Feb 18 2008 11:01AM

The Silver Lining: Part I

The following is edited from Chapter 10 of my new book How to Prosper during the Coming Bad Years in the 21st Century.

The Silver Lining in every cloud” is the symbol of optimism. It is right up there along with gold and platinum for jewelry or wedding rings. Silver has been by far the most commonly-used monetary metal; silver coins are far more common than gold in much smaller denominations. It is the most common coinage used as money (the British pound sterling?); Silver coins have been standard currency in many nations in all ages of time, much more even than gold. It has been used more often than gold for coins because many silver deposits are much shallower than gold, so they have been easier and cheaper to mine, even by primitive methods.

But never before have government silver coffers been so bare.

Silver is used in more applications than any other commodity (aside from petroleum).

Those are the words of a well-known independent silver analyst. I agree with him that, despite the insanely profitable gold bull market, silver may not be just twice as profitable as gold in the next few years, but even more than that. Why?

He also says, “silver is in huge short supply, and the shortage is getting worse by the day; the silver inventories which depressed the price for more than sixty years are gone!” He’s certainly right if you are talking about silver at today’s price!

Unlike gold in the 70’s when Jimmy Carter decided that rising gold was an embarrassment to the dollar and announced gold sales from Fort Knox to depress the price, government can’t decide to dump their silver onto the market to artificially suppress the price – because they no longer have any! Silver is still the poor-man’s gold, and the time is not far away when the investment world finally wakes up to the shortages, and soaring demand will make it difficult to find any investment silver at any price this side of $100 an ounce.

In the inexorable law of supply/demand, price is the great equalizer. There is plenty of silver available – at the right price – and $14 to $17 is not the right price. At increasingly higher prices, silver jewelry and sterling silver will come out of the wood work. I remember back in the ‘80s when I put out my famous silver sell signal, my only recommended bullion dealer, made millions buying down and melting and salvaging all kinds of silver – sterling silver and bags of coins – as investors who believed me that the silver bull market was over, were melting down even heirloom sterling silver. The same thing will happen again, but at much higher prices. And silver will come out of India and China in the form of jewelry to be melted down, but again, at much higher prices. At these prices, with their economic boom over the last decade, the newly created middle-class Indians and Chinese are buying gold and silver jewelry.

Says the same analyst, “If you could find a commodity which was considered a precious metal and was far more rare than gold, wouldn’t today’s crazy price discrepancy ($12.50 silver and $700 gold at the time he said it seem utterly ridiculous?” I agree, but not necessarily for the same reasons.

When the world discovers the supply-and-demand fundamentals, silver will be the star for investors. The safest money will be made in physical silver held in your possession. Someday soon, the users who need it may not be able to buy physical silver at anywhere near today’s price because there won’t be any available in the empty warehouses. If they need or want some, they may have to buy yours or metals from India or China – at a much higher price!

How, Where and Why to Buy Silver

You have a lot of choices here, some better than others, some good and some just plain bad. Let me count the ways:

  1. Junk Silver: The government stopped making 90% silver coins after 1964. These commonly circulated (not rare) coins can still be bought from coin dealers by the bag or half bag. A bag contains pre-1965 dimes, quarters and halves with $1,000 face value, weighs about 55 pounds, and the coins contain 715 to 725 ounces of silver. As this is written, a bag costs a bit more than $12,000 and half a bag is about $6,000. The coin industry calls this “junk silver.” They are “circulated,” have no numismatic (rarity) value, and you will not pay the face value of the coins, but the current value of the silver in the bag, plus a small premium. Many of them are being scrounged out of circulation and melted down into bullion bars; soon there may be a rising premium. Pay it. It’s worth it!

  2. Engelhard Silver Bullion bars: For larger amounts of silver, you can buy Engelhard 1,000-ounce bars and store them in a safe depository. They can be bought from any of the coin-and-bullion dealers listed in the Appendix. If they are to be stored any place other than where you bought them, or you have taken personal possession of them, they will have to be assayed when you sell them, which can be expensive and time consuming. If they are in storage, be sure they are in trust with an independent trustee.

  3. Silver rounds: some private mints have manufactured some coin-like “rounds” which you can buy from a coin dealer for very little premium.

  4. Semi-numismatic coins: These coins have some of the features of rare coins and bullion. Their price is based on their rarity and lack of flaws, plus the value of the bullion they contain. They are especially interesting for more than one reason; the numismatic value is based both on their age, and their condition, but the bullion content gives them a price floor, because if they ever lose their scarcity value, they can never be worth less than their bullion value. I really like them a lot.

  5. Silver in the ground: Silver mining stocks will be huge winners in the next few years. They are leveraged to the price of bullion, and will grow much faster than coins. They will be like a license to print money!

  6. ETFs:Silver ETFs(Exchange-traded Funds) have recently been launched and are sold on the American Exchange (ishares Silver Trust (AMEX: SLV). It is a convenient way to buy silver. You can buy or sell your shares of the ETF at will, just like stocks. They will trigger a lot of silver buying, and are a very-bullish development as it exposes million of potential, non-traditional investors to silver. The ETFs will also have to buy huge amounts of silver to meet their legal obligations, which will be a big demand factor, which is bullish! We’ll be watching them closely to be sure they do the required buying.

  7. Futures Contracts: Caution! These are highly leveraged, because you will only have to put up a fraction of the value of the silver in the contract, enabling you to contract for several-times as much silver with the same amount of money. As silver goes up, if you don’t get a margin call along the way, you will make a lot more money than if you own physical silver. But if it temporarily goes down, you will lose your money a lot faster. If you have 10% margin and silver doubles in price, you will make ten-times your money. But if silver goes down 10%, you will lose all your money. Futures are only for those with a lot of money to risk, and nerves of steel. Most of you should avoid them, and the profits in mining stocks may be just as profitably leveraged. The COMEX futures-contract exposure is at least as great as all the known silver bullion inventories in the world.

This form of paper silver will boom price-wise as long as bullion does, but in the long run, by far the most safety will be with physical silver, especially if there isn’t enough inventory left for silver-users to get delivery settlement on their futures contracts to meet their commercial needs, and they will be forced to raise their bids so they can get you to sell them yours.

Where Did The Silver Go?

A lot of the world’s underground silver deposits were laid down very shallow when God created the Earth, so it has been easily mined over the years, even by primitive methods, and most of the world’s easy, cheap silver has been dug up. The world is now dependant on increasingly hard-to-find-and-mine deposits. There is continuing production of by-product silver found along with copper, lead and other minerals. The old, shallow pure silver mines have been depleted or are getting harder and more expensive to mine. Much of the cheap, easy, underground silver is exhausted.

The world’s biggest supply of above-ground silver is in India, but it’s not in ware-houses owned by the government. It is in the form of jewelry. It is a form of wealth worn by millions of Indians. No one person or government can decide to sell some reserves for any reason. It will take mass psychology, and that will take a lot higher prices.

Part II will run here in two or three weeks.

By Howard Ruff
The Ruff Times


Howard J. Ruff, the legendary author and financial advisor, has re-edited and will re-issue his 1978 mega best seller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times Financial Newsletter. This article appeared in the February 15, 2008 issue of The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio.

(You can learn about it here). The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world. His new book will be in book stores in April.


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