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 - 20:05 | 3093939 auric1234
auric1234's picture

Paper silver goes bust. Real silver skyrockets.

 

Mon, 12/24/2012 - 20:20 | 3093956 seek
seek's picture

We get true price discovery.

The paper metals market and derivatives are used to actively interfere with price discover of silver (and also gold). Silver is much more overexposed and manipulated via these mechanism, and the presumption is when actual price discover happens, we'll see silver's price rise significantly. Some of the figures proposed are difficult to believe outside of a full dollar collapse ($500+/oz), but for it to double or more from where it is today would be trivial (indeed, if it adjusted to the historical 17:1 pricing with gold, silver would be roughly $100/oz, or basically triple the current price.)

The discovered price could be more or less, but the key is it'd be a true, unmanipulated price on physical. We don't have that now. This is why everyone here keeps saying silver's on sale.

When this does happen, however, we'll likely see at least one major bank (JPM) require some sort of extraordinary support. Probably covert support in this case.

Mon, 12/24/2012 - 20:55 | 3093993 DoChenRollingBearing
DoChenRollingBearing's picture

I really like reading anything that seek writes.  I would urge everyone here at ZH to study his comments too.

 

+ a million (?)

Mon, 12/24/2012 - 19:33 | 3093893 Dr. Sandi
Dr. Sandi's picture

When Comex silver implodes, so does the paper market for silver.

That means those holding paper certificates instead of actual silver will be cashed out at the cash price of their holdings at the time of the crash. Then trading in silver will be halted for awhile while the world figures out the REAL price of REAL silver.

You won't be able to buy silver from the usual markets until the dust settles. And when said dust has found a resting place, silver will be priced much higher. That's because the price will be based on the actual amount of silver metal in circulation, rather than the inflated amount of silver paper that has suddenly been turned into paper money instead.

There will be a worldwide sucking sound as the value of money shrinks when compared to the value of silver metal.

Whether this will be a big enough vortex to suck in the fake gold as the same time is anybody's guess. As a silver holder, I'm hoping silver goes first. Then I can use the greatly impoved Gold:Silver ratio to swap some of my silver for gold. After that, one can sit smugly and wait for the inevitible gold crash.

But with my luck, they'll rip open at the same time. Still, it's nice to be able to fondle large amounts of real silver. It's real wealth, not a promise of real wealth.

Mon, 12/24/2012 - 19:35 | 3093897 imbrbing
imbrbing's picture

Thank you!

Tue, 12/25/2012 - 12:23 | 3094694 Uchtdorf
Uchtdorf's picture

Good comments, but the squid bankers know all that and so they call in some favors from their pals in DC and make it so that the serfs need to turn in all their precious metals...for the children. I mean it's only fair. 

Tue, 12/25/2012 - 19:27 | 3095370 Dr. Sandi
Dr. Sandi's picture

Just like a banker, I have confidence that there is a way around any confiscation laws. You just have to be willing to be creative, with the cooperation of other creative people.

Not only have I been known to break the law by driving a little too fast, but I have also been known to not come to a complete stop at some stop signs when nobody's looking.

Da Boyz can pass laws to confiscate any or all of our stuff. I don't see any reason to pick specifically on PMs, now that they're not backing the currency. Better to confiscate real estate, which is much harder to lose in a boating accident.

 

Mon, 12/24/2012 - 17:48 | 3093742 stant
stant's picture

silver and ar 15 for xmas

Mon, 12/24/2012 - 17:48 | 3093745 Bay of Pigs
Bay of Pigs's picture

BUY GOLD & SILVER.

Merry Christmas to all my fellow ZHers!

Peace and Aloha...

Mon, 12/24/2012 - 20:52 | 3093990 DoChenRollingBearing
DoChenRollingBearing's picture

To you too, Bay!

Tue, 12/25/2012 - 16:11 | 3095067 yabyum
yabyum's picture

DO&BAY MERRY CHRISMAS to both of you, Hedgeless, whats for dinner ?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

?

Mon, 12/24/2012 - 17:48 | 3093746 therealmonty
therealmonty's picture

1700/55 = 30.9

1700/16 = 106.25

bitchez

Mon, 12/24/2012 - 19:37 | 3093900 imbrbing
imbrbing's picture

Like I said above, you can't have mine for less than $100 :) Ill buy at $30 all day long

Mon, 12/24/2012 - 20:46 | 3093986 TheSilverJournal
TheSilverJournal's picture

10000/10 = 1000, which is the minumum that gold, silver, and the gold/silver ratio will go to when the bond/credit/fiat/housing/service sector/government/entitlement bubble bursts.

Mon, 12/24/2012 - 17:50 | 3093751 therealmonty
therealmonty's picture

AR-15 + Silver Bullets = death to vampire banksters

Mon, 12/24/2012 - 17:53 | 3093754 lunaticfringe
lunaticfringe's picture

The fraud that has priced silver continues. It should be a criminal act to trade futures well beyond the available supply.

When are we going to demand that the CFTC be prosecuted for failing to do their job? Or does this shit just continue ad infinitum? Just like fractional lending and our insolvent banking structure...when it implodes will the American taxpayer be asked to bail the bullion banks out too?

Mon, 12/24/2012 - 17:57 | 3093762 therealmonty
therealmonty's picture

It's gonna blow up one day regardless, then Blythe the Wicked Witch of the West, and Jamie "Making Markets" Dimon will be left holding the (empty) bag. Until then, be glad we're getting it at a discount.

Mon, 12/24/2012 - 20:58 | 3093996 TheSilverJournal
TheSilverJournal's picture

At which time the scapegoating will begin. Can you say "blame it on capitalists who might crawl out from under a rock and slime you with their greed?" Those greedy speculators. Better leave it to government to straight up steal from the rich because people don't deserve to keep what they earn. Then we really get to see what it's like to live in a world in which creating wealth is punished  and destroying wealth is celebrated.

Riots at home coordinated by central planners, war overseas coordinated by central planners, all so the collapse of the worldwide fiat monetary ponzi is anybody else's fault other than the central planners' who created and perpetuated the ponzi.

Mon, 12/24/2012 - 22:17 | 3094052 Raymond Reason
Raymond Reason's picture

Wealth is a relative thing.  Billionaires rarely retire.  Fabulous wealth is even more fabulous if you can reduce the wealth of other people.  So this becomes their new mission, and is why most of them are Democrats.  Of course, they love to frequent charity balls also, to prove to the world their unselfishness.     

Mon, 12/24/2012 - 22:38 | 3094080 TheSilverJournal
TheSilverJournal's picture

You seem to think like one of those Democrats (or Republicans, I guess, because today they're pretty much the same thing now). I say this because socialists tend to think that wealth cannot be created or destroyed, it just is. And your saying that it's not about the absolute, but about the relative. Poor people today have much more wealth than most rich people 3000 years ago.

If you are "wealthy," than you have control of more resources than most others. However, wealth is absolute. Wealth is how many resources you have control over. Period. Therefore, the only way to gain a truly ridiculous amount of wealth is not only to control of a large share of resources in the world, but to also grow the wealth pie of the world.

Tue, 12/25/2012 - 03:25 | 3094324 Raymond Reason
Raymond Reason's picture

I used to think that also, until i lived in a second world country.  For example, the poverty level in the US for a family of 4 is around $23,000.  People living below this level feel poor, oppressed, downtrodden, and in general are not happy about their situation.  The World Bank defines MODERATE poverty, worldwide as around $700 per year.  In some places, there is a lot of envy towards people making $7,000 per year, and some of those big spenders feel pretty smug about their situation.  I think wealth, in the minds of those who dovote their lives to it, is relative, not absolute.  It's all about having more than your neighbor. 

Tue, 12/25/2012 - 13:21 | 3094783 TheSilverJournal
TheSilverJournal's picture

The fact that people are basically idiots and tend to be happier if they are wealthier than their neighbor is pretty well known. But this is not all that matters and it's definitely not what it's all about. The stupidity of some gives no excuse to not advocate improving the world.

Tue, 12/25/2012 - 11:58 | 3094657 blunderdog
blunderdog's picture

     Wealth is how many resources you have control over. Period. Therefore, the only way to gain a truly ridiculous amount of wealth is not only to control of a large share of resources in the world, but to also grow the wealth pie of the world.

If that's the case, what part of the current "wealth pie" can be attributed to Warren Buffet, George Soros, and the Walton family?

How much of "the world's resources" would not exist if not for those guys' actions?

Tue, 12/25/2012 - 17:07 | 3095200 RockyRacoon
RockyRacoon's picture

That depends upon how you define "resource" I suppose.   Silver and oil are resources.  Are iCrap and plastic Christmas trees?  Resources, chattel, junk, whatever. 

Tue, 12/25/2012 - 21:39 | 3095518 blunderdog
blunderdog's picture

I think technically it's an argument with a missing middle.  I'd say the assertion that the "only way" to be wealthy is to "produce" resources is so obviously false it needn't be disproven, but I was hoping he might try to support that claim somehow.

Mon, 12/24/2012 - 19:18 | 3093861 SWCroaker
SWCroaker's picture

Um, demand how?  Plenty of e-mails/calls to the CFTC, congresscritters, TWH, all to the sound of <crickets>.   The media sings a chorus of <crickets> on this too.

We live in a "Democracy", which apparently means we get to go through the motions of "voting" for one offered evil or another, people who then, "represent" us by doing what they want when they want to whomever they want. 

Our system has 0 recourse, and 0 accountability.   Demanding is akin to wishing in terms of its effectiveness...

 

As for criminal standard (what is right as defined by the State), how about just using a moral standard (what is right as defined by individuals)?  I think it is immoral to sell/lend something you don't own.  Period.  So get rid of shorting and fractional reserve banking.   If farmers/producers still need to mitigate risk, then *they* can sell options on their crops/production on the likely chance of them coming in.  The finance wiz-kid has no need to do the same.

Mon, 12/24/2012 - 20:24 | 3093960 Clycntct
Clycntct's picture

 "The finance wiz-kid has no need to do the same."

Not true It is the only thing they can do. That's where the Wiz come in.

Tue, 12/25/2012 - 11:01 | 3094580 AE911Truth
AE911Truth's picture

If all the wiz-kid can do is sell what he does not have, then he should stop acting like a criminal and get a real job.

Tue, 12/25/2012 - 03:55 | 3094310 AE911Truth
AE911Truth's picture

When are we going to demand that the CFTC be prosecuted for failing to do their job? "... whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness."

Vote with your wallet. Buy and Hold Physical Silver.

Tue, 12/25/2012 - 10:24 | 3094513 auric1234
auric1234's picture

when it implodes will the American taxpayer be asked to bail the bullion banks out too?

No, this bailout is actually impossible.Taxpayers can't be forced to produce silver out of thin air. If there ain't enough metal, there ain't enough metal.

Ah, the beauty of honest money.

 

Mon, 12/24/2012 - 17:58 | 3093764 therealmonty
therealmonty's picture

Don't Corzine me bro!!

Mon, 12/24/2012 - 17:59 | 3093766 imbrbing
imbrbing's picture

I have just recently noticed certain "silver eagles" are not obtainable until Jan 17th. Not sure I have seen that in the last 6 months. WTF

Tue, 12/25/2012 - 10:27 | 3094516 azzhatter
azzhatter's picture

I just took delivery of my monthly stash yesterday and it included some silver eagles.

Mon, 12/24/2012 - 18:02 | 3093769 devo
devo's picture

My allocation is more dollars in gold, more oz in silver.

I think this is smart. We'll see.

Mon, 12/24/2012 - 20:58 | 3093995 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

My holdings are similar.

Mon, 12/24/2012 - 21:53 | 3094029 Non Passaran
Non Passaran's picture

Approx. 1:10 weight-wise here

Tue, 12/25/2012 - 11:06 | 3094593 sampo
sampo's picture

Approx. 1:4000 weight - wise here, and holding way over an ounce of gold..

Tue, 12/25/2012 - 13:51 | 3094841 Svendblaaskaeg
Svendblaaskaeg's picture

Exacly 1:17,815057283 weight-wise here

Mon, 12/24/2012 - 22:08 | 3094043 seataka
seataka's picture

Many Vietnamese escaped the fall of Saigon to come to America only because they had gold, after the currency became worthless...

The proper gold to silver ratio for a realist is determined by the SHTF definition of wealth, which is what you can carry on your back at a dead run...

Mon, 12/24/2012 - 18:05 | 3093772 Silversinner
Silversinner's picture

Artificially low prices drives up physical demand.

Me calling coin shop and order silver ounces

after big cartel raid.econ 101.

 

Mon, 12/24/2012 - 18:11 | 3093777 Yen Cross
Yen Cross's picture

 Silver is a smoking good deal right now! Down just over 13% from the start of December. I'm buying and averaging in.

 This is a great time for people do do some catch up on both Gold & Silver. Even if the Fiscal Cliff issues deteriorate further, I'll just continue to add. XAU weekly chart is at the 50% Fibi. of the move [1,526.927-1,795.851] 100 week M/A comes in around 1594.oo.

Mon, 12/24/2012 - 18:12 | 3093779 Bansters-in-my-...
Bansters-in-my- feces's picture

I get a warm and fuzzy feeling every time I see a silver eagle or gold eagle with that word "liberty" and that "one dollar" and the soaring eagle and all.

 

I know the goverment that represents "the people" and is paid to do so "by the people" has "the peoples (sheeples) best interest in mind.

 

Why would ones own goverment that is supposed to help ones own citizens,instead continuely decieve its people by putting the word "one dollar" on a silver eagle and "fifty dollars" on an gold eagle...when they are worth considerably more....?

Some how I get the feeling"the goverment is not your friend".

Oh ya....hows that silver manipulation investingation thingy going...????...to yous CFTC readers of the hedge.

Ya thats what I thought.

 

Mon, 12/24/2012 - 18:31 | 3093795 margaris
margaris's picture

well government will never admit that inflation exists...

that's why they still calculate with the $ price from 1.5 centuries ago.

Mon, 12/24/2012 - 19:49 | 3093912 Doña K
Doña K's picture

Understandable. But just in case they do something funny, you can always melt it and sell it as a commodity.

Mon, 12/24/2012 - 22:14 | 3094048 seataka
seataka's picture

 Days before the Continental Army attacked the hired german mercenaries at Valley Forge, most of the men's enlistments had expired, they wanted to go home, tend their farms, be with their family, and it was dreadfully cold outside... they were preparing to leave and then a wagon arrived from Philadelphia, with a chest full of gold coin to pay the Continental Army their agreed upon wages.

1 chest of gold coin saved the American Revolution.

 

 

 

Tue, 12/25/2012 - 14:04 | 3094878 Svendblaaskaeg
Svendblaaskaeg's picture

"I get a warm and fuzzy feeling every time I see a silver eagle or gold eagle with that word "liberty" and...."

 

A comming collectors item? - Freedom...and its gone

 

"Freedom are now just a thing of the past ... Children just aren't going to know what freedom is," he said"

"David Parker, at the Hadley Centre for Freedom Prediction and Research in Berkshire, says ultimately, British children could have only virtual experience of Freedom. Via the internet, they might wonder at Freedom scenes - or eventually "feel" virtual Freedom"

http://www.independent.co.uk/environment/snowfalls-are-now-just-a-thing-...

 

 

Mon, 12/24/2012 - 18:14 | 3093783 jeff314
jeff314's picture

Argent salope

Mon, 12/24/2012 - 18:21 | 3093789 caimen garou
caimen garou's picture

got some silver and gold buried somewhere on this property, just can't remember what I did with that map!MERRY CHRISTMAS EVERYONE!

Tue, 12/25/2012 - 08:17 | 3094393 JoBob
JoBob's picture

Me too. Plus a decent number of .223 in shrink wrap bags.

Mon, 12/24/2012 - 18:26 | 3093792 Winston Churchill
Winston Churchill's picture

The poor man's gold is living up to its reputation.

Hopefully its a sign that the sheeple are waking up ,and buying what they can afford.

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