Silver Price from 1964-2005
Part 1. Investing in Silver
Silver has been the metal filled with mystique
and fascination. It is irreplaceable in many industrial
applications, and has long been stored as money for thousands
Opportunists have kept silver on their investment
In 1979 the sons of patriarch H.L. Hunt,
Nelson Bunker and William Herbert, together with some wealthy
Arabs, formed a silver pool. In a short period of time they
had amassed more than 200 million ounces of silver, equivalent
to half the world's deliverable supply.
Once the silver market was cornered, outsiders
joined the chase, but a combination of changed trading rules
on the New York Metals Market (COMEX), and the intervention
of the Federal Reserve put an end to the game. The price
began to slide, culminating in a 50% one-day decline on
March 27, 1980 as the price plummeted from $21.62 to $10.80.
More recently in 1997, Warren Buffet purchased
130 million oz of silver secretly at below $5/oz. When he
made such investment known , silver price immediately spiked
up to $7/oz. from $4/oz. Granted, silver eventually came
back down, as with all metal prices in the late 90s. Unquestionably
though, a special place has been cemented in the hearts
of speculators, and for good reasons.
Fundamentally major sources of silver demand
are as follows,
- Industrial: From Plasma TV and laptops,
refrigerators to batteries.
- Photography and coating.
- Medical: disinfectant.
- Monetary: Named poor man’s gold, silver
has been money for over a thousand years in many nations
such as the UK, China, and Mexico. The British "pound
sterling" originally signified a pound weight of
Silver, money, and inflation
The curious might ask, why did various governments
around the world abandon the silver-as -money standard in
favor of a fiat money system* in the last 100 years?
Since president Nixon closed the gold window
in 1972, currencies could no longer be exchanged for gold
and silver at central banks around the world. The reasoning
involved the idea that a new fiat money system whereby government
controlled the money supply would offer more flexibility
to modulate the economies through peaks and troughs. In
other words, government would increase the money supply
at times of recession and decrease the money supply at times
when the economy was overheating. The timing of the removal
of the gold window was not arbitrary as the United States
was quickly depleting its gold reserve to the French and
rest of European nations due to a burgeoning U.S. trade
The government perhaps initiated this system
with good intentions, but a quick glance at the following
chart shows such a fiat system could produce irreversible
and potentially damaging rampant inflation.
The money supply (measured by M3) since1970
has increased 13 times from 800 billion to $10 trillion,
while at the same time GDP had increased 6 times (assuming
a 5% compounded annual growth over 35 years). Such is a
system that guarantees inflation.
*Fiat money system – A paper money system
that’s not backed by tangibles such as gold and silver.
Silver price from the past:
Adjusting for inflation with 1998 dollars,
silver presents quite a compelling investment. Today, the
ratio of oil over gold sits at near all time high, indicating
gold is an overlooked investment. While considering gold,
you could expect to hear silver bulls scream at you on the
ratio of gold over silver, which today sits un-naturally
high at 60+. Gold over silver ratio has been less than 20
for many centuries, the ratio of 60 shows silver today is
under-priced relative to gold and vastly undervalued compared
Many silver speculators are puzzled by such
comparisons. In order to analyze such anomalies, it’s important
to fill in some more facts about the silver market.
Silver market size and supply/demand
Silver is a small market with $7 billion
in global annual sales (900 million oz x $7.5/oz). This
compares to the $37 billion annual gold sales (80 million
oz x $460/oz), which in itself is considered small compared
to the over-$1.9 trillion daily Forex transaction.
To put silver numbers in proper perspective
– The U.S. hedge fund industry is now valued at over $1
trillion. Warren Buffet’s fund is valued at $130 billion.
Google is valued at 100 billion.
World known above-ground stock is generously
estimated at 200-500 million oz, or $1.5 billion to $4 billion.
Small markets tend to be more volatile and prone to short
Supply and Demand of physical silver.
Please review the following annual supply
and demand data from the silver institute.
One can see fabrication demand and mine
production have dominated the silver picture. Those numbers
have been fairly steady despite a volatile silver price.
This shows both total fabrication demand and mine supply
are price-inelastic. In other words, the silver quantity
demanded and supplied are not affected much by price. Therefore
silver price is likely sensitive to small changes such as
reduction in government silver sales or increase in net
Fabrication demand for the past decade has
consistently exceeded mine production supply by 200 million
oz per year.
Source: Silver Institute
Why is today’s silver price seemingly so
While no one knows for sure why silver prices
are not rising with such a chronic deficit, we enlist the
following as possible contributing factors:
1. Government sales
Global central banks perhaps have been more aggressive in
dishorading silver than gold, which has
certainly been the case with the U.S. Treasury.
No longer deeming silver as money or a strategic metal,
the United States Treasury dishoarded 3-4
billion oz. of silver in the last 3 decades. By 2003, it
completely ran out of silver inventory.
Coincidently this is when silver began its ascent from $4.4/oz.
to its present value of $7.7, (a 30%+
2. Extraordinary short sales by COMEX commercials.
There are two distinctive markets that determine
the global silver price. The physical trade that takes place
globally and paper trade on the COMEX, the US commodity
Contrary to common sense and different from
equity trading, traders on COMEX need not have evidence
of physical silver (by means of warehouse receipts) to short*
silver in the market. What this means is a COMEX trader
can theoretically sell unlimited number of silver contracts
to suppress the price.
The number of Comex silver short contracts
has steadily grown 10% yearly to now nearly 130,000 contracts,
or 600 million oz of silver. Of the total short silver position,
300 million oz of that is concentrated in 8 commercial banks.
*Short-Selling a COMEX contract would require
the seller eventually deliver the physical silver or settle
in cash before contract settlement date. The buyer of a
COMEX silver contract can demand physical silver delivery
or settle the trade in cash. Most investment funds choose
not to take physical delivery due to regulatory tax penalty
and storage concerns.
A 500 million oz. short position by commercial
traders almost matches annual silver mine production of
580 million oz, and exceeds world known above ground inventory
by as much as 50%. In equity analysis, this will be the
equivalent of shorting 800 million shares of Amazon Inc.
stock when Amazon Inc. has only 400 million shares floating.
Through the internet era of the late 90’s we were able to
see how short-covering could squeeze technology issues to
Judging by the size and the concentration
of commercial short position, one can plausibly conclude
there is a concerted effort to keep the silver price down.
Possible reasons to suppress gold and silver prices are
well documented at the non-profit gata.org and the prominent
Canadian hedge fund sprott.com. And because the short position
is so stunningly large, some silver analysts came out cautioning
a default on silver COMEX should the short squeeze takes
Percent of Open Interest Held by the Indicated Number of
the Largest Traders
: By Gross Position
: 4 or Less Traders 8 or Less Traders
: Long: Short Long Short:
All : 19.8 36.2 31.2 53.2
Gold vs Silver
Many gold investors also invest in silver,
hence there has been much heated debate on the merits of
silver vs gold as an investment.
Pro-gold camp pointed to 3 silver investment
a. How much more silver is produced over
(500 million oz. vs 80 million oz). We refute
such logic by pointing out that palladium, with no more
than 8-million-oz. of annual production, should then be
trading at a much higher price than gold (Palladium last
traded at $250/oz.).
b. Silver is bulky.
The insured storage fee amounts to no more
than 2% of the nominal silver value per year. In 1998, no
mutual fund investors complained about the 5% front sales
load in return for the double-digit gains. The 2% storage
fractional cost should be weighted against the potential
c. Silver is an industrial metal, not a
precious metal investment
We do not emphasize the industrial metal
vs precious metal issue. In our opinion anything that goes
up in price should be considered a good investment and silver
has gone up 70% since the 2003 low of $4.4/oz.
Silver investors countered those arguments
with pro-silver reasons.
a. Central Bank selling
While mine production supply couldn’t satisfy
physical demand for either gold or silver, it’s worth noting
that central banks have been more aggressive in dishoarding
silver, thus silver supply from central banks is likely
to be a lesser factor going forward
b. Commercial position
Total gold shorts on COMEX amounts to 20
million oz. vs 500million oz. for silver. The gold short
position is very small compared to the silver short position,
relative to nominal value, annual production, and above
ground inventory. Every short contract must be covered.
c. Consumed vs. Stored
Above ground gold inventory is rated at
around 150,000 tonnes, or $2 trillion. Above ground inventory
for silver is rated at 200 – 500 million oz, or $1.4 billion
– $4 billion. Silver has a better chance to repeat the palladium
supply scare scenario of year 2000 (when it raced from $350/oz.
to over $1,000/oz. in 12 months). Current silver known above-ground
inventory couldn’t fill the gap
d. Speculative appeal
In today’s world where paper money far out-supplied
any metal at current prices, fundamental supply and demand
of the metal itself is less relevant to the direction of
speculative money flow. Just like silver, which can be suppressed
because of the small size of the silver market, prominent
sizeable speculative capital can drive silver prices to
Since the gold to silver ratio peaked in
2003, silver has steadily outperformed gold, and therefore should be over-weighed for those who can withstand volatility.
Silver: Part I - Conclusion
Concurrent with the US dollar top in 2002,
the mutli-decade bear market for silver appeared to be over
in 2003 when it reached the inflation-adjusted historic
low of US $4/oz. Again we point to the following factors
for a higher silver price.
- Global central bank silver sales coming
to an end
- Depleting global physical inventory
- Speculative investment demand with an appealing story
and small market
- Rising industrial demand
- Silver miners unable to increase supply
- Potentially explosive commercial silver short covering.
We favor silver as an investment in the
commodity complex to supplement a well-diversified portfolio.
Assuming gold and silver returns to the historic average
of 20 to 1, this would equate to a silver price of $22/oz
with today’s gold price at 450/oz. Silver today trades at
Click on the link to read part II of the