Mining CEO Explains Why Silver Could Reach Over $136

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

His remarks started off like dozens of presentations that I had heard so many times before. . .

“Without silver,” began the speaker, “our entire society would go back to the Stone Age.”

The speaker was the CEO of one of the largest silver mining companies in the world, and he was a special keynote at the annual closed-door meeting of the Atlas 400.

CEOs of mining companies almost always start their presentations talking about how important their mineral is.

“If we didn’t have cobalt we would all be cave men again. . .” or “Without molybdenum our modern technology would cease to exist.”

It sounds impressive, but the same story applies to just about every industrial commodity in the world, from copper to lumber to recycled steel.

It’s hardly an original argument and doesn’t impress me enough to be bullish on their mineral.

The real investment thesis about silver is that it’s a precious metal that has industrial qualities and a long-standing tradition of value.

Like gold, silver was an ancient form of money. And for good reason.

Out of the 118 known elements that exist on the periodic table, gold and silver share certain chemical properties that made them ideal as a medium of exchange to our ancestors.

Gold and silver are solid at normal temperatures (as opposed to Helium). They’re not radioactive (like Plutonium).

They’re not explosive when they come into contact with water (like Cesium), nor do they rust when they get wet (like Iron).

Most importantly, gold and silver are rare enough to be valuable, but not so rare that it would be almost impossible to mine more.

Between the two, gold is obviously more rare… hence the higher price.

There’s an old estimate from the US Geological Survey from the late 1960s suggesting that the ratio of silver to gold in the earth’s crust is about 21:1.

(So assuming that’s true, the theoretical price ratio between the two should be around 21:1)

And in ancient times the price ratio between the two metals was frequently in the range of about 15:1, i.e. one ounce of gold was worth 15 ounces of silver.

Today the ratio is about 75, based on a gold price of about $1230 per ounce, and a silver price of $16.35.

This is fairly high even by modern standards as the long-term average over the past several decades is about 50.

This would suggest that silver should in increase in price relative to gold in order for the ratio to return to its historic average.

(A ratio of 50:1 would imply a silver price of $24.60 based on a gold price of $1230.)

Now, all of this is an argument that many of us have heard before.

But I did learn something over the weekend from the mining CEO; he told us that the current mining production ratio between the two metals is about 9:1.

This means that 9 ounces of silver are mined for every 1 ounce of gold that’s mined.

This is very interesting from a supply/demand perspective.

According to the Silver Institute, demand for silver hit an all-time high in 2016.

But the price of silver, at least relative to gold, is hovering near a multi-year low at 75:1. (Again, the historic average is around 50:1).

Moreover, even though the price is 75:1, the new supply of silver is only 9:1.

In theory if the new metal supply is 9:1, then the price should be 9:1 (which would be a silver price of $136.67).

Obviously that’s a purely academic postulate; reality rarely conforms to theory. And the mining CEO wasn’t projecting a $136+ silver price.

But it seemed clear to him that there’s an unsustainably wide gulf between the gold/silver price ratio versus the gold/silver supply ratio, especially when silver demand is at an all-time high.

Commodity prices tend to move dramatically when the market realizes there’s a serious supply/demand mismatch.

That seems to be the case with silver right now.

And while it would be silly to expect $100+ silver, there are certainly credible reasons why the ratio should close the gap and move MUCH lower.

Do you have a Plan B?

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The_Juggernaut's picture

mining CEO bullish om PMs? WHo could have seen that coming?

TeamDepends's picture

It is an insult to think of silver in terms of dollars.

Muddy1's picture

"... why silver could reach over $136"

OR NOT

bwh1214's picture

Pm's and crypto currency are perfect partners in a crisis portfolio. Video:

http://www.themonetaryreset.com/2017/02/complimentary-precious-metals-an...

VD's picture

maybe what he wasn't appreciating is that gold needs to be slammed harder vs silver allowed to rise to price discovery. either way, it's all rigged.

Mr. Universe's picture

E.O. 2017BS

All silver is now illegal to possess except jewelry and rare coins. Please turn in all you US silver coins to the nearest redemption point. You will receive face value for your coins.

tmosley's picture

At this point, I wish I had never learned about silver/PMs/the Fed and had just stayed in the fucking stock market with a focus on tech stocks like I was before all this shit.

It's fucked up, but it has worked, hasn't it? Tech stocks, specifically the stocks of the top AI firms, have, and will continue to outperform. No matter what you think of them, they are going to make TONS of money over the next few years. Fucked up that I have lost so much money that I feel locked in. Can't bring myself to sell and realize the losses.

Automatic Choke's picture

Silver has a funny economics twist in the supply curve:   there are several "pure silver" plays, where a mine is primarily digging silver, but much (most?) of silver produced is produced as a by-product of gold or copper mining.  This makes the production of silver relatively inflexible w.r.t. price.  This partly explains the traditionally high volatility of silver.  That volatility is offset somewhat by the rather large investment reserves -- there are a lot of coins and spoons out there that get melted down when the price goes up.   All this fades, however, compared to the influence of paper markets, which artificially set price based on paper contracts that have no intention of being held to delivery -- thus the paper volume greatly exceeds the physical.

 

edit:  hey Tmosley....can i sell you some tulips?

BaBaBouy's picture

Ya wanna know why SILVER is not moving, look no further than the paper futures shorting...

Just look at the "Commercials"...

http://www.cftc.gov/dea/futures/deacmxsf.htm

dark pools of soros's picture

Who the fuck buys their shorts? Just let it go to 50 cents to show how stupid the rigged game is

Mr. Universe's picture

It appears that through the paper markets the Central banks have complete control over ther the price of silver, and gold. This can only mean that either that they don't care who cashes in on a major disaster or they can control the price either way as to never happen. However if the dollar collapses, who knows what could happen.

SolidAssets's picture

she was a waitress in a cocktail bar now she owns a jet... http://bit.ly/2jdTzrM

Mr. Universe's picture

Sounds like a Warren Zevon song, but alas, just crappy spam.

unsafe-space-time's picture

The unicorn that tills and fertilizes all the rainbows also works a lot.

Jack's Raging Bile Duct's picture

I know what you mean. Through some dumb luck though, I've ended up selling on higher priced times. I shorted at damn near the top in April 2011, then sold it all again in early October 2013, then again just shy of 3 weeks ago. Only 2011 was based on market analysis--all other times were out of necessity.

I plan to re-accumulate, like every time, but its still difficult. I prefer silver for many reasons, but I may just go into gold because the volatility is killer--even for a true believer. I've got all my other prep taken care of and focus on my business endeavors. Oddly enough, I get most nervous when silver goes back up. The higher the price is, the more likely I'm going to need it. That never feels good. Thinking about it that way, it improves my buy-and-hold mentality.

August's picture

>>>I wish I had never learned about silver/PMs/the Fed and had just stayed in the fucking stock market

You can't spend your whole life worrying about your mistakes!

https://www.youtube.com/watch?v=zOXtWxhlsUg

gramps's picture

I wish I could stop backing up the truck every time it falls below 16.

BeanusCountus's picture

Jeezus Tom. How much of your net worth did you put in the stuff? And I certainly can understand listening to the newsletter guys leading to some losses (like real estate folks, always the time to buy). Hoping your holdings pay off soon. And if you really believe in the tech stuff, go with your gut and do it!!!

Zero_Ledge's picture

When a ZH'er capitulates and goes long tech stocks, surely the bell at the top will be ringing ... ?

 

silverserfer's picture

every ounce you own should just be stamped with a " fuck the FED" and a dirty bird. That alone should be enought reason to stack.  Savings in silver is a  vote of no confidence and return to savers mentality free of banker tyranny. 

DeepFriedLizards's picture

You can't sell because you know the market's rigged and your gut is screaming at you.  If you must, then quit stacking.  War is in the air, just hold.

Jungle Jim's picture

You said it brother. I *had* to sell all mine at yard sale prices. Now, because of that, I'm going to have to sell my childhood home, probably for half or less than half its true value. My health has gone down, and I am basically circling the drain. All because I listened to all that stuff about silver and gold going to the moon. The center of the earth is where they've been going, for quite a few years now.

gswifty's picture

On a long enough time line.....

stocktivity's picture

it could be worse. You could have stocked up on guns and ammo.

gaoptimize's picture

You need to stop thinking of silver as an investment and more of an insurance policy.  I don't invest in my firearms.  I don't even like to shoot them (with the cleaning afterwards and psychic damage to the wife and neighbors).  But I keep them.  When the inevitable adjustment to reality comes (I hope it can be postponed indefinitely), my family will not be hungry and homeless

TheEndIsNear's picture

How about silver rounds and bars? They have no face value.

syzygysus's picture

Drill a hole, attach a big ass chain to that 100oz bar, and ....jewelry.

Jimmy Jimmereeno's picture

Since when does the opinion of a mining company CEO carry any weight with regard to the price of silver or any other commodity?  Presented below I have had to crib from the Eidetic Research website that last year provided yet again a more reasonable (imo) interpretation about what is going on in the Au/Ag ratio:

".....Since antiquity, for literally thousands of years, the gold/silver ratio "ranged from a low of 2.5 to 1 to a high of 16:1, and never rose above 12:1 until after 1500 [A.D.]…For most of human history, a band from 8:1 to 12:1 has contained the ratio."  However, in or around the 1870s the ratio moved above 20 as silver was demonetized in both the United States and in Europe. Generally speaking, we may say that the gold/silver ratio was in equilibrium throughout most of human history.  That equilibrium was upset in the late 19th century.

A basic tenet of technical analysis [the people at Eidetic Research are technical analysts] is that once a market leaves an equilibrium or trading range it is said to be trending. In that context, [following an upside resolution of the equilibrium] values tend to register higher highs and higher lows while volatility (amplitude of swings) may increase.  Furthermore, history shows that once values move into new historic high ground following an extended trading range exit they usually stay at higher levels – i.e. regarding commodities they establish a new, higher trading range. In that case the old upper extreme values become the newrange's lower boundary. Therefore, we can summarize the gold/silver ratio's longer-term picture as rangebound until the 1820s and then uptrending during the last 190 years. Following 1940 – 1941 all-time highs at ~100 and excluding monthly extremes, ratio values have been rangebound and volatility has increased. Ratio lows in the 20th century were 18 in 1919 and again in 1968 not surprisingly holding comfortably above the upper extremes of ancient history.

To conclude, let’s note that even prior to the official demonetization of silver by the USA in 1873 and shortly thereafter in Europe silver’s value was declining relative to gold’s. Excepting approximately a 15 year period post-WWII and the 1991 – 2015 period a given amount of silver has bought less ounces of gold. It is an empirical fact that nominal silver prices (in US dollars) have never exceeded their 1980 high whereas gold has not only exceeded its respective high but it also has, thus far, not retreated below that high. That relative behavior suggests that there is little to no reason to anticipate any near-term reversion to historically lower levels by the gold/silver ratio..."

 

BeanusCountus's picture

Holy shit Jimmy!! That's a really well stated.... theory. No, I'm not saying you are wrong. Here is an alternative, very personal theory:

Love the stuff, buy it when I have a few extra bucks instead of a lottery ticket. All the ratios, blah blah blah. Usually buy the new stuff. Eagles, maples, etc. Damn, they are gorgeous. One of the most beautiful metals in the world. Especially when the mints make 'em with a great die. Silver Eagle.. magnificent. Maple.. amazing. But.. the longer they sit.. the more they tarnish. Nature of the metal.

Wild tree's picture

Beanus, here is an easy solution to silver tarnish.  Line a pan with tin foil and fill with cold water with two tablespoons of salt. Wait three minutes, remove, rinse and dry. Presto/Changeo, gleaming silver.

Life is hard, but there is an end, Ben

Miss Informed's picture

You will stand insulted when you go to sell it

Raffie's picture

In the year 2047 silver becomes worth $25.

Year 2100 silver explodes to $30. The great great grandchildren of the stackers kind of rejoice.

 

KEEP STACKING!!

 

/sarc

D. G. Neree's picture

In the year  2100 a loaf of bread will cost $100,= and  a can of beer $50,=

MrSteve's picture

Morgan or Peace dollars? What about Liberty Walking or Franklin HALF dollars? They're all good!

Anteater's picture

Goldman can crank out fiat SLV toilet paper faster than you can say $13  an ounce. Silver was $3 an ounce just a decade ago.

Miss Informed's picture

No it wasn't. The average price of silver in 2007 was $11.54

Jimmy Jimmereeno's picture

A decade is generally considered a 10-year period bounded by round numbers in a century: e.g. 2001-2010, 2011-2020...etc.  I would give Anteater's comment credence despite your objection.

More importantly, the silver market priced out the marginal consumer in 2011 at ~$50/oz nominal as it did in 1980.  Logically, it will price the marginal consumer back in when nominal prices are in single digits as it did at the bottom of the last price cycle.

JamesBond's picture

when silver goes to single digits, you will be paying attention to more important economic matters in the US

jb

Miss Informed's picture

What U talking bout Willis? The longest chart of silver price I see goes back to 1975. Nowhere in that time period did silver go down to $3.

HRClinton's picture

Murphy's Laws dictate, that the price of PM will skyrocket when you had to sell the last of your bullion.

unsafe-space-time's picture

That always happens when I need to sell. It should be called the law of vileness

mbutler101's picture

haha so true. I guess I'll have mine tossed into my casket along with the rest of the barbarous relics.

aurum4040's picture

Au and Ag are insurance policies against the system. They, in many cases, are not to be loaded up on to make a massive profit. Sometimes yes, but most of the time just allocate 10% of your money and keep playing the game. It's a decent time to be picking up gold and silver, not the best but decent. We need a massive flush out, I'd like to see gold dip below $1000 personally. At that point you will see the turning point and that's also the time to buy. Someone OT but everyone remember dead 3d printing? It's awakening and, like many stocks\investments, the time to buy is when most aren't even thinking about it. Aka gold $250ish in 2000. Buy DDD, SSYS, VJET, XONE, etc. NOW. 

e_goldstein's picture

Yeah, great.

How about we focus on when we might see $20 again?

Quantum Bunk's picture

The Austrains have done a disservice by talking as if silver is equal to gold. It is not. Central banks buy gold. Stick with gold and trade out your silver

Jimmy Jimmereeno's picture

Correct. 

Let's also note that when silver was demonetized it lost value relative to both fiat and gold.  When gold was demonetized a hundred years later it gained value relative to fiat and silver.  Silver is a commodity and 190 years of history corroborate that -- despite the fact that it has functioned as currency beside fiat in limited instances.

I have always loved the Antal Fekete quote about gold when its ultimate backwardation occurs:  "...If you want to get it, you have to have recourse to barter. You must give up silver, oil, wheat, and what have you, to get gold in exchange... This will be an historic event that is approaching with the inevitability of scientific law..."

 

 

Uchtdorf's picture

I upvoted you because it is an impressive quote, but I find it hard to believe anybody's comments about precious metals because so far all the "experts" have been wrong.