History of Silver, Part III: Inventories Are Gone (NYSEARCA:SLV)

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For nearly 5,000 years, the price ratio between gold and silver has averaged approximately 15:1. This number is very close to the 17:1 ratio which represents the natural occurrence of the two elements in the Earth's crust. It is interesting to note, however, that through most of history the price ratio has favored silver.

In the last century, that ratio has rapidly, if unevenly risen. As of this moment, the gold:silver price ratio is once again nearing 70:1. Given the historical data, the natural assumption to make is that the world must be practically overflowing with silver for the price ratio to have gotten this skewed. In fact, this couldn't be further from the truth.

In the modern era of silver production, annual mine production now amounts to more than 600 million ounces per year. However, while industrial and investment demand for silver are soaring, production is leveling off. Annual production in 2008 only increased by roughly 2%, despite the price of silver reaching its highest level in nearly thirty years.

Annual production is almost certain to decline this year. While the ratio varies year-to-year, roughly 2/3 of the silver that is mined is a “by-product” of the mining for other metals – such as copper, lead and zinc. With base metals production dramatically reduced this year due to a temporary plunge in demand, it is virtually impossible for silver production to increase.

One of the unique aspects of gold, as a commodity, is that almost no gold is “consumed” (i.e. used up) in any of the applications we have for gold – either now, or throughout history. As a result, if a concerted effort were made, almost all the gold that has ever been mined could be collected and melted down into bullion.

This is not the case with silver. Silver is not simply a much more versatile metal than gold, it is the most versatile of all metals (see “Increasing demand for Silver comes from MANY sources”). In recent years, there have been more new patents issued for products containing or using silver than with any other metal. Because of this amazing versatility, most of the so-called market “experts” (especially in North America) have branded silver an “industrial” metal.

In a follow-up commentary (“Silver's WIDE range of uses continues to push demand higher”), I discussed one of those new industrial applications: in polyester sportswear. The popularity of this material is soaring because silver's anti-bacterial properties dramatically reduce bacteria build-up on the skin – which dramatically reduces odor, since it is bacteria which actually create the odor when we sweat.

There is another aspect of silver which separates it from virtually every other commodity: in most of the countless “industrial” applications of silver, silver is used in trace amounts – amounts too small to be recovered. Referring to the previous example, 1,200 tons of silver (each year) are used to fabricate 20 million tons of polyester sportswear. There are two hugely important economic implications to be drawn from this fact.

One of these implications has been discussed by numerous, precious metals commentators (myself included). Silver is “consumed”, literally. Thus, every year, we permanently lose large amounts of silver, and permanently alter the supply ratio between gold and silver.

Polyester sportswear already consumes 1,200 TONS of silver per year, which (at 32,000 ounces per ton) works out to over 38 million ounces of silver permanently consumed every year – in just one application. To put this into context, there are supposedly only 600 million ounces in total, global inventories at the moment.

However, as I pointed out in “Silver market fundamentals distorted by bullion-ETF's”, there is every reason to believe that this number grossly exaggerates actual inventories. As will be evident by the end of this commentary, silver's amazing versatility has not made it less “precious”, but rather more so.

No one is more tireless in his research into silver than Ted Butler. I have cited him often, in my own previous commentaries, and do so again. In Part II, I noted that Butler had made a comparison between current silver inventories today and those of 50 years earlier (thanks to “Bullion Bulls Canada” contributor, Claude, for bringing this to my attention).

In 1959 there were 9 BILLION ounces of known, global stockpiles (at a time when our planet had less than half the current population). Butler observes that 90% of that silver is now gone – even making a generous allowance for 100's of millions of ounces of “scrap” silver which could appear on the market (given a significant increase in price).

Thus in a world with twice as many people, and with an ever-increasing number of uses for silver, we have 90% less silver to divide among us. How can this possibly make silver “less precious”?

Just ask the “experts”. Because silver is an “industrial metal” this means it's no longer a “precious metal”. This is nonsense. If we discovered a cure for cancer tomorrow which required gold as an input, would anyone suggest this made gold less of a “precious metal”? Obviously not.

Beyond that, is the even less-intelligent 'wisdom' of the market: silver is no longer deemed to be a “precious metal” because “people don't think of it as a precious metal, any longer”. Who are these people?

Certainly not the people of China and India, who make up nearly 1/3^rd of the global population, between them. Yes, in India, rising incomes fueled a greater level of demand for gold for several years, because people could afford it. However, now, with the price of gold having risen rapidly, and the price ratio with silver so extremely warped, the pendulum is swinging back in India – with silver demand rising while gold demand is stagnant.

It's certainly not the people of Germany who no longer see silver as a precious metal. Silver developed deep cultural significance to Germans when they experienced the hyperinflation of the Weimar Republic – and silver became a crucial store of wealth and real money for an entire population.

It's not the people of Mexico, where only a couple of years ago the government openly contemplated the possibility of reintroducing a silver currency to replace the peso.

In the United States, the Constitution still defines the U.S dollar as a measurement of silver. Of course, this has become an archaic document which hardly anyone pays attention to any more.

The fact is that apart from a lot of “experts”, it's hard to find any significant group of people who don't think of silver as a precious metal. Yet, with the price ratio of gold and silver currently nearing 70:1 the actual amount of available silver and gold in the world is likely no more than 6:1 – with many actual experts (including Ted Butler) convinced that this ratio is even lower.

This brings me back to the second, huge implication derived from the fact that silver is consumed (in most applications) in trace amounts. This is something which (to the best of my knowledge) has not yet been discussed by anyone else.

It is basic economics that when an input of production is used in small amounts, then the price of this input is very “inelastic”. To explain this without the economic jargon, I'll refer one more time to the example of polyester sportswear. As I pointed out earlier, 1,200 tons of silver is enough to fabricate 20 million tons of polyester.

This means that (by weight) silver only represents a little more than 1/20,000^th of the inputs in this product. Thus, if the price of silver were to double, this would have such a tiny impact on the final price of sportswear that demand would not change at all. In reality, the price of silver could likely increase 1000% with little to no effect on demand.

Obviously not all applications of silver use such tiny amounts of silver, but with the rapidly increasing use of silver in nanotechnology, many of these new applications will use even smaller amounts of silver. Therefore, unlike almost any other commodity on Earth, even with an extremely large and rapid increase in price there will be a relatively small decline in demand.

The world is currently facing the largest silver-shortage in centuries. Meanwhile, the Manipulators have deceived the market into believing that global silver inventories have tripled in a little more than three years – because the phony, “paper promises” of (so-called) “bullion-ETF's” are included in those inventories!

Intelligent people will soon begin to realize (in growing numbers) that with the current dynamics of the global silver market, it is totally absurd to even suggest that current inventories could have increased by 200% in 3 years. As this realization grows in size (and vehemence), several events are certain to occur.

First of all, large investors are going to start hoarding silver again. Think: “Hunt Brothers” except that now there is hundreds of times as much capital floating around – and 90% less silver.

Secondly, pressure will mount on the various forms of silver fraud currently taking place. Consider this: it is the Manipulators (the fraudulent, bullion-banks), themselves who are telling us that 2/3 of global silver inventories are held in bullion-ETF's.

Meanwhile, these same criminals are holding a short-position in the Comex market somewhere close to half of global inventories (based upon the Comex "Commitment of Traders" report). This raises the obvious question: what is backing this short position? Obviously (by definition), the Manipulators cannot hold more than 100% of all silver.

If they could somehow manage to cover their own short positions, there assuredly would be little or nothing left for the bullion-ETF's – sitting there with their paper promises.

When the current surge in demand for silver turns into a frantic rush to grab as much bullion as possible while it is priced at no more than ¼ of its current value, that will be the end of the Manipulators – and the end of all those “bullion-ETF's” who don't physically possess their own bullion.

The only remaining question is whether this will occur next decade, next year, next month, or next week. Got silver?

Disclosure: I hold no position in bullion-ETF's. I do hold "physical" silver.

This article was written by

Jeff Nielson

1.95K Followers

Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada (http://www.bullionbullscanada.com/#content). He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and misunderstood) in the world. It also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world's most-promising discoveries.