How Precious Is Silver?

There is an ongoing debate among investors whether silver is a precious metal or an industrial metal. Yesterday’s unique market action gives us an opportunity to answer this question.

Yesterday the price of gold rose from $777.70 to $862.90 an ounce for a total rise of $85.20 or nearly 11%, which may be the largest single day rise in the dollar price of gold since gold started trading in US dollars. Or if you want to look at it the other way, it represents the US dollar’s largest single day devaluation, in terms of gold, since President Nixon closed the gold window in 1971.

On the other hand, the prices of nearly all industrial metals fell yesterday. Copper fell $.03/lb. (1%), nickel $.018/lb. (2%), while lead, zinc and aluminum all fell by about $.01/lb.

If silver is indeed an industrial metal, you would expect it to have fallen along with copper, nickel and all the rest. So, what did silver do yesterday? It rose from $10.45 to $12.06 an ounce for a gain of $1.61 or over 15%. The major silver miners like PAAS and SSRI jumped along with silver and SLV, the silver bullion ETF.

It would seem to be a clear cut case – precious metals went up, base metals went down, silver went up, hence silver is a precious metal, case closed. Of course it’s not that simple, so let’s try to understand better what happened yesterday.

Over the past month, gold has been falling along with other commodities and equities as market players were deleveraging to raise cash and cover open positions. This hit everything, including gold, raising some doubts about gold’s status as a safe haven in times of market turmoil.

This all changed suddenly yesterday, with gold’s sudden jump while the markets continued their decline. Before yesterday the desire was to raise cash, and gold isn’t cash, so it was sold. Overnight, the fear of a systemic failure became greater than the need to raise cash, and gold is insurance against disaster, so it was bought. Apparently so is silver.

The vast majority of silver mined today is used in industry. On your average day, silver’s price is driven by industrial demand, but the monetary element is there too. On days like yesterday it’s silver’s monetary element that drives demand. Because, when things get really bad, silver provides disaster insurance just like gold. Maybe even better.

Disclosure: Long PAAS

Comments

[DizzySailor:]

It is nice to see something in the mainstream media about the value of silver. Now if the facts of supply and demand, the insane spread between the paper (COMEX) price and the physical price, and the actual shortage facing both industrial users and investors were to be public knowledge, you would really see some price movements. Oh, not so sure about SLV as a solid investment at this point. I don't think they hold the physical silver they claim to have on hand. Try and buy some 10 oz. or 100 oz bars somewhere and you will see what I'm talking aobut.

2008 Sep 18 11:53 AM

[DizzySailor:]

It's nice to see another article in the mainstream media about the real value of silver. Now, when the COMEX price is equal to the street physical price we will have some balance. Try and buy some physical silver today in 10 or 100 oz bars, try and cash in pool metal accounts for physical metal.... lots of fishy stuff going on.

2008 Sep 18 12:13 PM

[DizzySailor:]

Sorry for the double post.

2008 Sep 18 12:14 PM

[Mr.G:]

silver is a bargain at these prices for the avg person who cant afford gold at 750 an ounce -and it is also correct that both physical gold and silver is very hard to come by at 890 an ounce and 12.00 and ounce -shortages and backlogs are just about everywhere you go

2008 Sep 18 12:47 PM

[jessiejeff:]

"silver’s price is driven by industrial demand" ??? Silver's spot price is set by the paper futures market, and has little or nothing to do with industrial or invester demand. The physical, non paper silver price is closer to what it is selling for on ebay. At some point the invester shortages will swallow up the wholesale, industrial physical silver, and the paper prices will be brought in line with the true amount of the silver supply.

2008 Sep 18 01:41 PM

[GMiki1:]

I have both, but like silver a lot here. Silver is money--note the long history of silver coins. But, yes, silver is a commodity, with increasing numbers of industrial uses. I didn't hesitate to buy a few additional silver eagles at $20 each even this week when the spot silver price was under $11. I've bought eagles as low as $7, but I was willing to "overpay" for something I know will be worth a great deal more in the long run. (I only bought a few, however--I wouldn't suggest that for serious buying.)

2008 Sep 18 02:31 PM

[css1971:]

I'm surprised there's even a question...

1 Pound of Sterling silver.

Even the United States Dollar comes from the silver Thaler.

2008 Sep 18 02:55 PM

[copesetic:]

I backed up the truck this week on silver,and though I paid 2 to 4 over spot,I'm not worried since the naked shorts all over the market just got put on notice that they are gonna get their fannies paddled :) and are scrambling to cover.

2008 Sep 18 04:11 PM

[TERN:]

I cannot believe that SLV would not have real allocated bullion backing. Barclays would not allow such a situation to persist for more than a few weeks at most. If it did, there would be very dire consequences indeed.
That means that the Ebay bullion sellers are currently like ticket scalpers, arbitraging a temporary anomaly.
Rather than paying their outrageous mark-up over spot, I would rather invest more in that maligned "paper" silver as it inevitably catches up with the physical demand.

2008 Sep 18 06:59 PM

[Sakata:]

TERN, I think you need to read silverstockreport.com on a regular basis.

2008 Sep 18 08:58 PM

[Lionheart:]

I personally believe the reason the big jump in gold and silver happened is because of "unheard of" numbers of people - investors and dealers - were taking physical deliveries of their gold and silver at the comex and nymex while at the same time......NAKED shorts were diluting the crap out of the stockpiles in the warehouses.

In other words.....we were headed for the mother of all precious metals defaults. So the CFTC had no choice but to tell the criminals JP Morgan, Citibank and Goldman to "COVER" because they know dam well they aint got any gold or silver to deliver their short contracts with.

2008 Sep 18 09:57 PM

[ussmls7:]

Now that the Naked Short Sellers have been put on notice,I saw nothing where the CFTC would stop the JP Morgans or others from doing the same thing they did a few weeks ago to Gold & Silver History making Price take down! Naked Short Selling is a Felon,will the main stream media put JP Morgans & the others who played a part in alowing this unlawfull Manipulation of Gold & Silver on the Front Page to the American Public to see? We will see,but it seems that only the Banks that legal Short Sellers who bet against a few Banks got the head lines!!
I read the only way for the Small Investors to get help,is those Holding Shares in Gold & Silver,Make sure they are not loaned out,to be used by these Banks that have cost the Miners,Small Investers all sorts of pain,plus putting the Free Market at risk, or to Default in Silver! Then it a default happens,who loses? Its a hell of a mess!
GATA.org has been releaseing updates in lighting speed,with Paulson,Ben,Nancy,Reid & Barney Franks coming up with more ways to stick Tax Payers & rescuing the Banks is alarming! A hell of lot of stuff happening to fast!

2008 Sep 19 09:38 AM

[User 30121:]

TERN, you need to get your head out of that hole! The worm has moved along long ago!

2008 Sep 19 10:01 AM

[User 30121:]

ussmis7: Your post is right on! Let's face it, if the DEMS get control of EVERYTHING come November, what your seeing on Wall St is NOTHING compared to what will come later in the year (2009). Full disclosure: McCain is NOT the answer, but he'll have to do until IT comes along. It certainly isn't the DEMS (the party of NO ideas, except how to SCREW the folks, while stuffing their pockets).

2008 Sep 19 10:10 AM

[leh:]

<<t certainly isn't the DEMS (the party of NO ideas, except how to SCREW the folks, while stuffing their pockets).>>

Gee, last time I looked there were Republican oilmen in the White House
setting energy/war policy and enriching themselves on the back of US taxpayers. And explain to me how Bush, Cheney and their little freedom project in Iraq are not responsible for exacerbating the burgeoning budget deficit and national debt.

2008 Sep 19 02:02 PM

[Indenial:]

leh, don't waste your time asking a republican anything. they are all indenial.

2008 Sep 19 03:37 PM

[REBEL:]

The three posts before mine seem to think if they go with their "team" - either the Dems or 'Publicans - things will turn out OK. Newsflash: BOTH
PARTIES are corrupt and have been stealing US wealth with both hands at least since 1913 - the year the FED took over the US money supply,
(with both parties supporting the FED).

2008 Sep 20 12:29 AM

[marxbites:]

Rebel my friend; it goes all the way back to monarchist big govt pro bank Hamilton and his fractional reserve shylocks of special UNGENERAL govt privilege; which fails the Gen'l Welfare AND Equal Protection clauses by leaps & bounds.

Jackson killed the 2nd BUS off and paid off America's debt the first and LAST time in our history. Only because our currency no longer cost taxpayers compounding interest for it's use, as the shylock Fed now charges. Prices were stable and American wealth accumulation was staedy and rising all the way to the CW. The exceptions were under high protective tarrifs - ie GOVT intervention.

After the taxes and fiat of the CW up until 1913 w/the FED & Inc Taxes enacted, was another period of almost true free markets free from govt and Americans flourished. The downfall actually began earlier when Big Biz finally got it's ICC to regulate fat profits while stomping out pesky little profit encroaching small competition.

What Americans dont understand is that BOTH parties long ago traded in maximum freedom Jefferson for massive govt Hamilton.

The proof for you idiot Republicans that still think our party is any much different than those commie coddling war mongering and profiteering Morgan Dems, is the incessant praise the likes of Newt or Trent Lott lavish on FDR, one of our most criminal presidents ever, right up there w/Lincoln, TR, Wilson & Bush's.

99% of Americans still believe the Govt is a net positive - it is not. Govts costs to humanity and civilisation far far far outweigh it's puny net benefits.

The same people behind the Fed & the Inc Tax are the same people that opened the New Republic to agitate against the Germans and entry into the war that Wilson got re-elected promising we'd never enter. The SAME people were behind FDR's confiscation of the people's gold and IT's presumed subsequent loss to the Fed as loan collateral.

Look what the Maestro said back in the day:

Alan Greenspan - “Gold and Economic Freedom” 1967
"An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other. . . . This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

2008 Sep 20 10:25 AM

[Tim H.:]

Since your talking politics. I would say the Bush Tax cuts will expire now in 2010 regardless if McCain wins. Country cannot afford them. Economy was not in crisis before the cuts. Just show I am not totally partisan. I believe Obama must admit he will have to scale back some of his tax cuts for middle class and spending programs. THAT is reality the banking crisis. Some fiscality by government and everyone is what this country needs. I myself have debt and been working to pay it off.

2008 Sep 20 03:34 PM

[sandspider:]

For all you republicrats out there you are simply different sides of the same coin. What the international bankers like....the federal reserve is no more federal then federal express. The same runs Amerika and they simply keep up the game for your benefit. I know most have never read the why of America before we allowed the internationals take over. Democrats, Republicans and democracy ....hell what happened "..into the Republic for which it stands..." Your system which you permitted is the root of the plague which infests every inch of America. Your too busy squabbling over the scraps left you from the internationals table to have a clue or a sense of what is right. You have no sense or respect for who you are up or down.

2008 Sep 21 02:31 AM

[silver-bullet:]

Who gives the right for the Fed to print money!?!***%%@#$%!!!

For those who are not aware, the Fed is made up of big banks: JP Morgan, Citi Bank, Bank of America, Wells Fargo, and a few more ... iN Collusion with the Federal Government.

We are enslaved by our Government and the Big Banks via FIAT CURRENCY!

"When the MAFIA prints money, we call it COUNTERFEITING.
..When the FED prints money, we call it INFLATION."

Inflation is nothing but a HIDDEN TAX on the masses.

Get REAL MONEY --- SILVER & GOLD ... PROTECT YOUR WEALTH, NOT YOUR CURRENCY.

2008 Nov 02 02:45 AM