The points below are neither comprehensive nor exhaustive. They are intended to provide merely a prologue to some of the foremost motives for investing in physical silver as accented by many silver investors. However, a key point to keep in mind is that silver should be viewed as a hedge against inflation, rather than an investment per se.
Money Printing to Infinity
Governments around the world have been printing money, adding to their money supply. The Federal Reserve of the United States is a prime example of this, having added trillions of dollars to their money supply (‘Quantitative Easing’) over the past few years. Essentially, this will inescapably devalue the U.S. Dollar, creating a fertile environment for inflation. ‘As a result’ [of money printing], Mac Slavo, explains, ‘more money is chasing fewer goods, with silver being one of those goods. For the reasons above, as well as the fact that there is more money available, the price of silver will continue to “inflate,” just like other hard assets. Over the last 100 years, since the Federal Reserve was established, the US dollar has lost some 95% of its value.’ Inflation, therefore, means an increase in the commodity prices like silver.
Declining Silver Deposits to Mine
No new silver deposits have been discovered in recent decades, the result of which is that more silver is used and required than it is mined. Ted Butler expresses this well when he wrote that ‘It is only a question of time when the shortage of silver will come. The USA has enough gold for 1,000 years of future defense needs, and not one day’s worth of silver. There is no extra silver left in the world. When the [price rise] comes, it will go so high the whole world will ask how this could happen.’ It has been said that if all the current above-ground silver was distributed to every person on earth, they would each have less than 1/10 of an ounce of silver. That is less than 3 grams per person.
Growing Investor Demand
There is increasing demand for physical silver in terms of investor demand. There is presently less above ground investment-grade silver available to investors than there is gold. For example, although more gold is mined than silver, the United States Mint has reported that in some months during 2012, they sold the same Dollar value in silver as they sold in gold. Clearly, this is representative of the substantial increase in investor demand. As attested by major players in the silver investing world, purchasing significantly high quantities of physical silver is extremely difficult, if not impossible. As pointed out by Mike Maloney, ‘for the past 30 years the world has used up more silver than has been mined, and today silver inventories are near all time record low levels. For example, When Eric Sprott, from Sprott Asset Management, was preparing to open his physical silver trust, he had difficulty acquiring just 15 million ounces. Considering that hundreds of thousands of paper silver ounces trade on theCOMEX daily, this clearly points to a physical shortage available for investment purposes.’
Increasing Industrial Demand
The second aspect of the physical silver demand relates to the ever-increasing industrial demand. Silver had been dubbed the indispensible metal, for it has literally thousands of essential industrial, medical, military and manufacturing uses. A case in point is the electronics industry. Each electronic device, like cell phones, computers, and even hearing aids contains a particular amount of silver; silver is the most electrically conductive metal on the planet. Even if the silver price shoots through to the stratosphere, so to speak, Apple will nonetheless still require a specific amount of silver to manufacture their electronic products, thus, being forced to absorb the price increase. What is more, 95% of the silver used in such devices is never recovered or recycled, unlike gold. Add to this equation the increasing demand from the solar panel manufacturing sector, and the tightening of the physical supply becomes unambiguous. Therefore, the demand for silver is not only increasing, but it is still rising, and it is inelastic to price.
Manipulation of the Silver Price
The manipulation of the silver price by the so-called ‘cartel’ has been investigated since 2008. JP Morgan has been accused of being one of the central players in this price manipulation scheme, and has at times owned more than 25% of all short contracts on silver (‘naked shorts’ i.e. paper silver contracts not backed by the physical metal itself). Although no official report is yet available that confirms silver price manipulation, it is nonetheless considered fact by legendary precious metals fund managers and investors like David Morgan, Mike Maloney, James Turk, John Embry, and Eric Sprott. In any case, when, not if, the silver price manipulation fails, the price of silver will inescapably rocket to its intrinsic worth set by the free market. The longer the silver price remains manipulated, the more dramatic the breakout will be towards its fair value.
Gold/Silver Price Ratio
Historically, the average ration between silver and gold is about 1:16. In other words, one ounce of gold could purchase about sixteen ounces of silver. Currently, the silver/gold ration is around 1:50. This is clearly skewed and unsustainable, and a correction is inevitable. Although gold is more rare than silver when mined, gold has been treasured, whereas silver has been ‘consumed’ by industry, essentially making the remaining silver more rare than gold in terms of its 1:10 ratio in which it occurs. As Chris Dwain has asked, ‘if throughout all of history, for every one ounce of gold that has been mined, ten ounces of silver have come out of the ground, how much longer can we expect to have a 1:50 ratio?’
The Inflation Adjusted Silver Price
The silver price is way below the inflation-adjusted high. In January 1982, the silver price reached an all time high of about $50.00 per ounce. This price, if adjusted with inflation over thirty years, would mean a silver price of approximately $130.00 per ounce today. This is about 75% below the real 1982 silver peak price. Even though such a pronounced price adjustment is unlikely to occur in the short term, even a marginal adjustment towards this 1982 peak price, adjusted to inflation, would mean a much higher silver price in the near-term. Where that price will end up exactly is not certain. However, what is certain is that, in the medium to long term, the silver price is sure to increase considerably. The point is this: the silver price is extremely undervalued in terms of its all time price highs.
Silver is Relatively Cheap
It is easy to write off silver as an ‘investment’ by reasoning that it was under $10.00 per ounce a decade ago, and that at current price levels, it is overpriced. However, at current price levels, the cost of mining and production is as high as 80-90%. Therefore, silver, at the current price, is cheap and it truly deserves the name, ‘the poor man’s gold’.
No Counterparty Risk
A ‘counterparty’ is a party with which a transaction is done. If A sells something to B, then B is a counter-party from A’s point of view and vice-versa. So, for example, even if you own your car outright, or have the title deed to your house, you are still liable to pay tax on those ‘assets’ or items. Although you own them, there is counter party risk (also known as ‘default risk’). That is, you are required to rely on someone else to fulfill a promise in order for your asset to maintain its value. However, purchasing physical silver bullion permits direct ownership of silver without counterparty risk, (e.g. the management qualities of the mining company).
Recommended Readings for Further ResearchFumi Teru 2009. How to buy and invest in physical gold and silver bullion [Kindle Edition].
James Turk 2004. The Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets. Dobleday Publishers.
Michael J. Hoiden 2009. A Guide to Getting Started Investing in Numismatic Coins and Bullion [Kindle Edition].
Michael MacDonald and Christopher Whitestone 2012. The Silver Bomb: The End Of Paper Wealth Is Upon Us (Volume 1). An independently published book.
Michael Maloney 2008. Rich Dad’s Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future. New York: Business Plus.
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