls: The Great Silver Boom and Bust. Connecticut: Arlington House Publishers, 1980 (p.3).

A New Data Point for “The World’s Cumulative Silver Production”

Total Silver mined from 4000 B.C. through 1991: 37.5 billion ounces.

Source: Blanchard, James. Silver Bonanza: How to Profit from the Coming Bull Market in Silver. New York: Simon and Schuster, 1993.

Since mine production from 1992 to 2004 was about 7.0 billion ounces (Part 1), the new total is 37.5 billion ounces + 7.0 billion ounces = 44.5 billion ounces

Previously, the average cumulative silver production based upon 5 sources was 45.55 billion ounces.

With this additional data point, the world’s cumulative silver production is now the even more certain figure of 45.38 billion ounces.

This post is part of a multiple essay series.

Comments

[Concerned:]

[quote]
>>But I don't see how I'm confusing production volumes with rarity.
>>silver price is fine where it is and gold needs to come down, or that silver needs to go up relative to gold, since gold's valuation is many times higher than its production ratio against silver
[/quote]

Production quantity is meaningless. An item's value is not based upon how much of that item is produced in comparison to production of some other item. Rather, value is determined by an item's usefulness/demand with relation to its ability to be produced.

Let us change the terms of your argument so that you can begin to see its absurdity:

Each year 50 English longbows are produced and 50,000 Remington 700 bolt action rifles are produced. Clearly there is a 1:1000 production ratio between these two items; therefore, an English longbow should cost $800,000.

What are the fallacies of the above argument? (This is your argument, by the way, I only changed the terms.) There are many.

For starters, a longbow isn't as useful as a modern rifle for the item's intended function: hunting. Who wants to use a weapon which takes years to master, has poor accuracy, and low muzzle velocity (which translates to low range and low stopping power) when they could use a far superior weapon with high accuracy, high muzzle velocity (extreme range and stopping power) and can be used effectively with only a few minutes/hours of instruction? Even if English longbows were freely given away by every government on Earth and it was a requirement of every person on Earth to own one, most hunters would still use a modern rifle because of the irrefutable fact that a rifle is a FAR SUPERIOR weapon.

Secondly: production quantities of the longbow with respect to bolt action rifles can be altered should demand for the longbow suddenly increase. Look around. Most places on Earth have trees. I'd wager that you could take someone without even a high school education, show him/her an instructional video on how to craft their very own longbow, give them a hatchet, a plaining tool, and the proverbial ball of yarn, and point them in the direction of a tree, and with a few days of time they'd be capable of producing their very own bow. It might not be a composite bow and it most certainly would not be as capable as an authentic, professionally fletched longbow, but they'd be capable of crafting a bow of some sort and chances are high that it would even work. Now, take the same scenario and ask that same person to craft for you a modern rifle in the same period of time and chances are high that you'd starve to death before you had a weapon capably of killing anything other than its operator. So you can see it takes hundreds of times MORE WORK to produce a rifle than it does to produce a bow.

Thirdly is the availability of the resources necessary to produce the weapons. In the case of bows: Trees are plentiful, skill of labor requirement is low, necessary tools are few. In sum, making a bow is easy. In the case of rifles: Iron ore is much less plentiful, skill of labor requirements is extremely high, necessary tools are staggering. In addition the basic raw material, steel, must first be mined as ore, then refined and processed into usable steel. This in and of itself requires its own industry to do just that. Then this steel must be machined and numerous complex parts must be fashioned from it and assembled before you have a weapon. In sum, making a rifle is extremely difficult.

Okay, so that's just three fallacies with your argument. There's likely a half dozen more that I didn't touch on. That said, its likely you won't understand any of the above, evidenced by the fact of your fallacious argument to begin with so let me put it into terms that you might understand.

1: Gold is more desirable than silver as a monetary instrument. The reason for this is because gold is fundamentally a far superior instrument for its intended function: wealth. For some reasons why it a superior instrument of wealth, see below.

2: Production volume of Silver can easily be increased, should demand for it suddenly take a trip to the moon. Silver is everywhere, its easily mined, and its easily extracted and refined. Mining companies could hire more miners and run 24/7 to increase production. Gold, on the other hand, is rare. Mines are rare, mining is difficult, extraction and refining is difficult, even dangerous. Miners must pull out vastly greater cubic meters of ore out of the earth to net the same volume of refined gold as silver. Even if mining companies hired more miners and ran 24/7 shifts to increase production, they would NEVER be able to produce as much gold as silver in the same period of time because the saturation volume of gold in ore is much less than silver.

3. Production of one cubic meter of refined gold requires MUCH MORE WORK than to produce one cubic meter of silver.

4. You go on and on about silver's industrial use to justify your argument for its primary use: wealth. This in and of itself is staggeringly, mind-numbingly nonsensical. At anytime anything becomes sufficiently rare and expensive to preclude its secondary use, people will use something else instead. This is basic high-school economics. You did graduate from high school, didn't you? Let's assume for a moment that what you state is true: silver is going to become so rare (due to industrial demand) that its price will increase twenty-fold. If what you state is true, then I submit to you that no manufacturer in the world will be using silver to produce anything beyond the point it becomes economically infeasible to do so. To say otherwise is madness. Furthermore, once silver becomes economically prohibitive, industry will use some other economically attractive substitute and silver will never reach the value you and Ted Butler predict because of the fact that there is simply more silver on the Earth and IN the Earth than gold. I'd wager that you could take every bit of silver that ever been refined in the history of the world, every silverware, every coin, every bullion and dump it into the abyss, never to be seen again and silver would still not reach the levels you and Ted Butler predict. Why? Because THERE IS MORE SILVER IN THE EARTH THAN GOLD.

Let me put your argument another way, because you're likely still shaking your head and not getting it. More likely is that you DO get it but you're going to pretend you don't just so you can keep preaching your nonsensical silver theories.

At any case, by your logic, everyone should invest heavily into companies which produce steam-powered electricity generators because production of steam-powered generators is lower than petrol based generators and therefore should be worth more; Furthermore, everyone should invest heavily into petrol based generators because as we all know, oil is a finite resource and its running out and the price of oil is going to go up and therefore petrol based generators are a great investment.

Can't you see how nonsensical the above arguments are?

By advicing everyone that will listen to you to invest in petrol energy solutions, you're completely ignoring the fact that petrol will be replaced with some other energy source (ethenol, hydrogen, solar, geothermal, tidal, etc, etc) as soon as energy companies get fed up with paying increasingly higher prices for it. Even private consumers will stop buying it to burn in automobiles, eventually. Already, people are paying to have their automobiles converted to burn alternate fuels. The fact is, the rarer something is or becomes, the more expensive it is. Eventually, it gets prohibitively expensive to continue using it so people will use a substitute instead. If you want to invest is anything for long-term wealth, you should invest in the substitute, NOT in the item that's going to be replaced by the substitute. The problem with silver is that is serves a duel function: Wealth and Industry. Eventually the industrial use will cease and you'll be left with only the wealth use, in which case, prices will drop like a stone in water because suddenly most of the demand for silver will be zilch.

Seriously, you and Ted Butler are hilarious to read. One of several things:

1. Both of you are uneducated idiots;
2. Both of you have bought huge quantities of silver and are actively attempting to artificially inflate the price of silver by scaring equally uneducated investors; or
3. You and Ted Butler are one in the same and you're his alias intended to lend credence to his rubbish by acting as his second mouthpiece.

Whatever the case, I'd reccommend you A) Get a college education (a real one, not one of those bought-over-the-intern... B) stop spewing this rubbish all over the internet C) rethink your life before you end up in prison for pump and dump schemes.

2008 Jan 01 06:12 AM