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August 20, 2004

I’ve had so many questions about silver that I figured I ought to get around to saying something about it.

Unlike gold, silver is not predominantly a monetary metal. By that I’m not trying to imply that gold is used exclusively for money, rather that its price is determined by its value as a monetary asset. If gold was not valued as money, its current price would be but a small fraction of what it currently is… much like silver.

While silver has from time to time been used as money, its chemical and physical properties make it far less desirable than gold. Among other things, silver oxidizes very easily, and it is also more abundant, even though you might not think so given how tough it is to find a good silver stock to buy. But more about silver stocks in a minute.

Annual mine production of gold is about eighty million ounces while annual mine production of silver is roughly six hundred million ounces. Silver production is more than seven times the annual gold production. Yet, in dollar terms, the gold market is more than seven times as large as the silver market.

Why is gold expensive and silver less so? Because gold is money and silver is primarily an industrial commodity.

Annual fabrication demand for silver is well in excess of eight hundred million ounces a year, of which roughly forty percent is used for industrial applications, just over twenty percent for photography, thirty percent for jewelry, and the rest (less than five percent) for coins and medals.

As you can see, industrial applications and photography account for about two thirds of annual silver consumption, and the rest is used mainly for jewelry. Fabrication demand therefore plays a key role in the silver market.

If we look at both gold and silver in US dollars, then whatever effect the dollar had on gold, it would have had a similar effect on silver. If both were priced as money, the charts would look the same. But they don’t.

Silver actually performed much better than gold during the Nineties, rising more than twenty percent from early in the decade and trading fairly consistently around $5.50 an ounce from 1994 to 1999. Gold, on the other hand, increased by only seven percent from 1992 to 1994 and stayed in that range only until 1996. From 1996 to 2001 the gold price declined by more than thirty percent while the silver price held up until 1999 and then declined only slightly more than twenty percent until 2001.

Industrial demand for silver supported its price during the latter part of the Nineties, which is why silver outperformed gold.

Industrial demand for silver increased by more than thirty percent from 1994 to 2000, and has declined by more than six percent since then. So while the “tech boom” was in full force, silver got the benefit. When the tech boom went bust, silver suffered as well. And that is why the silver price barely budged from 2001 to 2003, while the gold price rallied strongly.

But the amount of silver typically used in any given application usually represents a very small component of the overall manufacturing cost. The demand for silver from both industrial applications and photography is therefore very inelastic, meaning if the price increases the demand does not decrease.

It is this inelastic demand for silver that could propel its price much higher if investment demand for the metal picks up. And that is precisely what has been happening since late last year.

Because the silver market is such a small market, in dollar terms, a relatively small amount of investment demand can cause the price to spike dramatically. And because fabrication demand is inelastic, it doesn’t decline either.

So when speculators start buying silver in anticipation of a move upwards, it very easily become a self-fulfilling prophesy, and the silver price soars. But when they want to sell their metal to take profits, the same illiquidity that drove the price up will drive it right back down again.

The bottom line is that I fully expect silver to outperform gold as the bull market unfolds but at some point, I also expect the silver price to collapse again, at which point it could vastly under-perform gold.

The biggest problem for silver speculators is the lack of quality silver companies to chose from. Silver is primarily a by-product of lead-zinc mines, with secondary production from some copper-gold, and gold-silver mines. There are very few primary silver mines in the world -- at least not many large ones.

Silver often accounts for a minor amount of the revenue generated by large lead-zinc, and copper-gold mines. So even if the silver price does increase, it has only a small impact on the value of the mines. So unless you specifically want to be in the lead and/or zinc businesses, you’re probably better off buying physical silver.

Fortunately, because of the volatile nature of the silver price itself, one could stand to make a handsome profit just buying the metal, although storage might become a problem.

But if you buy physical silver at least you don’t have to worry about geo-political risk, management risk, geological risk, or any of the other “risks” that far too often “happen” to mining and exploration companies.

Even though the silver price was less volatile than the gold price during the Nineties it will become much more volatile in the future as speculators drive the price upwards. So if you like volatility, silver’s for you.

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.


This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.

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