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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Mon, 12/24/2012 - 19:24 | 3093875 Freddie
Freddie's picture

The poor man is also buying every gun and bullet he can lay his hands on.

Mon, 12/24/2012 - 20:59 | 3093997 DoChenRollingBearing
DoChenRollingBearing's picture

Yep.  Bullets and bullion.  A great combination!

Mon, 12/24/2012 - 22:23 | 3094058 rayduh4life
rayduh4life's picture

Precious metals?  Canned food and ammo?

Tue, 12/25/2012 - 20:24 | 3095434 Freegold
Freegold's picture

Exactly, poor mans gold. Surely silver can have another run or two but i wouldn´t bet all my chips on that. And that´s if the system still is somewhat intact. If not, your best oprtion is/was to be in gold. Before that happens Eric Sprott and JPM will make a lot of money from you investers/speculators. Gold is held by centralbanks and the REALLY wealthy in the world. Gold is for savers. And savers don´t need an incomestream from speculating. When SHTF silverholders will find out what a referencepoint is. It might take a cpl of years more but who cares. +20x will be a nice added bonus to my savings.

Get your gold while it´s still dirtcheap :-) Some of you silverados might be lucky enough to make the switch to gold but most of you won´t.

 

Mon, 12/24/2012 - 18:36 | 3093798 mwarden
mwarden's picture

how many americans have an extra $1730 of discretionary income lying around that they can stick into a gold eagle? in 2008 when the ratio was 2.6x, a gold eagle was $850ish. i think an "affordability" argument could be made where silver is "stealing" demand from the pool of people who are interested in having physical metals in their posession.

Mon, 12/24/2012 - 21:47 | 3094024 Non Passaran
Non Passaran's picture

I wish it was $1,730 but I will try to use the opportunity that is presenting itself.
I think your argument is right.

Tue, 12/25/2012 - 17:18 | 3095213 RockyRacoon
RockyRacoon's picture

Your answer is the correct one.  The simplest answer turns out to be the right one on many occasions. 

They just ain't got the dough to spring for gold coins, nor do they want to pay the premiums for fractional gold coinage.  It's okay, really it is.  That premium doesn't disappear when the coin is bought.  It stays with the coin (and increases along with the spot price), and it is redeemable when sold.  I have 2 rolls of 1/10th ounce AGEs.  A roll is 5 ounces of gold (50 coins).  Paid just over $2K per roll a long time ago.  The premium I paid is still there -- many times over. Don't sweat the premium, it's still money and a stored value.  Just a reminder.

Mon, 12/24/2012 - 18:41 | 3093808 buzzsaw99
buzzsaw99's picture

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)...

 

Five billion oz my ass. It's closer to 25 billion. Silver is a byproduct, the dross of gold and copper mining. I wouldn't pay half the current price.

Mon, 12/24/2012 - 18:56 | 3093831 Jreb
Jreb's picture

LOL. Sorry shouldn't have junked you. Maybe you can provide some data for your thesis. Not syaing you aren't correct about tonage - just wondering how you arrive at it??

I Love this quote - one of my favorites of late:

"Silver is a byproduct, the dross of gold and copper mining."

I love how you phrase this and what it is meant to say - that silver is more or less useless - like methane is a byproduct of taking a shit. The shit is the real value - the methane is "just" a byproduct". Of course if you didn't take a shit well... I suppose the consequences would be bad. Constipation anyone?

I wonder if companies such as First Majestic and others are aware that they are engaged in the mining of a "byproduct"? Indeed - I wonder if they are aware of the time they are wasting when they could be bypassing silver altogether and going straight for the copper??? Fools.


Mon, 12/24/2012 - 19:19 | 3093850 Yen Cross
Yen Cross's picture

 Hey dumb ass. When you learn to spell?  Copper is priced like other P/M's, (tradeable on futures, option, spot charts, by exchanges)...

 

    http://finviz.com/futures_charts.ashx?t=HG&p=d1   Iron ore is a bit more tricky, as it is sold by "gross tonneage".

 Think before your speak dumb ass/  First Majestic? Are you fucking kidding me? Evergreen Clown!

  I meant to junk your smart ass! No, I won't divulge my Iron Ore pricing sources BITCH!

Mon, 12/24/2012 - 19:54 | 3093921 Jreb
Jreb's picture

Actually, that should be: "Hey dumb ass! When _did_ you learn to spell?" or more appropriately: "WHERE did you learn to spell?"

Probably the same place you did - in grammar school. Moreover, I never realized there was some unwritten standard for grammar and spelling here on ZH? Tyler - did I miss something in the disclaimer???

But hey - if you can't refute the message - trash the messanger by all means. This is why I apologized for junking the guy I questioned with a down arrow and just asked for data.

As for the rest of your meaningless rant - well - it is what it is. Obnoxious.

This is why people who think - even if we aren't necessarily investors by trade (thankfully I am not) - are buying PM's. We know bullshit when we smell it. And our current politcal/ecoonomic situation is loaded to the tits with it.

Have a merry Christmas.

 

Mon, 12/24/2012 - 20:48 | 3093953 Yen Cross
Yen Cross's picture

 I'll work on my underscores_ .   I just stated the obvious. You are full of shit, and tried to jump on a well respected Z/H contributor, in a demeaning way.

  I hope you take the next few days to reflect on your demeanor, and investment strategies. When it comes time to lecture, ask your wife? She is your better half (ass/face)

  Hey ( Meat Ball), I'm not your origional target>/ 

Mon, 12/24/2012 - 20:51 | 3093987 Jreb
Jreb's picture

No I didn't. I asked in a very polite way for data - and that was after apologizing to the guy for hitting the down arrow. I didn't have to say a word to him - he would have been non the wiser for it. The rest of my post was merely pointing out a flaw in the logic he was using. "Respected" or not an error in logic is still an error. Maybe my analogy of shit to methane was too extreme for you? Frankly I thought it was appropriate.

Why are you so aggressive and rude?  Are you trying to hurt my feelings??? Do we have to act like poorly behaved children to try and get our message across?

If you were a thinking/moral human being you'd refute what I have to say with some sort of logical argument but instead you reduce yourself to infantile name calling. "Ass face"??? Really?

Beat me with logic. I am always happy to admit if I am wrong.

Merry Christmas friend.

 

Tue, 12/25/2012 - 02:12 | 3093998 Yen Cross
Yen Cross's picture

 You and your clown buddies are going to get eaten for lunch/ 

  I'm not done with you, and you know it. We will explore charts, and Sovereign offers/

  Your Clown window group got their bonuses/ I'll see you soon. --- Status Quo--=-

Tue, 12/25/2012 - 09:17 | 3094406 GetZeeGold
GetZeeGold's picture

 

 

You and your clown buddies are going to get eaten for lunch

 

I'll bring my girlfriend Sasha......pretty sure she'll dig that. If you do a good job...she might let you stay for dinner.

Mon, 12/24/2012 - 21:35 | 3094015 TheSilverJournal
TheSilverJournal's picture

My guesstimate is there's around $20B of above ground silver. After the 1960's, the US gov sold about 40B oz of silver onto the market over the next four decades, smothering the market. Today, there's about $1B of "investable" silver and another $1B in coins, but on top of that, there a good amount of silver in other forms such as silverware, candle sticks.

Sorry, no stats, but the "investable" amount is easy to find, the amount in coins is doable too. The other 18B in silverware/candlesticks/serving trays is probably impossible to find a stat for. I'm sure the 40B oz that the US once held is findable as well. I hope that helps.

To be sure, 20B is not a lot of silver, that's only about 3 oz per person. The US is now set to print almost $200 per person on the planet in just this next year, and that's not including how many additional unfunded liabilities or contingent liabilities it's racking up, or 0% rates. Just counting the rate of annualized fiat creation, enough money over the next year (and likely more when QE5 comes along in a month or two) will be printed to purchase the current stock of silver, assuming 20B oz at $30/oz almost 2 times over.

Mon, 12/24/2012 - 22:12 | 3094030 Yen Cross
Yen Cross's picture

 My best estimates, excluding your estimates, are that (XAg) is , and will always be desireable for conduction and building high quality machines.

 Stick to the paper. I just spent 2 months in Queensland /Northern Territory. Discussing mining costs and rights!

Mon, 12/24/2012 - 22:13 | 3094047 TheSilverJournal
TheSilverJournal's picture

That's all fine and good, but the price rise in PM's will be mostly a monetary cause. Worldwide hordes will be rushing out of fiat and when you go through the lists of what makes good monies, there just aren't that many good suspects...gold, silver, platinum, paladium (rhodium cracks). There is nothing else. Maybe bitcoins, but that's weird and you need the internet to take it with you. Diamonds aren't homogeneous, copper isn't scarce enough, maybe nickel is scarce enough, food isn't durable, paintings aren't homogeneous or divisible.

Mon, 12/24/2012 - 22:26 | 3094064 Yen Cross
Yen Cross's picture

 Two Hundred Thousand years ago, (grain was traded for shells and beads). Fiat will never die. (you know that's truth), Just like you feel the whisper of your mistress...

Mon, 12/24/2012 - 22:48 | 3094098 TheSilverJournal
TheSilverJournal's picture

Actually, I expect fiat to die, or to come very close to it. Likely it will come back after this period because the state loves to pay their bills through fiat ponzies...and then who knows, after a time of buying assets at firesale prices it may be time to invest in bonds again.

You invest in beads, shells and fiat. I'll stick to silver until it hits $1,000.

Mon, 12/24/2012 - 23:02 | 3094117 Yen Cross
Yen Cross's picture

 You're missing the pointe'. Fiat was created as a form of exchange. \(generalization of commodities/ Exchange.

  Ever heard of the term/ Apples for Grapes?

Mon, 12/24/2012 - 23:16 | 3094130 TheSilverJournal
TheSilverJournal's picture

Ever heard of the term money? Money is used so you don't have to barter.

Fiat was created first so bankers could rake in more profits, and then so government could enjoy the power of money creation.

I hope your real point isn't that we need fiat in order to /aageneralization/exchange or whatever you wrote. If that's really your point, go join Krugman on his quest for a mock alien invasion, breaking windows, the more inflation the better, and 91% federal tax rate.

Mon, 12/24/2012 - 23:36 | 3094152 Yen Cross
Yen Cross's picture

 Thank You/ you just solidified my previous comment!   The [Silver Journal], just won the Treasure!

Mon, 12/24/2012 - 23:44 | 3094160 TheSilverJournal
TheSilverJournal's picture

Umm...I'm pretty sure I didn't, but I do like booty.

Tue, 12/25/2012 - 02:18 | 3094174 Yen Cross
Yen Cross's picture

  Ok you didn't?  BTFD ( you just contradicted your self) How can you justify purchasing(Treasury Notes), yet still purchase (VIX,VXX)

   You are a Fucking Hypocrite!

Tue, 12/25/2012 - 07:09 | 3094381 thecoloredsky
thecoloredsky's picture

YC, are you just worried that stackers are a threat to your livelyhood? Figuring that since you make "money" through paper markets and when those markets go poof, well...

Tue, 12/25/2012 - 16:36 | 3095148 TWSceptic
TWSceptic's picture

Fiat will never die.

 

Are you a troll or just very stupid?

Tue, 12/25/2012 - 20:35 | 3095444 Freegold
Freegold's picture

Fiat will not die but it will surely by less in the future. FIAT is perfect for short tearm transactions and will have that role even after the dollar hyperinflates. For savings though, gold will be preferred.

Mon, 12/24/2012 - 23:18 | 3094132 Harry Dong
Harry Dong's picture

You just can't really go wrong with nickels, right kyle?

 

Tue, 12/25/2012 - 14:31 | 3094934 DosZap
DosZap's picture

You just can't really go wrong with nickels, right kyle?

Last year for 75/25 nickels 2012 was it.

95/5 pennies are a better investment.

Tue, 12/25/2012 - 14:12 | 3094890 jumbo maverick
jumbo maverick's picture

The other 18B in silverware/candlesticks/serving trays is probably impossible to find a stat for.

Wait until the next census comes around. Wonder what kind of questions they will be asking everyone.

Mon, 12/24/2012 - 22:19 | 3094055 Yen Cross
Yen Cross's picture

 Jreb , when you get over the "every one" hates me "reverse psychology"., give us a call! 

    You are a giant "flagellating pussy'...  Your mental games might work at home. Not here little boy!

  I'll bet you are living at home , just looking for a way out!  PUSSY!

Tue, 12/25/2012 - 17:29 | 3095227 RockyRacoon
RockyRacoon's picture

Alright, already.  Give it a rest.

Mon, 12/24/2012 - 23:12 | 3094125 Yen Cross
Yen Cross's picture

 7-8 people in a department (compartm,ent) Junk away/  Have fun>feel free.  You're still clowns/

Mon, 12/24/2012 - 23:22 | 3094137 Jreb
Jreb's picture

Dude - you have some serious anger issues. I'd give you a hug if i could. After all it's Christmas Eve... and you sound like you are ready to blow a gasket. Truth be told I kinda feel bad for you. Maybe you should turn the computer off and get some rest. I know I'm going to. Good night all!

Mon, 12/24/2012 - 23:31 | 3094147 Yen Cross
Yen Cross's picture

 Are you 3 years old? MR. Sir.  You are a child! You have never been taught to respect you elders. You are a babbling idiot!

Mon, 12/24/2012 - 23:32 | 3094150 TheSilverJournal
TheSilverJournal's picture

If somebody can't hang now, then how are they gonig to do after fiat collapse?

Tue, 12/25/2012 - 00:11 | 3094178 Yen Cross
Yen Cross's picture

 This comment willl be delayed/  The Silver Journal.  We have discussed smaller denominations and farming?

    Just joking, We have a GDP to trade .

Tue, 12/25/2012 - 02:38 | 3094306 Yen Cross
Yen Cross's picture

 Fuck Off/ You are a wana be! 

Tue, 12/25/2012 - 08:53 | 3094409 GetZeeGold
GetZeeGold's picture

 

 

I sense the playa's are getting a liitle ticked off.

Tue, 12/25/2012 - 17:32 | 3095231 RockyRacoon
RockyRacoon's picture

Not really.  Just bored and annoyed that it has become necessary to scroll down for real comment material.

He's acting like the mean drunk in a bar just looking to pick a fight.  Sad really.  He's better than this usually.

Tue, 12/25/2012 - 22:27 | 3095568 Jendrzejczyk
Wed, 12/26/2012 - 01:00 | 3095689 RockyRacoon
RockyRacoon's picture

Damn fine that.  Andy was kinda like Ernie Kovacs.  A genius that transcended his era.

http://www.youtube.com/watch?v=416o9b_pjQk

Tue, 12/25/2012 - 08:53 | 3094410 JoBob
JoBob's picture

Hey Yen

Before you call someone a dumbass for spelling you should learn that "P/M's" is just flat wrong...it is PMs. Since it is plural, it does not have an apostrophe; only possessives get one. It is also an acronym and doesn't have a slash, either.

Notice I did not call you a name in the process.

Merry Christmas, Bro!

Tue, 12/25/2012 - 17:35 | 3095236 RockyRacoon
RockyRacoon's picture

And a merry christmas to you JoBob.  BTW, it would be an "initialism" since PM isn't a word but has to be said per each letter.

Mon, 12/24/2012 - 19:22 | 3093866 buzzsaw99
buzzsaw99's picture

according to wiki there is 5X the amount of silver above ground than gold. ironically the following is from a bullish silver piece but i read it as bearish for gold:

...we'll use a very conservative estimate of 37.5% total industrial consumption. This would leave us with 25 billion total ounces of silver (857,000 tons).

http://seekingalpha.com/article/393651-silver-and-gold-trading-the-ratio

I am a PM bear and I have a right to exist (just like Israel). LULZ

Mon, 12/24/2012 - 19:26 | 3093877 Freddie
Freddie's picture

Doesn't The Ben Bernank, Warner Buffert and Charlie Muger have golden slippers?

Mon, 12/24/2012 - 19:31 | 3093891 Yen Cross
Yen Cross's picture

 I just call bullshit when I see it buzz/ 

Mon, 12/24/2012 - 19:56 | 3093926 Jreb
Jreb's picture

Ya. That's what it was....

Mon, 12/24/2012 - 20:50 | 3093942 Yen Cross
Yen Cross's picture

 That's exactly what it was. Until you prove otherwise? 

 Get yourself/family together. It's going to be a learning session for you.  (liquidity)

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