Most investors believe that the reason silver is about 50 times cheaper than gold is because it’s a more abundant resource. It’s a simple example of the law of supply and demand. Having done some study on this I was amazed to find that this is simply not true. The amount of available silver is far less than the amount of available gold. I believe that the divergence in the price between an ounce of gold and an ounce of silver will be closing and soon.
This is a fact that is overlooked by the many seasoned silver investors. While global silver mining has increased significantly over the past two decades and silver output has more than doubled since the early 1990s, the global demand for silver is outpacing the global supply. In fact according to a report from the CPM group, a commodities research and asset management team, global silver production has been unable to meet global demand for more than fifteen years. The world’s silver mines are simply not producing enough silver to meet demand.
My regular readers know that I have been a gold and silver bug since I was a child and my Grandma used to teach my brother and I about coin collecting. Back then it was a hobby. You also know that I have written on more than one occasion that I have more than my fair share of physical gold and silver. I have also written about the logistical problems of holding physical. Storage and safety are two issues that come to mind immediately. One of my readers wrote to me that if I have physical gold and silver I also better have a gun and be prepared to use it. He signed off “I remain long Gold, Silver and Lead!”
In 2010 the global demand for silver exceeded 1.05 billion ounces while the global mining only produced 700 million ounces. That begs the question, where is the surplus coming from? The answer is that over the last two generations major government stockpiles of silver have been sold off to supply the shortfall. The United States government alone has supplied nearly 5 billion ounces of silver into the market since World War II.
While silver is 17.5 times more abundant in the Earth’s crust than gold the amount of above the ground gold far exceeds the amount of silver. This is because silver has industrial uses. Products like CDs, cell phone batteries, calculators, printed circuit boards, hearing aids, electronic switches, TV screens, catalytic convertors, inks, computer monitors and thousands of others use silver in their production. There are new technologies every day that use silver.
What do we do with these products when they have out lived their usefulness? We throw them away. That is because it is so labor intensive to reclaim the silver, it ends up garbage dumps. Indeed, I predict that garbage dumps will be a source of silver in the future. So while gold is produced, silver is consumed. Even though gold is highly desired, silver is needed. Add to this that the middle class man would rather own 40 ounces of silver than one ounce of gold and you can see why I believe the divergence in price between gold and silver will not last long. I’m not saying that it will be one for one but a ratio of 15 to 1 seems more like a realistic possibility in the near future.
OK. I have a nice position in physical and I want to use ETFs to take advantage of these parabolic runs we have experienced. I have decided to use two silver ETFs. The Sprott Physical Silver Trust (NYSEARCA:PSLV) and Pro shares Ultra Silver (NYSEARCA:AGQ). I have shied away from using iShares Silver Trust (NYSEARCA:SLV) because there is ample evidence that if SLV was ever asked to produce the underlying asset it would not be able to do so. Add to this that a look at the chart below will show in the last run up PSLV actually outperformed SLV. I conclude that this is because they do hold the physical silver.
I also have done a lot of study about Pro Shares Ultra Silver. This ETF makes no bones about the fact that it doesn't hold silver. What you are buying are futures contracts that are leveraged 2 to 1. It is not a trade for the faint of heart. Yesterday while Nero fiddled and the market sold off for the second day I was watching AGQ and I knew that today it would bounce. I bought 10,000 shares at $174.92 at 2PM on Wednesday and prayed. I innately knew that gold would make a big move today and whatever happened in the market gold would carry silver with it. For safety I had a tight stop under it so I knew if it went badly I would be out without too much pain. See the Chart from today below.
Click to enlarge
In the pre-markets I saw that AGQ was going to open at $183.00 so I knew things would go my way. And boy did it. At 11:27 AM I sold all 10,000 shares at $198.88. That’s a realized profit of 23% in I day! I do want to stress that while it worked remarkably well today this is a stock that is used for day trading. I want to stress that as I have already written this holding is not for the faint of heart. If this holding goes the wrong way you get wiped out in a heartbeat.
In conclusion, I will continue to build my position in PSLV on any weakness and when the opportunity arises and I am sure as sure can be I will float like a butterfly and sting like a bee with AGQ.
Disclosure: I am long PSLV. I also may reopen position in AGQ within 72 hours