Sunday, December 9, 2012

The True Value of Silver

What is the true value of silver?  To find this out we need to look at some facts about silver.
Most of the silver produced on this planet is a by product of a primary mining operation.  That is to say there are very few silver only mines.  As pointed out in  There is a reason for this. There used to be many silver mines being worked and doubtless there are still many silver mines out there that are not being worked. With the price of silver being so low and the cost of mining so high, it is uneconomical to work a silver mine hence 80 percent of the silver extracted is a by product of other mining activities.
Despite this there is a heavy demand for silver both in the investment as well as the industrial fields yet the price does not match this and although the demand is there, the supply is still not commercially feasible.
On top of this we have the investment anomaly of   the ratio between the gold and the silver price being about 50 or so to 1.  This is an anomaly because the ratio of gold to silver in the earths crust is around 17:1, not 50:1 and these metals one would expect to be mined and available in the same ratio.  Yet we have a suppressed silver price well below its proper ratio with gold. These metals should be mined in about the same ratio as their availability and of course they are not, purely because the silver price is far below the costs required to mine it.
According to both the Silver Institute and World Gold Council, silver has only been mined at a ratio of around 7:1.  So silver is being mined at less than half the rate one would expect if the silver price reflected the true value of silver.
As Jeff Nielson in his article, ‘Silver Smoking Guns’ recently pointed out.
“What happened toward the end of the 20th century? Nothing much…other than the price of silver being driven down to a 600-year low (in real dollars)—and held there. At this point the realities of silver mining become just simple arithmetic.”
“If the price of copper was driven down (and held down) at a 600-year low, there would soon be few if any primary copper mines in the world; and the vast majority of copper would have to come as a by-product of other mining. If the price of nickel was driven down to a 600-year low, the world’s nickel mines would quickly be driven out of business. And so on.”
With silver 17 times more abundant than gold you would expect more silver being mined as a primary activity.  The fact that the silver price is extraordinarily low for the value both in investment as well as industrial terms only gives further credence to the manipulation of the silver price.
Which brings us to Mr. Butler’s revelations concerning the massive short positions held by essentially five banks.  These five banks hold 80 percent of the short positions and continue to do so year after year in the Comex, the world’s largest silver market. JP Morgan is the bank that holds the largest of these short positions which is, interestingly, bigger than the long position held by the Hunt brothers when they were charged with silver manipulation.  Something JP Morgan appears to have avoided so far.
So from an investor point of view, why should one invest in silver when there is so much manipulation and it appears that the silver price is never going to go up.  Fortunately it is not as bad as it seems.  
The answer is simple, as Jeff Nielson points out. “Low prices lead to high prices.”  When silver is severely manipulated leading to an inventory collapse, such as 2011 when the silver price was pushed down to 4 dollars an ounce. It drove the price to 50 dollars an ounce in the northern hemisphere spring of 2011.  We are approaching an inventory collapse as less silver is being mined and current stocks are being depleted as the price has been held down so it is economically unfeasible to mine silver. Then the demand is going to increase and industry as well as investors are going to start stock piling silver, even remove what actual silver is in the COMEX, and this will drive the price up again to closer the true value of silver.

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