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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Tue, 12/25/2012 - 02:41 | 3094308 Yen Cross
Yen Cross's picture

 You couldn't find (XAU/XAG) if it was put in your Cereal! Jreb, you are even more unintelligent than I thought!

   You are a fool living on the Tax Payers dime! You disgust me!

Tue, 12/25/2012 - 09:20 | 3094418 awakening
awakening's picture

"You are a fool living on the Tax Payers dime! You disgust me!"

Such ignorance of the root causes that create the very need for ZH to exist should not be ignored.

It ain't those collecting healthcare (them damned unemployed we should really thank given a less than 5% rate in some economic models leads to an unstable currency [Bernanke will need all the help he can get, though it will only delay the inevitable] ) that live off the sweat from the brow of others (Tax paying or not, spare a thought for the black market/cash economy of which a share may not actually pay those taxes your so fond of), but those only that print those 'dimes' that we all waste so much time and effort to obtain (those promisary notes, created with a (steadily basterdised) rule of law and upheld by a force that is as equally blinded with the very same ignorance of said issue (thanks for working your arse off for me today, here's some printed currency notes I made while you were off working, chao).

Now if the above "heavily summarised" post on the makeup (it ain't natural, squirrels don't exchange nuts for goods and services) of fiat currency/money (or whatever else it gets called depending on the point of view of others, I think of it as an ingredient of alchemy turning paper into gold =) ) isn't enlightening enough as to why I find such commentary (usually ignored but I'll make exception for ZH) incredibly naive and foolish than I suggest a much slower re-read of most of Zerohedges articles may be much needed in your instance (most that is, some of the humorous pages like Simon Black's jet setting adventures while comical will be of little assistance for your education).

All the above assumed that your not trolling of course, whereupon that case 4Chan/reddit may be more your style of website.

Mon, 12/24/2012 - 19:56 | 3093918 oddjob
oddjob's picture

There is an entire paper world for you to exist within, no need to crowd into an investment than comprises less than 2% of all global assets. israel feels threatened by children throwing stones and you feel threatened when people choose to save in PM's, nice.

Mon, 12/24/2012 - 20:14 | 3093951 buzzsaw99
buzzsaw99's picture

...you feel threatened when people choose to save in PM's, nice.

 

Not true in the least. Some of my best friends are gold and silver bugs. At least they don't try to make their case by blowing smoke up my ass. I wish you all the best and hope PM investing works out well and have owned PMs in the past but I just don't happen to agree with the PM thesis as it currently stands.

Mon, 12/24/2012 - 21:11 | 3094002 oddjob
oddjob's picture

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

I'm just wondering why you would attach such a political subject to PM's.

Mon, 12/24/2012 - 21:17 | 3094006 Yen Cross
Yen Cross's picture

 Isreal has "XAU, ART" vault...

Mon, 12/24/2012 - 21:59 | 3094037 A Lunatic
A Lunatic's picture

I would hear your rationale..........

Mon, 12/24/2012 - 22:45 | 3094091 knowless
knowless's picture

Probably taking the ratio to mean a gold reversion as people cover losses from fiscal cliff non resolution? Market plunge, ride and reenter as commodities in general 4ever with the rest. Hoping for an 08/09 Redux, just a guess.

Tue, 12/25/2012 - 03:32 | 3094129 Yen Cross
Yen Cross's picture

Tyler is obviously on the "time lapse" plan. We checked it out. I'm losing interest in Zero Hedge/ Tyler is playinmg games with timing .

  That's ok, Ignorance is bliss. + 1 to the guy above you.

Tue, 12/25/2012 - 18:47 | 3095318 knowless
knowless's picture

You'll be back.

Tue, 12/25/2012 - 21:17 | 3095492 infinity8
infinity8's picture

Tyler(s) are playing games and are ignorant at the same time? pick a point.

Tue, 12/25/2012 - 15:18 | 3095021 buzzsaw99
buzzsaw99's picture

that's actually not bad knowless. i'm going to have to put you on my xmas card list. zh claims again and again that a stock market crash is coming and yet insists that gold will not be negatively affected. zh also insists that interest rates will rise but again gold will be unaffected on its way to infinity. the zh position of being pm zealous in the face of pervasively illogical forward-looking positions makes my nose wrinkle.

Tue, 12/25/2012 - 18:39 | 3095312 knowless
knowless's picture

As far as I'm concerned the only real thing to watch is the dislocation between physical availability. That will happen as the spot price consistently misaligns capital flows into the metals. Which i think is the point of the article..

Gold would be effected. The long game doesn't change though, what does it matter if rates rise, the fed will just print the difference.

If the government had any reliable source of funds besides printing i might be worried..

Just to be clear though, i hold no "investments".. Hand i was dealt. A reliable return on my "surplus income" would be completely negligible, and totally meaningless.

Tue, 12/25/2012 - 19:50 | 3095398 buzzsaw99
buzzsaw99's picture

Your last paragraph places you in a large group that supports my theory. The playas in Chicago and NY can run prices up on leverage but the average joe (aside from goldbugs) is no longer buying so they have no-one to dump to except the central banks. Check out mining stocks or jewelry stocks. I haven't bought diamonds or gold for years now. That is actual end demand, not etfs and hedge funds who will sell what they hold back and forth an hundred times a day. Time will tell but if I am right everyone here will never admit it.

Mon, 12/24/2012 - 19:55 | 3093924 Jreb
Jreb's picture

LOL. Yes you do. And thanks for the link.

Tue, 12/25/2012 - 10:35 | 3094534 auric1234
auric1234's picture

If you think PMs will go down, go short on the COMEX futures. It so happens that everyone here (including you) will agree that PM futures are worthless (for different reasons). So it's the safest bet you can get.

But keep in mind this creates a long position in worthless FIAT. Find something to compensate that. Anything.

 

Mon, 12/24/2012 - 19:43 | 3093909 Element
Element's picture

Host rock, mineralogies, grade and resulting economic extractability, is what determines if any silver that may be present is worth extracting. Sometimes the copper is dirt cheap to extract profitably, but the silver can only be recovered by reducing profitability ... well, unless the price rises ... so it may become economically viable to extract it, at that time ... until the price falls. So you set it aside for possible future extraction when the economics improve, or else the technology gets more efficient and cheaper.

 

Mon, 12/24/2012 - 19:55 | 3093923 Doña K
Doña K's picture

Are we then saying that by overproducing copper when the byproduct (silver) sells for higher?

Is there a buy silver sell copper play here?

Mon, 12/24/2012 - 20:05 | 3093938 Yen Cross
Yen Cross's picture

It's all about [content] and technology. I think you should be assaying over production of silver first. /hint hint/

Mon, 12/24/2012 - 20:02 | 3093932 Yen Cross
Yen Cross's picture

   Good comment Element. One mans trash, is another mans treasure/

Mon, 12/24/2012 - 19:49 | 3093911 Quinvarius
Quinvarius's picture

So much hyperbole and denial from the long abused hard money shorts.  Like moths attracted to the soft glow of Fukushima.

Tue, 12/25/2012 - 13:25 | 3094792 Bay of Pigs
Bay of Pigs's picture

After 12 years you would think they might come around a bit or at least soften their stance.

Fucking Bozo's.

Mon, 12/24/2012 - 18:44 | 3093815 q99x2
q99x2's picture

I have more gold. That eagle looks like one of my eagles.

Mon, 12/24/2012 - 18:46 | 3093816 debtor of last ...
debtor of last resort's picture

I really don't know what to say to a 234 pound balled guy with nazi tattoos and a good after shave asking me: wanna go phyzz bitch?

Mon, 12/24/2012 - 19:58 | 3093929 Doña K
Doña K's picture

It depends on whether he has a mustache or not!

Tue, 12/25/2012 - 12:03 | 3094663 blunderdog
blunderdog's picture

Tell that 234 pound balled guy that there are treatments for elephantiasis, and he'll be a lot more comfortable after getting some help.

Mon, 12/24/2012 - 18:49 | 3093820 Bokkenrijder
Bokkenrijder's picture

"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?"

 

Well...maybe Gold is OVERvalued compared to Silver and a DROP in the price of Gold will return the ratio to 16:1?

Mon, 12/24/2012 - 20:13 | 3093950 Jreb
Jreb's picture

If PM markets are as heavily manipulated as some claim I am not sure that anyone really "knows" what the value of them are. If paper assets are worthless at some time in the future then hard assets could become priceless in relative terms - or rather they could be the replacement for paper assets which renders the current arguement about value somewhat moot. Of course, it is all a matter of degree. Regardless - without truly free markets (it occurs to me to say there is no PM manipulation is to say that markets in general are not manipulated - Libor anyone?) everything is a fog and the truth is difficult to know.

Free markets could tell us that gold and silver are worth relatively little compared to say - a home, a car or even a productive business. Or free markets may tell us that they are in fact money - a medium of exchange and store of value somehwat superior to current styles of money. 

Until we have law and order restored to our financiial systems (and until we have the freedom to choose these things for ourselves) we will continue to look at PM's as an investment priced in currency units which are manipulated themselves. Thus the true value of these things are truly - at this stage - unknowable. The more I type the deeper down the rabbit hole I go and I realize how truly fucked up this system is....

 

Mon, 12/24/2012 - 18:55 | 3093827 Silver Garbage Man
Silver Garbage Man's picture

Too bad this article came out 4:37 Christmas Eve.
Perhaps a less festive time of year would have caught more eyeballs.
I am committed to silver and I sleep like a baby.
It is only a matter of time.
Merry Christmas and Thank You to Zero Hedge for a top notch site....GREAT JOB

Tue, 12/25/2012 - 04:17 | 3094338 The Navigator
The Navigator's picture

Double Ditto your sentiments.

Thanks Tyler and Merry Christmas to all ZHer's - it's been a fun/intertaining/informative year thanks to you all - look forward to more in 2013.

Unless, that is, the Mayan Calendar was off by 2 months - in which case, thanks for all the fish.

And lynnybee, if you're still out there, hope you're still hanging tough and best wishes for 2013.

Mon, 12/24/2012 - 18:56 | 3093829 Right Wing Nut Job
Right Wing Nut Job's picture

I recommend simply buying physical and shorting the equivalent dollar amount in paper assets like gld/slv etfs. It's a net neutral trade in theory, but any event that creates significant price increases always expands that spread and anything truly catastrophic to fiat currency will also create widespread concern for paper assets. 

Mon, 12/24/2012 - 20:11 | 3093945 Doña K
Doña K's picture

If many people did that, the price of physical will be supressed enough to limit the upside, which is what is happening now.

Most of the freedom loving, banker hater groups and the non-bigots who hate everyone equally but want to preserve wealth buy physical and the bankers are shorting the paper market resulting on limiting the upside. Only if many of us buy enough to make it too expensive for bankers to short paper PM's whould allow PM explosion to the moon.

Quote from non other than Kyle Bass that counting to a quadrillion would take 31 million years or so. That puts in perspective what would happened during the great unwind.

Yes Virginia head for the Andes!

Mon, 12/24/2012 - 18:56 | 3093832 The Duke of New...
The Duke of New York A No.1's picture

Becuase it's cheap like Borsch.

Long NY Fed Tungsten.

Mon, 12/24/2012 - 19:01 | 3093839 Edward Teller
Edward Teller's picture

The Ag:Au ratio (silver:gold) has been increasing for centuries originally running about 10:1 2000 years ago. There was a huge increase in silver production in the late 1800s which depressed the purchasing power of Ag relative to Au. The actual PURCHASING POWER of silver today in lower than it was 200 years ago, and greater than it was 50 years ago. Example, 1 US silver dollar will buy you 6-7 gallons of gas today vs. 5 or so in the late 1950s. The exange value between Au and real things is also a bit higher than historical norms stretching back several thousand years - but not too badly out of whack.

My suspician is that the precious metals will not increase much, at least if you measure in REAL purchasing power unless driven there through some "bubble" hype. Of course, where they may go in make believe money I have no idea.

Think reality.

 

Mon, 12/24/2012 - 19:01 | 3093841 e_goldstein
e_goldstein's picture

Not sure we can call anyone buying eagles from the mint the smart money.

 

Mon, 12/24/2012 - 19:12 | 3093854 Clint Liquor
Clint Liquor's picture

Please explain, oh wise one.

Mon, 12/24/2012 - 19:50 | 3093913 rehypothecator
rehypothecator's picture

You do know that government websites have URLs that end in .gov, right?  Like, http://www.usmint.gov/ ?

Mon, 12/24/2012 - 19:59 | 3093927 e_goldstein
e_goldstein's picture

My mistake, thanks for pointing that out for me. Btw, usmint.gov has an even higher premium.
http://catalog.usmint.gov/webapp/wcs/stores/servlet/ProductDisplay?catal...

Mon, 12/24/2012 - 21:56 | 3094033 rehypothecator
rehypothecator's picture

Those are "specially burnished" and have the W mint mark, so they're not regular Eagles.  But they do indeed have quite a premium.  

Tue, 12/25/2012 - 01:03 | 3094229 Room 101
Room 101's picture

The premiums at govmint are sky high. Not a good example. APMEX though.....

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

Mon, 12/24/2012 - 19:08 | 3093847 ultraticum
ultraticum's picture

I like that Sprott always looks at physical fundamentals and carefully quotes his sources.

 . . . . . . . . . . . . . . . .

Retire FRNs forever in favor of something tangible that is nobody's liability, and something that didn't bear interest to an evil, global cabal from the instant it was printed.

Mon, 12/24/2012 - 19:23 | 3093871 Yen Cross
Yen Cross's picture

 I trade Currencies for a living, and I like Sprott! The correlations of certain currencies and {Peripherial Bond yields}, are tied in with commodities as a whole/

Mon, 12/24/2012 - 19:20 | 3093867 LiquidityandLunacy
LiquidityandLunacy's picture

So many of you people are sitting here PRAYING for the collapse of the silver and gold markets or rather hoping for parabolic paper appreciation. The people who want this are FOOLS. WHY would I want to trade more fiat for less gold and silver? Keep stacking and stop bitching. Its all a discount at any price.

Mon, 12/24/2012 - 19:41 | 3093906 Dr. Sandi
Dr. Sandi's picture

If it's going to blow up anyway, I'd like to enjoy watching it with a full deck. If it takes too long, I'll be too Altzheimered up to really appreciate the ironic justice of it all.

Tue, 12/25/2012 - 04:22 | 3094342 The Navigator
The Navigator's picture

Yeah, but your heirs will think you were a genius and thank your foresight.

Either way you win.

Mon, 12/24/2012 - 22:29 | 3094067 Raymond Reason
Raymond Reason's picture

Some of us don't have a job. 

Mon, 12/24/2012 - 22:43 | 3094087 Pejorative Requiem
Pejorative Requiem's picture

They're not praying for colapse in PM's, they're praying for higher interest rates. But they see thmeselves as the true optimists...... only pessimists put more that 15% in gold.

Mon, 12/24/2012 - 22:43 | 3094088 Pejorative Requiem
Pejorative Requiem's picture

They're not praying for colapse in PM's, they're praying for higher interest rates. But they see thmeselves as the true optimists...... only pessimists put more that 15% in gold.

Tue, 12/25/2012 - 14:39 | 3094889 DosZap
DosZap's picture

only pessimists put more that 15% in gold.

Or people who have a REAL inside track on  what is coming down.................

Suggest you read what some of the largest Hedge Fund mgrs in the world's take on this.

kingworldnews.com

Do NOT follow this link or you will be banned from the site!