12 Reasons Why Silver Will Outperform Gold

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 |  Includes: GLD, PSLV, SLV
by: Golden Economizer

Or more accurately: Twelve reasons silver will CONTINUE to outperform gold. As I write this, the spot price of silver is $42.30, and the spot price of gold is $1478.20

1) In the past year, gains in silver have outperformed gains in gold by nearly 500%. In the past 365 days, the price of Silver has appreciated 129.5%, more than doubling, while the price of gold has appreciated only 27.4% (source: finviz.com). We all know that past returns are no guarantee of continued future performance, but the exact same fundamentals are still in place that caused last year’s differential in returns, with no sign of any change on the horizon. Over this same 365 day time period, Crude Oil has returned 26.9%, the Nasdaq 100 has returned 13.2%, the DJIA has returned 10.3%, the S&P 500 has returned 8.5%, the 30 Year US Treasury Bond has returned 3.1%, the 10 Year US Treasury Note has returned 2.3%, and the US dollar has returned NEGATIVE 6.8% (-6.8%), a LOSS of nearly 7% (source: finviz.com).

2) Silver posted an average price of $20.19 in 2010, a level only surpassed in 1980, and a marked increase over the $14.67 average price in 2009. This buoyancy is very much alive today, with the 2011 price averaging $31.86 [as of April 7], based on the London fix, through the end of the first quarter. (source: silverinstitute.org)

3) World silver investment rose by an impressive 40 percent last year to 279.3 million troy ounces, resulting in a net flow into silver of $5.6 billion, almost doubling 2009’s figure. Implied net silver investment increased by 47.5% from 120.7 million ounces to 178.0 million ounces (source: silverinstitute.org)

4) Exchange traded funds registered another sterling performance in 2010, with global ETF holdings reaching an impressive 582.6 million ounces, representing an increase of 114.9 million ounces over the total in 2009, an increase of 24.6%. (source: silverinstitute.org)

5) Silver Coins and medals fabrication [in 2010] rose by 28 percent to post a new [global] record of 101.3 million ounces. In the United States, over 34.6 million U.S. Silver Eagle coins were minted, smashing the previous record set in 2009 at almost 29 million. (source: silverinstitute.org)

6) In January of 2011 alone, the U.S. Mint sold 6,422,000 ounces of American Silver Eagle investment coins. In the first three months of 2011, the U.S. Mint sold 12,429,000 ounces of American Silver Eagles. At the current rate of sales, the American Silver Eagle program will increase its sales by 43.7% to 49.7 million ounces this year, smashing last year’s all time record. Source: (usmint.gov) This result has been achieved despite production delays and continual shortages of silver blanks at the mint due to mismanagement of the program, in violation of the law requiring the mint to provide adequate supply to meet public demand.

“For the weekly period ending March 9, the US Mint recorded sales of 668,500 of the one ounce Silver Eagles. This compares to 1,509,000 coins sold in the previous week.

Since the start of sales for the 2011-dated coins, the US Mint has carried out sales under their standard allocation program. Rather than accepting unrestricted orders, available supplies of silver bullion coins are rationed amongst the authorized purchasers. As such, sales figures reflect the number of coins that the US Mint is able to produce and make available, as opposed to the level of demand from the market.” [Source: goldandsilverblog.com]


7) On April 7, 2011 the House Financial Services Subcommittee on Domestic Monetary Policy held a hearing on “Bullion Coin Programs of the United States Mint: Can They Be Improved?” Some highlights from Subcommittee Chairman Ron Paul:

a) It is "imperative" that the U.S. Mint should be able to produce an adequate supply of coins to the U.S. public. According to Rep. Ron Paul, investors are rushing to purchase gold and silver due to quantitative easing by the Federal Reserve.

b) The U.S. Mint should take the appropriate steps to source enough planchets to meet public demand for gold and silver coins. People are worried, stated Rep. Paul, and are trying to preserve their wealth through the purchase of gold and silver due to government policies that will lead to inflation and debasement of the currency. Rep. Paul stated that "If we had a sound currency" there would not be a shortage of gold and silver coins since demand by the public would be a non event.

c) Rep. Paul detailed the "horrendous huge debasement" that has occurred with the U.S. currency. In the early 1930's, when gold was on a fixed exchange rate with the U.S. dollar, the dollar was worth 1/20 ounce of gold. It was subsequently devalued to 1/35 ounce of gold during the 1940's, to 1/38 ounce of gold in the early 1970's and to 1/42 in 1973. Once it became legal for U.S. citizens to own gold and the dollar was based on market prices, the value of one dollar subsequently dropped to 1/1450 ounce of gold.

d) Rep. Paul noted that total annual demand during 2011 for Silver Eagle bullion coins should reach 48 million ounces, but that total U.S. silver production would amount to only 40 million ounces. The U.S. Mint should take all necessary steps to ensure that adequate supplies of silver are available to meet public demand for silver coins.

e) By law, the US Mint is required to produce coins "in quantities and qualities that the Secretary [of the Treasury] determines are sufficient to meet public demand". There were no U.S. Mint representatives present at the Subcommittee hearing to explain why the U.S. Mint is unable to comply with production mandates specified by law.

(Source: House Committee on Financial Services)

8) In 2010, the total U.S. mined Silver Production was 38.6 million ounces. 89.6% of all silver mined in the U.S. in 2010 was consumed JUST by the American Silver Eagle program of the U.S. Mint, leaving only 10.4% of all U.S. mined silver for all other investment use (bars, ETFs, privately minted coins), all industrial use, jewelry, photographic use, medical use, etc. (source: silverinstitute.org)

9) Total global silver fabrication demand grew by 12.8 percent to a 10-year high of 878.8 million ounces in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 million ounces, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011 (source: silverinstitute.org)

10) Global Silver mine production rose by only 2.5 percent to 735.9 million ounces in 2010 despite a 37.6% increase in the average price of silver from 2009 to 2010. The difficulties and rising costs of silver mining have caused silver to have one of the most inelastic supply curves of any commodity.

11) Silver is continually consumed, unlike gold. Industrial uses of gold have purposely been minimized due to decades of high prices, and it is very efficiently recycled. Silver is just the opposite. Decades of price suppression have resulted in many and increasing industrial uses of silver, and has made it uneconomic to recycle. Since many uses of silver are in small or microscopic amounts, that silver can / will never be recycled, as it is continually discarded into landfills.

12) Publicized Silver Inventory figures are fraudulent, because they include the Silver held by ETFs. As of the end of 2008, two thirds of official world silver inventories were fictitious. Quoting a highly recommended article by Jeff Nielson:

“From 2005 to the end of 2008, after silver inventories plummeted by 90% in just 15 years (due to being grossly under-priced), we are supposed to believe that inventories suddenly 'made a U-turn' – and tripled over the course of just four years.”

“Anyone with even a slight understanding of markets should recognize the obvious sham here. An “inventory” is the amount of a particular good warehoused and ready-for-sale. Conversely, the units of SLV (and all other bullion-ETF's) represent privately-owned silver which has obviously been taken off the market. As a matter of elementary logic, it is impossible for even one ounce of silver to be both an “inventory” and an “ETF”. It can be one (silver-for-sale) or the other (privately-owned) but not both. Thus, at the end of 2008, two-thirds of official, global inventories of silver were nothing but an obvious paper-sham.”

[Source: Fifty Years of Suppressing Silver]

During the four year period referred to by Jeff Nielson when Silver Inventories supposedly tripled, the world mined silver supply increased by just 7%, from 637.3 million ounces to 681.9 million ounces.

WORLD SILVER SHORTFALL (MILLIONS OF OUNCES) (source: silverinstitute.org)

YEAR

WORLD SILVER MINE PRODUCTION

WORLD SILVER FABRICATION

YEARLY SILVER SHORTFALL

IMPLIED NET INVESTMENT

COINS & MEDALLIONS PRODUCED

2001

606.2

873.6

267.4

3.6

30.5

2002

593.9

843.5

249.6

(18.9)

31.6

2003

596.6

860.1

263.5

(1.6)

35.7

2004

613.0

850.6

237.6

29.1

42.4

2005

637.3

873.6

236.3

55.9

40.0

2006

641.7

863.5

221.8

53.2

39.8

2007

665.4

870.3

204.9

12.5

39.7

2008

681.9

874.7

192.8

18.2

65.4

2009

718.3

779.2

60.9

120.7

79.0

2010

735.9

878.8

142.9

178.0

101.3

Click to enlarge

What should we learn from this chart? Well, one obvious thing is that there has been a consistent shortfall of total silver mined to total silver used by industry every year of the past decade, averaging hundreds of millions of ounces per year. This Silver Deficit has been compensated for by government silver sales and scrap recovery, neither of which are sustainable. Indeed, most governments, including the U.S., have no stockpiles or central bank reserves of silver. Only the governments of Peru and India are believed to have any silver reserves at all, and those are not likely to be large or to be coming to market any time soon. The government of Mexico is also rumored to have some silver reserves.

Silver scrap recycled in 2010 was up by 26.6 million ounces, not even one third the quantity needed to offset the 83.6 million ounce increase in silver used by industrial applications. Silver scrap, of course, is limited in quantity and cannot be expected to continue increasing available market supplies.

Another notable feature of the chart is that “implied net investment” has been rising sharply since 2008. Without going into the reasons for this, first let’s determine, what is “implied net investment?”

Implied Net Investment is a made up figure, a simple account balancing entry used to make the total world silver supply exactly equal to the total world silver demand, year after year on the books of the The Silver Institute, and as such, has no real meaning at all. To illustrate how meaningless this number is, I have included the yearly world production of investment coins and medallions in the chart for comparison. Just the production of investment coins and medals alone surpassed the “implied net investment” figure in six out of ten years during the past decade, and this does not even include all other forms of investment silver such as Silver Bars and Silver ETFs. Clearly the implied net investment figure from the Silver Institute greatly underestimates the true investment demand for Silver.

As I continue my extensive research on the investment characteristics of silver, nothing I have read contradicts my conclusion that silver is the most undervalued commodity in history, and the most remarkable investment opportunity of the next decade. I’ll leave you with this chart of Silver vs. Gold performance over the past decade.

Click to enlargeClick to enlarge

Source: Golden Economizer 4-14-2011



Disclosure: I am long physical precious metals. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.