Friday, November 20, 2009

Silver - "The Poor Man's Gold"

Now that Gold has crossed the $1100 level and appears to be blasting higher, it makes sense to take a day to examine the merits of Silver, sometimes known as "The Poor Man's Gold". Silver is MUCH cheaper than Gold - trading at a little above $18.  However, unlike Gold, Silver has multiple uses including industrial,  jewelry and photography. It has also served as a store of wealth.  Silver has superior electrical  and thermal conductivity so it's industrial use is pretty stable.  In fact, a liquified form of Silver, called Colloidal Silver has medical uses such as preventing colds and as an antibiotic.  Unfortunately, large drug companies have a vested interest in pushing drugs so the use of Colloidal Silver, even with the oncoming H1N1 virus, is not very likely to take off.

Silver and Gold are highly correlated with the Gold/Silver Ratio (GSR) which most typically trades at between 40 and 60. The ratio is currently 62 after trading at a low of more than 70 last November.  By comparison, in 1980, when Gold hit its prior peak of $850, Silver peaked at $50 - a ratio of 17.  At the very least, as the mania in precious metals continues, it will be likely that the GSR climbs to at least 40 and may overshoot yet further on the upside in reaction to the overshoot last year.

Silver is increasingly in short supply.  According to a recent article by Jason Hommell, a noted expert on Silver who also owns a coin store, 19 major dealers are "sold out". These dealers include the Perth Mint in Australia and the Scotia Mint. I can tell you from personal experience that buying Liberty Dollars from the U.S. mint is very difficult in any reasonable size.

Annual demand for Silver is approximately 1000 million ounces, while mine supply runs at 650 million ounces. Part of the deficit, 250 million ounces, is made up of recycling of bulk silver, much of it coming from coin shops selling coins with no numismatic value.  One wonders how long that will continue as Silver rises in price.  Even if not, that still leaves a deficit of 100 million ounces annually. In my personal opinion, Silver has even MORE upside than Gold.

But a few more notes on Gold.  I reported in a prior essay that the tiny country of Sri Lanka had purchased 5.3 million tonnes from the IMF.  What I didn't report was that this represented a DOUBLING of their supply!  Since then,  the even tinier country of Mauritius purchased 1.9 million tonnes from the same source doubling THEIR supply.  Russia's central bank has bought 30 tons for their central bank, although from domestic sources.  The scramble to buy size is on. Finally, noted investor John Paulson, who made billions by betting on a meltdown of subprime mortgages, is reported to be starting his own fund with $250 million of his own money as seed capital.

As always, I sincerely appreciate comments and/or questions and I hope you check out our growing library of topics which include other essays on Gold, a proposed solution for the housing crisis, tax policy and many more.

Marko's Take

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