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

Tyler Durden's picture

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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Pinto Currency's picture

 

Silver is also uneconomic to recover from the LBMA and the COMEX because there is almost none there compared to the hundreds of claims per oz. on the unallocated accounts.

Jack Napier's picture

I'd like to see somebody estimate how high the price of silver would have to go for it to be profitable to dig through landfills for cell phones and break them down. By the time it does become profitable to do so the minimum wage will probably be double what it is now to boot.

blunderdog's picture

Big difference.  Helium LEAVES THE PLANET.

NoClueSneaker's picture

String instruments - strings & frets . Lot of silver dumped ....

FeralSerf's picture

There may be 10 times as much silver as gold in the ground naturally, but silver gets used up; gold doesn't.  There is not 10 times as much silver above ground as gold.  There's probably about the same.

Freddie's picture

There is a severe .223 ammo and PMag shortage for AR's.

OldTrooper's picture

You can still get em - just have to pay (at least) 4X as much.  Price gouging laws don't apply to us filthy gun nuts.

GetZeeGold's picture

 

 

Yeah....but that was last week. There is nothing out there now. While the politicians were playing....America was quietly arming herself.

 

Lead tiimes for 5.56 FMJ's are now late March....but only girls use that crap.

RockyRacoon's picture

CheaperThanDirt doubled the prices of 30rnd .223 mags.

So much for cheaper than dirt.  I'm not buying there any more.

Renaming the place GreedierThanShit.  Yeah, I know.  Free markets and all that.  They would have made their nut on the stock on hand, and sold out quickly.  That's fine.  ProMag put out a notice that they were NOT increasing the prices on any of their products.  Gouging the customers on existing inventory is simple greed.  I've had about enough of that.  All they had to do was put a limit, say three, for existing customers.  Easy stuff.  

OldTrooper's picture

I'm not so upset with CTD for raising prices.  That's one way to ration scarce goods and higher prices encourages higher production.  I don't like the higher prices, but higher prices do serve a useful function.

Pulling their firearms is a different matter.  THAT really demonstrates their character (or lack thereof) in my book.  CTD will need to work pretty hard to get any of my future business.

silverserfer's picture

normal yearly transition between 2012-2013 minages shutdown. Changes strike plates, maintenace of facilities, etc...

James's picture

"Silver Eagle production will NOT recontinue on January 7"

 

 

 

Is'nt that just the discontinue of production @ San Francisco Mint?

aphlaque_duck's picture

that would be strange, didn't they only just start minting ASEs in SF in 2011?

James's picture

aphlaque-Went to look on this and I was wrong.

S.F. just stopped production of 2012 silver Eagles early.

They will be producing 2013.

My bad.

klockwerks's picture

Anything, link, whatever to back up this. Proof? If this is true I would go Wed and buy a couple more boxes at the price it's at today and give myself a nice Christmas gift

ball-and-chain's picture

The problem with silver is that it has industrial use.

So if the economy slows, the price can go down.

If you insist on holding metal, gold is still your best bet.

http://www.angrysinner.blogspot.kr/2012/12/yesterday-i-hiked-five-miles-...

savagegoose's picture

another prob with silver is, when the spot price gets to $50 every cunt on the planet. including Mr. " it should be 16:1 ratio " sprott . Sells their fucking stack

Western's picture

To more buyers, idiot.

 

Unless you're claiming there's going to be "so many sellers" that the market goes "bidless".

savagegoose's picture

well thats exactlly what happened back at $50, it went bidless and fell back to $26.

 

and the more buyers where being sucked into buying on claims " to the moon and over $100 " when the econ gets moving is the time to buy. silver is still more industrial than investment.

theres less platinum than gold to, WTF is that doing under the price of gold? and it dont get hoared so there is fuck all  left in stock piles! to the fucken moon i say.

Western's picture

of course the market was bidless when someone is looking to unload 10% of the world's yearly mined supply AT THE FUCKING CRACK OF MIDNIGHT WHEN NOBODY IS TRADING.

savagegoose's picture

well thats exactlly what happened back at $50, it went bidless and fell back to $26.

 

and the more buyers where being sucked into buying on claims " to the moon and over $100 " when the econ gets moving is the time to buy. silver is still more industrial than investment.

theres less platinum than gold to, WTF is that doing under the price of gold? and it dont get hoared so there is fuck all  left in stock piles! to the fucken moon i say.

Jack Napier's picture

Considering gold and more so silver are the most manipulated markets in the entire world, if silver does break the old high of $50 it will be because the central planners lost control, in which case their debt based monetary system will be going the way of the dinosaur. Anybody with a clue knows they won't let $50 be breached if they can help it since it would wake too many people up, and there is no resistance above that mark. Feel free to sell into a hyperinflating failing currency, calling other people idiots as you crash and burn.

If silver were fair value today strictly based on supply and demand, and gold price did not budge, silver would be well over $200/oz. It doesn't matter what the paper price says. We can buy on the cheap until they deplete the supply. After that it's a new ball game.

elementary's picture

Glad I got mine at $4.50 per ounce. Nuf said.

LouisDega's picture

I remember that abominable snowman scared the shit out of me when i was a kid. He was one scary fucker.

http://25.media.tumblr.com/tumblr_me4a6dTZB71rf1v32o1_1280.jpg

killallthefiat's picture

Nice.  My wife laughs at me because of this whenever we watch this with the kids.  My favorite song!

The Navigator's picture

My favorite gift, giving and receiving.

If my coin shop was up on marketing, they would loop that video and play it through out the year.

therealmonty's picture

Silver Bells, Silver Bells

imbrbing's picture

I don't care what the spot price is now, if anyone wants mine at the moment be prepared to pay $100 per troy ounce out of my stash.

Otherwise it aint going to leave my house.

mwarden's picture

hey, then i have a great deal for you. i will sell you silver for just $90/oz, which is a full 10% discount to what you value it

auric1234's picture

Why would someone buy silver from you at that price, when there are legions of fools willing to sell it for less than that?

 

mwarden's picture

um, yes. exactly. please re-read my comment with sarcastic mockery in mind.

killallthefiat's picture

You might want to think about losing it in a boating accident before you go shooting your mouth off.

Banjo's picture

SILVER BITCHEZ !!

Silver_K-9's picture

No offer for mine!

SilverDoctors's picture

The ratio actually reached 75 oz of silver sold by the Mint for every ounce of gold for several consecutive months this summer.
Alasdair Macleod states that the silver demand is about to come to an aprupt head, as he says a COMEX silver default is likely to occur soon.

http://www.silverdoctors.com/alasdair-macleod-we-are-quite-likely-to-hav...

THX 1178's picture

Likely the implosion of the silver derivative market. And when one derivatives market goes... well... they all do.

imbrbing's picture

please go on, when it implodes, then what?