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Silver Investment Fundamentals

Although silver is extremely scarce in relation to most elements and resources, it is the most plentiful and least expensive of various precious metals (compared to gold, platinum, palladium, and rhodium). Thus silver is the world’s most affordable precious metal and especially over the last ten years this precious metal has gained a larger portion of many investor portfolios.

Historically speaking, for many thousands of years silver has served as a trustworthy store of value, money for day to day transactions, and a vehicle for long term savings and capital formation.

Silver coins, mostly struck with sterling silver (some copper added to make them more resilient and durable for monetary circulation), have been used in virtually every culture and country at various times. Examples include ancient Lydian silver coins, Greek drachma silver coins, the silver Roman denarius coin, and British pound sterling silver coins.

In various languages, the word silver literally means money or cash. For example in French, Spanish, Portuguese, Thai, and Greek.

Nobel Prize winning economist Milton Friedman once quipped, “The major monetary metal in history is silver, not gold.” Most likely he was referring to the fact that in overall historical transaction volumes, silver has served mankind more as money than even gold, most likely given silver’s smaller value and ease of use in tiny transactions.

Silver remains a secure and affordable safe haven investment helping investors hedge their wealth against economic disruptions, bank bail-ins, fiat currency devaluations, and systemic financial crisis.

On the brighter side, there are many positive reasons why silver bullion buyers buy and own silver many believing the precious metal is wholly undervalued today. Silver remains second only to oil in the amounts of products it is used in, with good reasons.

 

By silver's very essence and fundamental nature:

 

 

Aside from silver’s consistent usage as a monetary metal, its other diverse uses are in silverware, jewelry, dentistry, air conditioning, water filtration, mirror coatings, solar panels, various electronics, photography, and other applications we will examine further in the silver demand section below.

The following is the world's silver supply and demand data for ten years from 2006 - 2015. Note the consistent deficits in silver supply vs increasing silver demand.

 

Silver Supply Silver Demand
Source

Silver Supply

Mankind has mined an estimated 1.5 million tonnes of silver to date. This amount of silver could fit into a 52 meter cube. Unlike gold mining output, which is almost all entirely with us still today, much of these nearly 50 billion silver ounces mined have been used in industrial goods and remains not recycled nor a large portion even unrecoverable at today’s current silver prices.

Including both silver mining and silver scrap recycling, the annual supply for silver hovers around 1 billion ounces per year. Roughly 80% of the annual silver supply comes from silver mining of which less than one third is derived from silver-only mining efforts. Most silver is mined as a byproduct of other industrial and precious metal mining efforts.

 

World Silver scrap supplies
Source

 

Given that about 20% of annual silver supply comes from refining and recycling old silver, it could be argued that the true annual addition to the above ground silver supply is around 800 million ounces per year.

According to Thomson Reuters, world silver demand has outstripped annual silver supply levels the vast majority of the past decade. According to the Silver Institute, an overall slowdown in silver mine production is expected to continue.

 

World Silver Mine Supply Silver Mine Supplies by Region
Source

 

Mexico, Peru, and China in respective order produce the largest silver mine outputs in the world. In total they account for over half of the world’s annual silver mine supply. Other silver mining countries, the largest silver ore producers, and largest primary silver mines can all be found here.

The following two charts examine above-ground silver bullion supplies and transparent silver holdings purportedly held in ETFs, mutual funds, and other silver investment proxies. 

Silver bullion inventory levels silver supply vaults 2006 - 2015
Transparent Silver bullion vault holdings
Source

 

Amongst private silver bullion bar and coins buyers, exchange traded silver funds, and futures exchange warehouses, some 3 to 3.5 billion troy ounces exist today in .999 fine bullion form. In other words, about 6 to 7% of the all time silver mined remains held in a .999 fine bullion coin, round, or bullion bar form.

 

Silver as a percentage of global assets share of global assets
Source

 

Total world silver bullion holdings value at less than $70 billion in US dollar terms today, whereas most other major asset classes (stocks, bonds, real estate and even gold) are measured in the many multiple trillions of US dollars.

 

Gold percentage of global assets Real estate bonds stocks equities
Source

 

The all time estimated gold to silver mined ratio is about 8 oz of silver to 1 oz of gold (based on the all time estimate of 1.5 billion tonnes of silver and 186,700 tonnes of gold mined). According to geologists, we find 0.075 parts per million (ppm) of silver vs 0.004 ppm of gold which would give us a naturally occurring ratio of 18.75 but recall too that almost all the silver we mine today is done as a byproduct of other metal mining operations.

 

100 year gold silver ratio
Source

 

For over 100 years now governments and central banks have been actively influencing and even arbitrarily setting the prices and values for silver and gold. As a consequence the over 5,000 year historical average gold to silver value ratio of about 15 has ballooned at times to a ratio as high as 100, now nearing a ratio of about 70.

 

USA Silver Reserves 1940 - 2014 vs USA debt 1940 - 2014
Source

 

By 1964, the US government was forced due to phase out using silver in its circulating coinage mainly do to years of deficit spending and lessening silver bullion reserves. Nations such as Britain, Canada, Australia, Mexico, and others also moved away from using silver in their circulating coinage for essentially the very same reasons.

Although not transparent nor published like Official Gold Reserves, government silver reserves are not deemed to be a large portion of the current silver supply (unlike central bank gold reserves which constitutes almost one-fifth of all the gold ever mined, under direct government ownership).

 

Silver Demand

In 2015 alone, total world physical silver demand stood at a record of 1,170,500 troy ounces.

Silver Jewelry & Silverware

About one quarter of 25% of annual silver demand is used in silver jewelry and eating utensils. Silverware has long been prized for its brilliant luster, germicidal properties, and easy malleability for conducive for silver artisans.

A comparatively high gold price has helped sustain and grow new markets for mid-priced silver jewelry items. Many consumers have begun to choose small sterling silver jewelry items or gifts in larger numbers.

Silver Industrial Demand

Just over half or 50% of the annual silver supply is used in industrial applications. Silver is driven significantly more by industrial demand than gold (roughly 50% industrial demand for silver vs only 10% industrial demand for gold).

Silver’s larger industrial role can be an impetus for downward volatility and spot price sell offs during economic downturns, as futures contract trader logic assumes less products will be made during recessions. Bearish cases for industrial metals like silver can quickly turn on their head with central bank intervention and monetary accommodations (i.e. from 2008 crash to QE 1, QE 2, etc. leading to $50 oz silver in spring 2011).

Without silver our modern way of life would be hard to maintain. The amount of industrial applications for silver is surpassed only by crude oil itself. Silver has thousands of modern-day industrial uses for which supplementation with other metals is unlikely given silver’s current price point and its superior elemental attributes.

 

Other industrial silver uses and applications include silver in the production of various:

  • Batteries
  • Electronics
  • Solar Panels
  • Alloys & Solders
  • Automobile switches
  • Car Glass & Mirrors
  • Nanotechnology
  • Engine bearings
  • Electroplating
  • Clothing
  • Hospital Surfaces
  • DVDs and CDs
  • Pharmaceuticals
  • Medical Equipment
  • RFID technologies
  • Superconductors
  • Wound Dressings
  • Photography
  • Producing Antifreeze
  • Deodorant
  • Musical Instruments
  • Tinting Sunglasses
  • 3d Printing
  • Weather Modification
  • Dentistry
  • Surgical Masks
  • Implants / Prostheses
  • X-Rays
  • Chemical Production
  • Air Conditioning
  • Insulation
  • Water Purification

 

Silver’s industrial demand in various cases may be inelastic to price spikes due to tiny trace amounts of silver utilized in many of the aforementioned industrial applications. Even if silver were to be priced many multiples higher than today, smartphones and other electronics will most likely still be using silver in their production. For instance a computer generally only contains about 1 gram of thinly placed silver coatings while a cell phone typically uses just 0.2 grams of silver. Any additional cost per unit due to higher silver prices would likely be passed to consumers as opposed to supplemented with inferior metals.

One of the fastest growing and most intensive industrial applications for silver is in the solar industry. The typical solar panel today actually uses about 2/3rds of a troy ounce of silver (about 20 grams).

Industrial silver applications are growing and shall remain essential to our modern way of life.

 

Silver Investment Demand

Investor .999 fine silver bullion buying now accounts for roughly one quarter of 25% of annual silver demand. This segment of silver demand growth has exploded over the last decade much in part due to the 2008 Financial Crisis (where the median middle class American lost over 40% of their wealth on paper).

The internet has also further allowed average investors to learn fundamental investment factors for silver. Physical silver investment buying has surged over the past decade, accounting in 2006 for just over 5% of total silver demand to almost 25% in 2016 alone.

 

Silver Bullion Demand 2000 - 2015

 

Since the start of the millennium in the year 2000, silver has risen from a price of $5.39 per troy ounce in US dollars to an intraday high of $49.51 an ounce on April 28, 2011. Today silver is trading for less than $20 an ounce.

In the late 1980s, two of the largest government silver bullion coin mints (the US Mint which produces the 1 oz American Silver Eagle bullion coin, and the Royal Canadian Mint which produces the 1 oz Silver Maple Leaf bullion coin) began producing legal tender bullion coins which are sold both domestically and internationally.

These two highly traded silver bullion coins have become the first and second most popular silver coins investors buy in terms of overall sales volumes (#1 American Silver Eagle Coins, #2 Canadian Silver Maple Leaf Coins).

 

Government Silver Bullion Coin Sales 2003-2015

 

Since the 2008 Financial Crisis, many respective private and government silver mints have consistently reported record silver bullion round, bar, and coin sales.

Supplementing government silver bullion coin sales have been private silver mints which produce millions of ounces of silver bullion bars and silver bullion rounds annually which investors often prefer to purchase given the general lower price premiums privately minted silver bullion products carry versus higher priced sovereign legal tender silver bullion coins (e.g. American Silver Eagle Coins, Canadian Silver Maple Leaf Coins, etc.).

 

Silver Price Discovery

Commodities like silver (as well as gold, oil, palladium, platinum, wheat, coffee, cotton, and other items) all have futures contracts listed on various futures exchanges throughout the world. Perhaps you have seen certain acronyms like the NYMEX, TOCOM, CME Group, CBOT, SHFE, and COMEX etc.

Futures contracts have been used in one form or another for hundreds of years. The original intention of futures contracts is to give producers of commodities (like silver miners for example), end users (Silver refiners and bullion dealers for example), and price speculators (those who simply trade on futures exchanges for short term gains) ways to respectively manage price risk, buy and potentially take actual delivery of the real world goods, or now more so than ever simply speculate and place bets on a commodity’s future price rise or fall.

A commodity’s futures price is based on ongoing price discovery for optional future delivery contracts of that particular commodity.

The spot price of silver is determined by its most highly traded futures contract. This most traded futures contract can be the current month or it might be two or more months into the future.

Currently the silver spot price is a fluctuating combination of world futures market prices (mostly influenced by the highly fractionally reserved COMEX and London Bullion Market) found via the selling and buying of virtual contracts representing the potentially deliverable physical precious metal.

 

Silver Futures Exchange Silver Bullion Inventories
Futures Exchanges Source Pg 41

 

The entities who exert the largest influence on the current silver spot price are for the most part not actually exchanging physical silver, but instead trading derivative contracts to highly influence what the real world’s physical silver price is.

For example, it was estimated as recent as 2014 that the annual silver market accounts for a gargantuan $5 trillion in US dollar trading volumes. Note again that the world’s annual physical silver bullion supply would have been valued at about $20 billion US dollars in 2014. This implies an annual supply versus trading volume leverage of 250 multiples.

Far less than 2% of silver futures contracts (excluding the SHFE) are settled in physical delivery of silver bullion. Thus the price for silver is currently mostly influenced by short term price speculators trading futures contracts, political and economic events.

If a large enough percentages of the world continue to growingly demand physical delivery of their silver bullion, the current highly leveraged fractional reserve future markets may be forced to adapt to a situation where deliverable physical silver bullion indeed drives the price of silver ahead.

 

Silver Spot Prices vs Silver Bullion Prices

Virtually all online bullion dealers carry a live silver spot price quote on their website sometimes even quoting silver prices in various fiat currencies (US dollars, Canadian dollars, euros, etc.).

The most popular silver bullion products available to purchase from silver bullion dealers are virtually all priced per ounce at a few percentage points above the fluctuating silver spot price. This is mainly due to the given costs associated with refining, manufacturing, minting, marketing, hedging, warehousing, and selling the respective silver bullion products.

Conversely when selling silver bullion to retail dealers, silver bullion products will typically yield a sell or bid price at or just below the fluctuating silver spot price.

 

Silver Bullion Price vs Silver Spot Price (during calm low market volatility)

 

Silver Bullion Price vs Silver spot price during normal calm markets

 

In general, during times of calm market equilibrium, silver bullion product prices hover slightly over the silver spot price. In other words, if silver’s spot price is $20.00 oz, most physical silver bullion products will be priced slightly above $20.00 per troy ounce of silver bullion.

 

Silver Eagle Coin Price Premiums 2008 - 2017

 

Yet note too that during times of silver bullion market disequilibrium (like during the 2008 Financial Crisis), silver bullion product prices available for immediate delivery may spike higher (both on the sell and buy side) to levels both hovering above the world’s fluctuating silver spot prices.

In summation, the silver spot price relation to deliverable physical silver bullion generally functions like so:

 

When most long term bullion buyers learn about how fractionally reserved silver future markets function to derive the world’s fluctuating spot prices for silver, they often choose to simply bypass trading virtual silver proxies. More and more these prudent silver investors simply elect to buy and take physical delivery of their silver bullion.

By owning your silver bullion outright and directly, you can even potentially take advantage of times when silver bullion premiums spike over fluctuating silver spot prices (similar, yet possibly larger than even the 2008 Financial Crisis when many silver bullion product premiums spiked to more than 50% over the then silver spot price).

More and more investors around the world appear to be confirming Milton Freedman's words, “The major monetary metal in history is silver, not gold.

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