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 of years.
Opportunists have kept silver on their
investment radar screen.
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
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
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 deficit.
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 to oil.
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
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 term manipulation.
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 investment demand.
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
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
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 exchange.
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
*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 irrational heights.
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 place.
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 overall return.
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
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
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 unforeseen heights.
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.
Investing in 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
Click on the link to read part II of the