35 Reasons Why Silver Prices Are Surging

 |  Includes: SIL, SIVR, SLV
by: Mark Thomas

Silver has had an incredible run, up 84% in 2010 and up another 20% Y.T.D. so far in 2011. We wanted to list 35 reasons why silver prices are surging:

  1. The U.S. dollar has lost 20% of its purchasing power just since 2000 and 30% since 1990. 70% of that decline has been since 1978, when the mandate for the Fed was changed to a dual mandate of both price stability and full employment. Since the Federal Reserve was created in 1913, the USD has lost 95% of its purchasing power. When you compare the appreciation in precious metals to the dollar in those same time frames, those facts alone should convince you that you need significant exposure to the sector in order to protect your wealth.
  2. Central banks for decades have been selling off their reserves of silver to meet excess demand, which has kept prices artificially low. That has made mining unprofitable for so long there is a shortage of mined capacity developing over the next few years.
  3. The majority of silver mined is used for consumption in industrial uses; therefore, unlike gold, most silver is consumed very quickly instead of hoarded. Silver is therefore a precious metal with a store of value quality like gold, but it is also primarily an industrial metal, which gives it an inherent useful value in growth industries like cell phones, computers and chemicals.
  4. Since 1980, the above-ground available gold stores have increased 600%, while above-ground available silver stores have been reduced 90% during the same time frame.
  5. The historical gold to silver ratio is approximately 15 to 1. The current gold to silver ratio is 38. In other words, it takes 38 ounces of silver to equal the value of one ounce of gold. We think the gold/silver ratio will return to approximately 20 to 1, which would, just by itself, make silver worth approximately $72.50 at today's gold price.
  6. Since World War II, the U.S. government has sold over five billion ounces of silver and currently has no reported stores. It probably has one for the military, but won't release that information -- and it wouldn't be that significant, anyway.
  7. The Silver ETFs (mainly SLV) have democratized precious metals investing to the average investor, who know doesn't have to worry about delivery and storage. Most importantly, this has made it easy for retirement and tax deferred accounts to purchase and hold silver much more easily. This increase in demand from new investors is removing almost 30% of current production. Today the physically backed silver ETFs hold over 50% of the deliverable bars of silver off the market. That is a positive as long as investors continue adding to their holdings. Surprisingly, silver investors -- even during the panic of 2008 and even amidst a 50% decline in the price of silver -- actually added to their positions.
  8. The ETF has opened investing significantly in silver to institutional investors to acquire a significant position in silver over time without going through the futures markets. These are the players who control dollar amounts in the hundreds of billions.
  9. While there are no easily verifiable statistics, new physical mined supply has not met actual demand for years. This excess demand has been met with central banks selling around the globe and industry recycling.
  10. A significant silver mine needs tens of millions of dollars (in some cases hundreds of millions) in capital to just get started, and could take easily about three to five years before any significant production to begin.
  11. Most mined silver is not from silver mines but is a by-product of mining for other minerals such as gold, copper, lead and zinc. Therefore it is not the primary focus of new investment in the mining sector. In fact, only 30% of newly mined silver comes from mines devoted primarily to silver. There are not that many places that can sustain primary silver mining.
  12. Since silver is such a unique element with so many unique properties, the chance of a silver substitute by other discoveries is very, very low. It hasn't happened in thousands of years.
  13. In a precious metals bull market, silver consistently over the long-term outperforms gold. Since October 2001, silver has increased in price from approximately $4 to a recent high of $31, which is an approximate 775% gain. During that same approximate time period, gold went from $265 to a recent high of $1430 for an approximate gain of 540%. So silver outperformed gold by 235% in the same time period.
  14. In 1980, silver briefly traded at $50; in today's equivalent inflation-adjusted prices, that would be at least $130.
  15. This time, participation by investors will be global. In 1980, only investors from North America, Europe and the Middle East were involved in the last big precious metals bull market. Now there are hundreds of millions of new potential investors in the same countries, but most importantly also in China, India and the former Soviet Union. This bull market will be global in nature, which will make it that much more explosive to the upside.
  16. Silver has literally hundreds of uses industrially in today's modern economy -- from computers, tablet computers, smart phones, cell phones, DVDs, mirrored glass, solar power, health care, wound care, and water filtration, to being used as a catalyst in many chemical reactions to produce many products, including plastics.
  17. Gold is a precious metal only for investment and jewelry, with little industrial use. While gold is more scarce than silver -- and easier for central banks to invest in because of the large dollar amounts involved, due to its relative higher price -- silver is the average person's gold because the denomination is affordable and viewed as relatively undervalued.
  18. Silver is the average investor's preferred metal when gold prices are than $1000 per ounce. When the price of gold becomes higher, s ilver becomes a greater substitute investment for gold due to its lower cost and similar qualities.
  19. Silver is more volatile in price than gold. That is a positive in a bull market where prices are increasing. Obviously, it can be a negative in the opposite bear market. Volatility can be an advantage to traders, but fair warning: Silver, like natural gas, is very, very difficult to trade.
  20. China, which is a significant producer of silver and used to export a significant percentage of its, has now significantly limited exports and ended tax rebates given to exporters of silver.
  21. China has now become a large net importer of silver even while being one of the largest producers.
  22. It is believed that China is purchasing and storing large quantities of both gold and silver. China's objective is to make its currency the new reserve for the world, so it can diversify out of the consistently declining U.S. dollar.
  23. China's Premier just called the USD as a world reserve currency a "a product of the past," so its goal has been made clear to anyone listening ... and become very obvious of late.
  24. To make the Chinese currency different from all other fiat currencies in the world -- and to give major trading partners more confidence in it -- it will be backed by a reserve of gold and silver.
  25. As gold prices increase, investors are forced to migrate to the more affordable silver, especially in India and China. India just relaxed import tariffs on gold and silver. China is encouraging its citizens to own gold and silver. China just recently allowed citizens to invest in gold ETFs, and a silver one is coming soon. China has used silver as a currency for thousands of years except since 1933, so it is used to it as a medium of exchange and store of value.
  26. We do not believe the conspiracy theories you read about JP Morgan (NYSE:JPM) and HSBC (HBC) having massive short positions in the silver futures market and are manipulating the price of silver lower for their own benefit. However, we do think those massive positions are actually done on behalf of China and are used to simultaneously go long and short silver futures. This is a very complicated way to purchase large quantities of silver and taking delivery of that silver upon expiration, without driving up the price as much as if it openly purchased the silver in the open market. The losses it takes on the short side add to its cost over just purchasing it outright at the spot price. However, to the Chinese, that extra expense is less of a cost than driving up the price by buying it openly, with the added benefit of confusing silver traders and investors.
  27. The total monetary supply in circulation and in the form of debt is over 10 times as large as in 1980.
  28. The United States Federal Reserve has for 25 years now been more irresponsible than in the previous 72 years combined, since the Fed was created with the creation of new debt and currency in circulation.
  29. The Federal Reserve will have taken the monetary supply from $800 billion in 2008 to $3.8 trillion by the end of Quantitative Easing Two by this summer. That is a 475% increase in the money supply, which must lead to significant inflation and the corresponding destruction of existing savings. The only reason it hasn't yet is the lack of confidence, the hoarding of cash and the low velocity of money currently. It is a matter of "when," not "if" inflation will occur.
  30. When economies of major societies use fiat money backed by nothing, precious metals eventually revalue themselves to account for all the extra currency printed and unsecured credit card debt created over time. This occurs when savers realize the value of savings is being destroyed and they race to preserve any value they have left. This can happen slowly over time, or very quickly -- but it always eventually happens.
  31. Precious metals will be the fifth and final financial bubble in the next three to five years. First was the Internet and technology stock market bubble, then real estate, then an overall economy and worldwide credit bubble, then U.S. Treasuries. Finally, a lack of confidence in the currency and solvency will lead to the most spectacular transfer of wealth yet, with a bubble in precious metals prices. You must be on the right side of this move and have the patience for it to unfold or you will be slaughtered.
  32. Former Federal Reserve Chairman Alan Greenspan was not the "Maestro" and the best central banker ever. He was the most irresponsible since John Law in France. In fact, we believe he modeled his monetary policy after Law, who convinced France to decouple its currency from any backing by precious metals, constantly expand the money supply to create an illusion of prosperity, and create asset bubbles in stock and real estate markets.
  33. Current Federal Reserve Chairman Ben Bernanke is a devoted Keynesian economist who is incapable of getting our economy to operate efficiently again, and was Greenspan's second in command during the 1990s. He, like Greenspan and most economists, is wrong about 90% of the time about both current conditions and future predictions for the economy.
  34. Deregulation in financial markets and the eternal ethic of greed by Wall Street and major money center banks are destroying the fabric and the functioning of the United States economy, its workers, savers and the country itself.
  35. The U.S. has a hopelessly corrupt political system that -- even after the worst financial crisis since the Depression -- can't re-regulate the financial sector or heal the economy. Not to mention that our deficit spending is now reaching dangerous levels never imagined previously, and there is no political will or market discipline to stop it presently or in the near future.

Disclosure: I am long SIVR, SIL.