Eric Sprott: Why are (Smart) Investors Buying 50 Times More Physical Silver than Gold?

December Markets At a Glance From Eric Sprott:

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. 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. 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.”

 

2013 Silver Eagles As Low as $2.59 Over Spot at SDBullion!

 

Markets At a Glance, By Eric Sprott:

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.

Comments

  1. Interesting.
     

  2. Poor Eric Sprott.
    The screaming shortage of silver; the mindless money printing of the academics and the corrupt banks that endorse them; the benumbed stupification of the public drives him to distraction and so he posts on Christmas Eve. And so we read it on Christmas Eve. He is a leader in the struggle for liberty.
    Dec. 24 2013 will be radically different tthan Dec. 24 2012. The political/economic gyre is turning a big ”clunk”.

  3. There’s a shortage in silver because I am buying what I can, and not planning to sell until it buys me a kingdom :-)

    There’s much anecdotal mention of large gold hoarders. World leaders amongst them. Any signs of substantial (50x greater holdings) in silver? 

  4. …doing my part to take some more phyzz off the market….come on everyone, keep stacking!
    Merry Crisis everyone…and a Happy New Fear…

  5. It’s one thing to buy 50 silver ounces.  That has some weight and more bang for the buck.  Buying one ounce of gold just doesn’t have the same Ooomph.  Just a thought. I like them both

    • No doubt about 1 oz of gold not having nearly the “oomph” of 50 ozs of Ag (or 55.6 as I type!)   For that matter a 1000 oz delivery bar has considerable more “heft” than 17.98 ozs of gold (using current 55.6 ratio.)

      This arguments Sprott are making are just as valid today as when I noticed all this a few years ago.   The fact that with all this information in the public domain people aren’t tripping over themselves to get a heavy weighting in physical silver is baffling and befuddling to me.    To some extent a lot of people already have, myself included.

      That dynamic powerspike from $17 to $49 was just a prelude to years ahead, with prices at a whole new level that could shock.    My loose ultimate target for silver is 15:1 at bare minimum and for 500 ozs of silver to buy a median US home.   That would be equivalent to 1980 when 500 x $50 = $25000 house (yes you could buy a house for 25k in 1980 and not in Detroit.)   And $850/$50 = 17:1     Silver may even briefly overshoot this on the ratio to perhaps 10:1 or lower.    That would be a good trade for gold.    Shortly thereafter could be when they “peg” paper money to gold again, and the upwards revaluation in gold would send the ratio in the other direction.   

       Just think about how many unenlightened poor souls there are out there with no silver.    Millions of millionaires with NO SILVER and only some gold jewelry lol.    There are really NO BILLIONAIRES in silver yet in a public way besides Sprott.   Jim Rodgers is a billionaire and he gives silver a shout on live TV so there’s one more.   Any others?    Just like in 2008, this shitslide is making a great base for much better things to come.

  6. And every ounce we take off the market is that many less (1,000, 100?) the cartel can sell in paper.

    • Mary, even back in 2005-2007 when silver investment demand was a paltry 150M ozs a year, the market was tight with upward pressure.    The amount of silver that will be bought going forward will be measured in billions of ozs.    

      Think about how easy it is for worldwide demand to swallow up all the silver in a given year.   At $30, its a pathetic $4.5B to buy 150M ozs.   There are small cities that issue more bonds than that!   LOL    It’s a real trip.    $4.5B is like $45M used to be.    $4.5B is 2 days budget deficit LOLOLOL    Any “rogue trader” can and DO lose $4.5B lol   

      There’s 5 or 6 billion ozs of gold out there in the world worth about $10T US.    150M ozs of silver is $4.5B      

      Dont get me wrong, I like gold, its great, and it’s time will come, but for gold to be $1700 ish and $30 silver is maddeningly wrong, and will not hold.

      1 million US dollars will buy you 33,333 ozs of SILVER NOW!   WHAT WOULD YOU CHOOSE?!??    That’s a ton.   It would make the fenders rub against the sidewalls if you tried loading it into a trunk of a small car.    It’s comical thinking about it.    But being able to maybe turn that silver into 3,333 ozs of gold???    That would be one helluva trade.    Especially if the currency system buckles and implodes and they revalue gold to $10,000.      Now you’ve got 33M dollars.     If we don’t get hyperinflation that will be sweet.    And maybe interest rates will be 15% again and you can get REAL interest on paper money again.

      Merry Xmas. 

    • “And maybe interest rates will be 15% again and you can get REAL interest on paper money again.”

      Maybe we could, but then… it will be a LONG time before any of us trust these banksters again and that’s what we would be doing if we hand over our money for them to hold just to get some interest income.  WAY too many sticky fingers in that crowd for my taste. 

    • Ed, exactly.   I will never place a large qty of money or value in the hands of a banker or broker again.   Never.  It is against my morals to do so.   Unfortunately I get aid in fat, and I have bill denominated in fiat, so I do have a small balance with each paycheck…… and I do mean small :-)  

      Never in my life will the morality of this change.  Morality doesn’t change…. 

    • Saddle… I freely confess to having more fiat on hand than I would like.  I have been stacking pretty regularly but still have not caught up to where I want to be in PMs in terms of their percentage of my total wealth.  Unfortunately, it can be hard to change the habits acquired over a lifetime… but I AM working on it!  Got my silver stack to just over 1400 ozs. now, which is not bad for having started in November of 2010.  Need to do more, though.  Would like to get some gold but keep having that feeling that when silver takes off, it will deliver a lot more percentage punch per oz. than gold will.  Maybe I should just say the heck with it, set up a ratio of silver to gold that looks good to me and go with it.  Over-thinking this could make things worse instead of better.  :-[
       

  7. Very interesting article. The goverment has to let the price rise in gold an silver so yes the can get there fair share. An my guess its going to be a huge move In the 1000,s %. An then there going to tax you 80% of your profits. I pridict there going to keep the pms down till the day the dollar dies. And thus is when  the dollars indexs big move down to the low 50,s.  I also have a very hard time thinking the dollar will lose most of its value. Its in need it just cant go away. With out the gov saying someday its worth nothing.They have to issue a whole new currancy. An by the way your u.s. dollar is backed by gold. For now. Yes you can still go buy gold an silver with 100% of it. as long as the line stays small. But tomorrow comes who knows. Have a nice day.

    • “An my guess its going to be a huge move In the 1000,s %. An then there going to tax you 80% of your profits. I pridict there going to keep the pms down till the day the dollar dies.”

      And my prediction is that a LOT of PMs will either be sold in the black market or be tragically lost in many boating accidents. 

  8. Great info! Very enlightening. Good fortune to all and to all a good night………….

  9. Whats interesting is to compare the sales of Canadian Maples from tonights Jeff Neilsen article, to Sprotts American Eagle sales.
    Canada a country a tenth of the size of the US, has;

                Maples    Eagles

    2009    9.7 mil.    28.4 mil.
    2010  17.8 mil.    39.9 mil.
    2011  23.1 mil.    33.8 mil.  

    • You are comparing apples and oranges.

      I wonder how many of those maples are purchased from US and Worldwide investors compared to native Canadians? You can’t compare sales as if all Maples are bought by Canadians and all Eagles bought by Americans.

    • +1 that! 

      Look up Maples on a bbs like kitco.com and they love the maples over there.
      I like the reverse on those beauties, the big Maple Leaf. But that mug on the
      obverse, I avoid that as much as I can. All I save with that criminal mug shot
      on it is the occasional fine metal Canadian coins I get in rolls of US denominated
      coin that I hunt through for fine metals. I really admire many things about Canada, 
      but they really need to tell jolly old England to SHOVE IT, and terminate the
      mineral rights and keep it for domestic uses and sales.

      GOD (censored to condemn*) the Queen

      If the monarchy is moral and ethical AT ALL, they will help us throw off the BANK$TER$ Yoke 
      once and for all when the SHTF comes down. Until then, IMO they are a major part of the 
      PROBLEM, and no part of the SOLUTION.

      ALSO: IMO, the COMEX sending Silver to the LBMA to cover their shorts, we have some unholy alliances there as well. This needs to STOP Too! But Our Own criminals are totally corrupt, no hope for a turn around like the Royals could possibly do. I would GLADLY
      say “GOD SAVE the QUEEN” if the Royals were to join the common people in this monetary event. Gladly.

      *Condemn: To sentence, convict, or to *DAMN to punishment. Justly, of course.  

       

    • “ALSO: IMO, the COMEX sending Silver to the LBMA to cover their shorts, we have some unholy alliances there as well. This needs to STOP Too!”

      Agree 100% on this and would LOVE to know where the heck all that silver is coming from.  Crimex raiding the SLV vaults for it?  Anyone know?  Source?

  10. Silver has a greater, UPSIDE it could create a lot of wealth, like the Gold ,Super Spike to 1800

  11. A bit off topic but an interesting post over at Kitco forum courtesy of Agathon.
     
    “I keep a year-end spreadsheet of all assets and liabilities including PMs. I update it each Christmas. Thought the forum would find this interesting.

    Silver Price
    Christmas 2010: $29.21
    Christmas 2011: $29.13
    Christmas 2012: $29.82

    I love silver, but those are pretty lame gains. Let’s hope next Christmas is a different story.

    Gold up about $300/oz in that same time period; platinum down $200/oz; palladium down about $70/oz. Just a “three Christmas” snapshot”.

    • “I love silver, but those are pretty lame gains. Let’s hope next Christmas is a different story.”

      Interesting info but my thought is that the real silver story has yet to be told.  These days, it is not about the fiat dollar price per ounce but how many ounces you have.  If I were to do that, I would find:  

      2010:     60 ounces
      2011:   280 ounces
      2012: 1400 ounces 

      So, yeah, 2012 was a HELLUVA good year for the stack!  :-D
       

    • Ed, I don’t share that precision of info, but every year just keeps getting better here too…..  I factor lead in with m totals…..

      One day my possessions will be illegal or taxed to hell on the ‘legal’ market….. on that day I hope I’m free in a non totalitarian country or I’m rotting in a hole in the ground with many more lead-borred holes throughout my body.

      I will die free.

       

    • Just making the point that this is not about fiat prices and never will be.  To me, silver is NOT an investment.  It IS money!  So, when I stack, I am converting some fiat paper into REAL money that retains its value, unlike FRNs, that melt away faster than ice cubes on a Texas sidewalk in August.  Notice that I did not include my address, my security layers, or the combo to my safe.  lol

      Yes, I also believe in the 4 precious metals:  gold, silver, brass, and lead.  At various times, each of these will be more precious than the other 3.  ;-)

      Anyone who does not love freedom more than life, is to be pitied.  Looking at life with a bit of a Viking bent, how can a man enter the gates of Valhalla if he attempts entry by sneaking in quietly.  Better to send a large number of vanquished enemies in ahead of his arrival, screaming and wailing, so that all of the great warriors there will know that one of their number comes soon.  ;-)

  12. Slvrizgold.    from your observations it appears that  Jim Rogers is the Warren Buffet of silver. And that is not a compliment.  There was a stat I read the other day that we spend $55 billion on pet care.  We could go along way to soaking up a good part of the silver available if we bought our four legged fluffballs a 1 ounce silver trinket. 

  13. If it is a matter of principle then why would an investor aid and abet central banks and sovereign governments around the world by purchasing into their next phase of financial tyranny?  I’ll stick with Silver and Platinum thank you. 

  14. What is the lesson from the 140-year  volatility of silver? Wise investors 
    should not touch the highs with a ten-foot pole. Even if the gold/silver price ratio 
    went to 16 today, there is no guarantee that it will not bounce back to 40 tomorrow. 
    Prepare for supernova bullion prices,  as Eric says? I’d say you had better 
    prepare for the zig-zags before we get there. 
     Beware of the fund manager, crying from his rooftop that the paper 
    silver market is a joke, while down there under the roof he is selling paper 
    silver at a 25% mark-up. 

    Quoted by a Monetary Scientist… 

  15. I like silver metal. I did not read these predictions. Maybe investors read them?

     
    SILVER to $50 By 2012 Says Jim Turk. (ME quoting Turk) Max Keiser & Rand Paul weigh in too…

    Silver prices likely to reach $50 an ounce and gold prices to bounce back to $1900 levels, said Stephen Smith, managing member of Smith McKenna, LLC.According to Smith, the precious metal boom that was cut short in 2011 could be making a strong comeback in late 2012 and over the next few years.The metal to keep a watchful eye on is silver. Analysts and precious metal experts are in harmony on predictions of silver surpassing $50/oz. and gold edging above $1,900/oz by as early as year end.

     The fundamentals are very strong for silver at this juncture. The Obama administration just put forth a budget that will result in another annual deficit of over $1 Trillion, despite promising to cut the deficit to $650 billion. The ECB is bathing Euro banks in liquidity and the US Fed has literally guaranteed an inflationary environment until late 2014. These policies create ripe conditions for commodities overall and precious metals in particular to make new all-time highs. With less above-ground investment-grade silver available than gold, the supply/demand situation can not persist much longer at such depressed prices. Physical silver demand is growing and confirming our bullish view, as Silver Eagle sales for January posted the second strongest month ever at 6.1 million ounces!Lastly, silver is the best form of money to own in the event of a collapse in fiat currencies. It will be difficult to use a gold eagle for small purchases, but silver eagles and junk silver will be ideal to use in purchasing food and other goods when the U.S. dollar is no longer accepted. This makes silver attractive not only for the strong returns and ability to increase an investor’s purchasing power, but also as a valuable insurance policy should the current monetary system break down.-Jason Hamlin, on February 18th, 2012

     Thomson Reuters GFMS’s Philip Klapwijk Wednesday forecast an average silver price of $35.66 per ounce this year, a short-term forecast of $35-$40 through year-end, as well as a price above $50/oz by the end of 2012.

     Leeb: Gold Going to $3,000 Before the End of 2012!”

    Stephen Leeb: Silver’s Going to $60, $70, by the End of 2012 – Easy!

    SILVER is Ready for Take Off! These 7 Charts Show Why

    The Dollar is Toast! The Future is Silver”

    GOLDRUNNER FRACTAL ANALYSIS: 2012 SILVER TO $70++

    James Turk: Silver Will Climb to $68-$70 in 2 to 3 Months

    Alf Field Sees Silver Reaching $158.34 Based on His $4,500 Gold Projection!

    Silver Will Go to $50 and Then Explode Dramatically Higher! Here’s Why

    With all of these lofty and reasonable predictions, why did not anyone predict the current circumstances?

    Could it be that the current circumstances are illegal? Immoral? Unethical? Un-prosecutable?

    If the bad guys can manipulate the price on the world stage, do we not think the world can see this for what it is too? Do we reall think we can hold out for USD fiat when we sell? Who’s fiat will we receive when we sell?

    Think back to MF Global…there is really nothing normal anymore. You figure out their end game, you figured it out. My calculations tell me that the door to create wealth without numerous income streams is all but closed. The days of buying low and selling high are over.

    We sure could use some Gerald Celente weighing in on this situation….alas, not here?

    I can not wait for the end of 2013 predictions….not

  16. Andrew James  I think the operative word in ‘principled’   I see advice from investment services that constantly tout how to take advantage of distress situations.  Having removed myself from the paper investor market, I read these services for their information content to gather data, not to take advantage of others distress. 
    There are most certainly those who will quickly jump on anything that offers a large return.  If an investor like George Soros can profit from the marketplace that is disrupted by the actions of a central bank or central government, they will not only get on board, they may even work to create a greater amount of damage, thus increasing their profit.  Soros made his first billion by breaking The Bank of England.  Some people are ghouls and savvy investors.  It’s just the nature of things. 

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