Eric Sprott: Why Are Investors Buying 50 Times More Physical Silver Than Gold?

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By Eric Sprott

Why are (Smart) Investors Buying 50 Times More Physical Silver than Gold?

As long-time students of precious metals investing, there are certain things we understand. One is that, historically, the availability ratio of silver to gold has had a direct influence on the price of the metals. The current availability ratio of physical silver to gold for investment purposes is approximately 3:1. So, why is it that investors are allocating their dollars to silver at a much higher ratio? What is it that these “smart” investors understand? Let’s have a look at the numbers and see if it’s time for investors to do as a wise man once said and “follow the money.”

Average annual gold mine production is approximately 80 million ounces, which together with an estimated average 50 million ounces of annual recycled gold, totals around 130 million ounces available per year. In comparison, annual mined silver production has averaged around 750 million ounces, while recycled silver is estimated at 250 million ounces per year, which adds up to approximately 1 billion ounces. Using this data, there is roughly 8 times more silver available to buy than there is gold. However, not all gold and silver is available for investment purposes, due to their use in industrial applications. It is estimated that for investment purposes (jewelry, bars and coins), the annual availability of gold is roughly 120 million ounces, and of silver it is 350 million ounces. Therefore, the ratio of physical silver availability to gold availability is 350/120, or ~3:1.1

Now, let’s examine how investors are allocating their investments between gold and silver. The data below is from the US Mint showing gold and silver sales in ounces:

Table1.gif
Source: US Mint (www.usmint.gov)

As you can see, investors are choosing to buy silver at a ratio to gold that is well above what is available. This uptrend doesn’t show any signs of slowing either. The ratio of the physical silver to gold is both rising and extraordinarily above the availability ratio of 3:1.

We can also use other data such as the most recent issues of the Sprott Physical Gold and Silver Trusts. The last Gold Trust issue in September 2012 raised US$393 million and the last Silver Trust issue raised US$310 million. On the basis of prices for each metal at the time of issue, we could purchase ~213 thousand ounces of gold and ~9.1 million ounces of silver. This represents a purchase ratio of 43:1.

If we examine ETF holdings in both gold and silver, we note that in the period from 2007 to 2012, the increase in silver holdings amounted to 12,000 tonnes, compared to 1,200 tonnes of gold – meaning, investors purchased ten times more silver than gold.

These are only three factual data points to consider, but there are other indications that silver investment demand is way out of line with availability. Our favourite question to the bullion dealers we meet, is to ask the ratio of their dollar sales in gold versus silver. The answer is that dollar sales are equal, which means that physical silver sales relative to gold are greater than 50:1.

A recent news headline on Mineweb read, “Silver Sales to Outshine Gold in India.2” It went on to quote a bullion dealer that “investors and jewelry lovers prefer silver jewelry these days.” As the largest importer of gold in the world, it would be impossible for India to purchase an equivalent amount of silver, as it would require more than one billion ounces, essentially more than the current annual mine production.

While these last two confirmations of silver demand are anecdotal, the statistics from the US Mint, the ETFs, and our Physical Trust issues, are factual.

For the time being, the silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading Commission stated on October 26, 2010, “I believe there have been repeated attempts to influence prices in silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in the silver market and any such violation of the law in this regard should be prosecuted.”3

Which brings us back to the phrase “Follow the money.” In our view, it is almost inconceivable that investors would allocate as many dollars to silver as they would to gold, but that is what the data shows.

The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). This is a ratio of 60:1 in dollar terms.4

How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold. Historically, the price ratio between gold and silver has been 16:1, when both were currencies. Today the ratio is 55:1, so what are the numbers telling us? We believe this is one of those times when smart investors will be well rewarded to “Follow the money.”

On behalf of all of us at Sprott, I wish you safe and happy Holidays and a prosperous New Year.

P.S. – US Mint Sold Out of Silver Eagle Bullion Coins Until January 7, 2013
The Mint recently informed authorized purchasers that all remaining inventories of 2012-dated Silver Eagle bullion coins had sold out and no additional coins would be struck. Since the 2013-dated coins will not be available to order until January 7, 2013, this leaves a three week void for the Mint’s most popular bullion offering.

1 Sources: Gold data is from World Gold Council www.gold.org, and silver data is from Silver Institute, http://www.silverinstitute.org/site/supply-demand/
2 Source: Mineweb.com
3 Source: Bloomberg: http://mobile.bloomberg.com/news/2010-10-26/silver-market-faced-fraudulent-efforts-to-control-price-chilton-says.html
4 Sources: Gold data is from World Gold Council, silver data is from United States Geological Survey (USGS) and Silver Institute.
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Mon, 12/24/2012 - 17:41 | 3093724 Oldballplayer
Oldballplayer's picture

Silver, bitchez.

Mon, 12/24/2012 - 17:46 | 3093736 ArgentoFisico
ArgentoFisico's picture

Argento, Trojazze!

Mon, 12/24/2012 - 18:10 | 3093776 The Shootist
The Shootist's picture

Silver, Bitchez. I was just thinking about that last night and how it is perhaps a better slogan for Zerohedge than "Gold, bitchez." More of an "I told you so fuckers." More to gain, more to break the back.

Mon, 12/24/2012 - 18:41 | 3093799 margaris
margaris's picture

AΣHMI, PE MALAKEΣ!!

Mon, 12/24/2012 - 18:47 | 3093818 gmrpeabody
gmrpeabody's picture

That's easy for you to say...

Mon, 12/24/2012 - 18:57 | 3093833 goldfish1
goldfish1's picture

Argent, chiennez!

Mon, 12/24/2012 - 18:59 | 3093837 e_goldstein
e_goldstein's picture

ribbit

Mon, 12/24/2012 - 19:55 | 3093905 Pinto Currency
Pinto Currency's picture

 

The Coinage Act of 1792 establishes one dollar as 371 grains of pure silver.

http://en.wikipedia.org/wiki/Coinage_Act_of_1792

Someone should challenge the Fed on issuing dollar denominated "Federal Reserve Notes" ( a note being a promise to pay) with no intention or ability to pay those dollars and with dollars that they conjure out of thin air by the trillions.  I am sure there is a legal term for that.

Note that the Wikipedia entry says there is no legal definition of "dollar" to be found in U.S. statute.  If that is the case, it would seem that the original definition should still stand unless specifically superseded.

Mon, 12/24/2012 - 21:42 | 3094017 Enslavethechild...
EnslavethechildrenforBen's picture

Not content stealing Trillions, they are now printing and s-t-e-a-l-i-n-g $Quadrillions...

QUADFUCKINGDRILLIONS

and the sheeple are watching Charlie Sheen and drinking budwieser

Tue, 12/25/2012 - 00:08 | 3094175 Nobody For President
Nobody For President's picture

I'm reading zh and drinking brandy. Is that better or worse?

Tue, 12/25/2012 - 03:45 | 3094334 strannick
strannick's picture

Eric Sprott is a financial terrorist. God bless and keep him.

Tue, 12/25/2012 - 08:23 | 3094396 GetZeeGold
GetZeeGold's picture

 

 

We would have closed Gitmo......but it turns out we may still need it.

Tue, 12/25/2012 - 15:07 | 3095002 OutLookingIn
OutLookingIn's picture

A perfect place - Gitmo!

For who?

Every crooked Wall streeter and corrupt politician.

Will it ever happen?

Not a chance in hell!

Tue, 12/25/2012 - 16:46 | 3095174 RockyRacoon
RockyRacoon's picture

Gitmo ain't nearly big enough... unless you divide it up into 3X7 foot plots.

Wed, 12/26/2012 - 09:35 | 3095941 N. B. Forrest
N. B. Forrest's picture

No kidding.  Breaking the strangle hold of the big banks, exposing the lies of central bankers, letting the average guy buy pms for his retirement account and becoming a billionaire in the process. 

 

Rather clever I'd say.  I hope he has a good security system and body guards. 

Tue, 12/25/2012 - 00:58 | 3094222 quadcap
quadcap's picture

You seem to think that the "laws" matter.  They don't any more, it's all about naked power now...  The sooner you grasp this, the better.

Tue, 12/25/2012 - 06:38 | 3094373 monkeys.pick.bottoms
monkeys.pick.bottoms's picture

Srebro, kurwa!

Mon, 12/24/2012 - 20:37 | 3093971 ClassicalLib17
ClassicalLib17's picture

.  

Tue, 12/25/2012 - 02:03 | 3094285 Matt
Matt's picture

"Why Are Investors Buying 50 Times More Physical Silver Than Gold?"

Is it because it is 50 times cheaper, and they buy equal $ worth of each?

Tue, 12/25/2012 - 06:30 | 3094371 new game
new game's picture

or we are hedging one against the other. as silver ratio improves gold will be rotated to.

win fucking win stategy...

smack down has been a very merry x-mas present indeed. history repeating to the day!

but ah, colt to silver-thanks prez>you may even get my vote next time!

you are waking many sheeple from their slumber-thanx for that too.

Tue, 12/25/2012 - 06:45 | 3094375 jeff montanye
jeff montanye's picture

right, but there isn't 50 times more silver available in the earth's crust or for investment out of current production and recycling.  there is less, somewhere between 16 and 3 to 1.

a comment above about the definition of a dollar in silver as 371 grains or about .85 of an ounce, around $25.  have prices of labor, land, commodities, etc. increased more than 25 times since 1792?  if so, perhaps silver is a buy.

Tue, 12/25/2012 - 08:38 | 3094400 Thomas
Thomas's picture

And the above ground stash of silver is near parity with gold. Silver could go totally nuts at some point.

Tue, 12/25/2012 - 16:48 | 3095180 RockyRacoon
RockyRacoon's picture

Silver could go totally nuts but for the blatant manipulation of prices.

From the article:

"How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold."

They are "surprised".  Right.  Sure they are.  Just too limp-wristed to jump into the conspiracy fray.

Wed, 12/26/2012 - 09:38 | 3095944 N. B. Forrest
N. B. Forrest's picture

I'm all for the manipulation.  I'm in the accumulation phase. 

 

I'm not a wealthy man, so the more silver I can get at fire sale prices, the better. 

Wed, 12/26/2012 - 11:41 | 3096196 fockewulf190
fockewulf190's picture

"I'm not a wealthy man..."

 

You will be.....you will be.... Yoda

Tue, 12/25/2012 - 13:06 | 3094758 Matt
Matt's picture

I'm betting if the price ratio was 16:1 the article would be titled "Why are investors buying 16X as much silver as gold?"

Wed, 12/26/2012 - 10:42 | 3096041 Jack Napier
Jack Napier's picture

I'm betting you only read the title, and not the content of the article that shows in previous years investors were buying less silver vs. gold as compared to today even when the GSR was higher than it is now. I'm also betting you are on the payroll.

Tue, 12/25/2012 - 16:19 | 3095113 TWSceptic
TWSceptic's picture

I've made it a habit to buy 50% of each often at the same time. I would buy more silver if it wasn't partly dependant on industrial use.

Tue, 12/25/2012 - 16:43 | 3095166 Silver Bug
Silver Bug's picture

Eric Sprott is one of the greatest Gold and Silver Vigilantes of our time. A true patriot.

 

http://ericsprott.blogspot.ca/

Wed, 12/26/2012 - 09:39 | 3095947 N. B. Forrest
N. B. Forrest's picture

But he's Canadian... It that possible?

Tue, 12/25/2012 - 20:44 | 3095451 NoClueSneaker
NoClueSneaker's picture

:-(  Doesn't work .

Mon, 12/24/2012 - 19:23 | 3093873 Larry Dallas
Larry Dallas's picture

This is where I'll be spending my holiday cheer too!!

http://gunshowtrader.com/gun-shows/las-vegas-gun-show-crossroads/

Sadly, the NRA will be probably be slowly neutered this coming year so I expect this to be incredibily packed with everyone and their brother in law to make the pilgrimage from California here.

Tue, 12/25/2012 - 00:23 | 3094193 Room 101
Room 101's picture

The NRA was neutered long ago.  It's a gun rights marketing organization, not a gun rights organization. The smaller, more active organizations like the Second Amendment Foundation, GOA, and VCDL are where the action is.

Attention thoughtcriminals! The guards, interrogators, and pain delivery specialists at the Ministry of Love wish you and yours a very Merry Christmas!  

Tue, 12/25/2012 - 02:07 | 3094289 12ToothAssassin
12ToothAssassin's picture

The AWB hits Jan 28th with no warning. you heard it here first.

Tue, 12/25/2012 - 04:54 | 3094347 MarcusLCrassus
MarcusLCrassus's picture

This is just classic Shock Doctrine effect.  Ratched up the fear and then watch the sales hit the roof. 

Gun manufacturers love it when these mass shootings happen.  Great for profits.   

Mon, 12/24/2012 - 23:44 | 3094161 swanpoint
swanpoint's picture

Trav777 WHERE ARE YOU? .. I think Trav777 started that +2 years ago..

Tue, 12/25/2012 - 08:25 | 3094397 GetZeeGold
GetZeeGold's picture

 

 

It's all funny until the blowtorch backfires.

Tue, 12/25/2012 - 09:06 | 3094413 spentCartridge
spentCartridge's picture

It only costs five bucks to dig it out of the fucking ground, right?

Tue, 12/25/2012 - 00:56 | 3094220 qqqqtrader
qqqqtrader's picture

Yearly Home Prices...

in Gold & Silver

Tue, 12/25/2012 - 10:20 | 3094501 El Oregonian
El Oregonian's picture

There's ALWAYS a SILVER Lining!

Mon, 12/24/2012 - 17:46 | 3093738 SilverTree
SilverTree's picture

Silver Eagle production will NOT recontinue on January 7. 

Mon, 12/24/2012 - 17:58 | 3093763 THX 1178
THX 1178's picture

Why? Does something happen between now and then?

Mon, 12/24/2012 - 18:05 | 3093773 JLee2027
JLee2027's picture

Signs of a severe silver shortage. Yes, you can buy 100 or 1000 ounces. Now go buy a million and demand delivery before Jan 1. You can't.

Mon, 12/24/2012 - 18:43 | 3093812 bank guy in Brussels
bank guy in Brussels's picture

Figures in the article are wrong, I believe - much more silver in the world - about 50 billion ounces, not 5 billion ounces - 5 billion is about the amount of gold in the world (160,000 metric tonnes, each tonne about 32,000 troy ounces) ...

The amount of silver that exists in the world is about 10:1 versus gold, thus interesting the price ratio has often been set at around 15:1

At $30 US fiatscos per ounce, that makes about $1.5 trillion Bernanke Bux price for silver in the world ...

But as it reads now, Sprott writes:

« The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). »

Mon, 12/24/2012 - 19:39 | 3093903 tmosley
tmosley's picture

50 billion ounces?  The 1950's called, they want their above ground silver statistics back.

Also, the article is talking about flow, rather than stock.  Both, of course, are important to the price.  Both are also extraordinarily bullish.

Mon, 12/24/2012 - 20:03 | 3093917 Pinto Currency
Pinto Currency's picture

 

Industry estimates indicate about 30 billion oz. of silver mined throughout history.

Most of that is in garbage dumps now.

The 5 billion oz. is an estimate of silver that is intact above ground.

Mon, 12/24/2012 - 21:14 | 3094005 Silver Bully
Silver Bully's picture

"Most of that is in garbage dumps now.

The 5 billion oz. is an estimate of silver that is intact above ground."

 

You, sir, are correct.

There is a reason the world's silver stockpile from the 70's has disappeared: industry. Silver has many industrial uses, which typically use the metal up in a nonrecoverable form. It isn't just photography. Solar panels, dentistry, optics, and especially medicine. Silver is toxic to many forms of bacteria, viruses, fubgi, etc. It is a natural germicide (like most heavy metals). Unlike Mercury, however, it is not toxic to humans. Once silver gets put into most medical forms (i.e. - catheters, socks, etc) those get thrown out and ARE NOT RECOVERED. Silver, as an industrial metal, is not typically recovered.

This is why the above ground silver supply no longer matches the amount historically mined (unlike gold).

Tue, 12/25/2012 - 02:21 | 3094297 AE911Truth
AE911Truth's picture

A significant percentage of the silver that is uneconomic to recover at current CRIMEX spot prices (illegally suppressed by the US government via JPM etc.) would be recoverable at an un-supressed free matket price.

Tue, 12/25/2012 - 08:42 | 3094403 Thomas
Thomas's picture

That's not really true (I think). At some point the energy alone will prevent recovery of the silver. Analogy is helium. Once helium ends up in the air, it's gone.

Tue, 12/25/2012 - 09:59 | 3094463 AE911Truth
AE911Truth's picture

Example of each:

Uneconomic to recover at any price = anti-microbial silver in medical disposables.

Uneconomic to recover at $30/oz, but economic to recover at $1000/oz, silver in cellphones.

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