Supply and Demand
Silver – The vanishing metal
If the case for why Silver prices should rise wasn’t compelling enough after reviewing its rich history and the current events that are setting the stage for one of the largest transfers of wealth in our lifetime, let’s take a look at one more reason to jump on the silver bandwagon – Supply and Demand.
There are very few laws more predictable and powerful than those that govern the law of supply and demand. It’s simple economics 101 actually, more product and less demand equals lower price. Conversely, less product and more demand equals higher price.
In silver’s case there are very few (if any) stories more compelling for a run up in price based on these rules than silver because supplies are sitting at historic lows and that silver is the second most used commodity on the planet with only oil having more applications for use.
On the supply side the United States once had the largest stockpile of silver ever recorded at 3.5 billion ounces in 1960. Since then the government’s holdings have plummeted to roughly 20 million ounces. Unlike gold which almost every ounce mined is still in circulation, silver is truly vanishing at an amazing rate. Why? Because thanks to silvers properties almost 50% of the metal mined is used for industrial applications. From CD’s, cell phones, and flat screen TV’s to water purification and health care products to superconductors. Silver consumption has outpaced production for almost 20 years in a row! Above ground supplies aren’t the only place silver is vanishing from. It’s reported in geological studies done by the government that there is less silver in the earth’s crust than any other metal and that without any significant silver finds, the metal left in the earth at today’s consumption would be depleted in roughly 25 years!
While we still have a few years to worry about that happening, short term problems still exist since 25% of silver mined is from actual silver mines. Meaning the other 75% of silver coming out of the ground is a by-product of mines that are actually digging for other metals. Why is that important? Because if the demand or the price of the primary metal mined should drop below a point that it’s not feasible to continue mining for another metal like copper for example the owner of that mine will have no choice but to shut down which in turn puts more of a premium on price for what silver is available.
While the silver to gold ratio might not fall under a supply and demand heading it is important to note that historically it has taken 12 ounces of silver to purchase 1 ounce of gold (most likely because there was approximately 12 times more silver available than gold giving gold its luster among the metals). But for a myriad of reasons as we start 2009 the ratio between the two has widened to a gap never seen before with a ratio of 70 ounces of silver needed to purchase 1 ounce of gold. Conventional wisdom along with economical conditions would not favor gold falling to 150 dollars per ounce to recreate the historical ratio which only leaves one scenario in which silver makes a historical move higher to close the gap…
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