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History of Silver, Part III: Inventories Gone! ~ Jeff Nielson
 
History of Silver, Part III: Inventories Gone!
by Jeff Nielson June 17, 2009
 
For nearly 5,000 years, the price ratio between gold and silver has averaged approximately 15:1. This number is very close to the 17:1 ratio which represents the natural occurrence of the two elements in the Earth's crust. It is interesting to note, however, that through most of history the price ratio has favored silver.
In the last century, that ratio has rapidly, if unevenly risen. As of this moment, the gold:silver price ratio is once again nearing 70:1. Given the historical data, the natural assumption to make is that the world must be practically overflowing with silver for the price ratio to have gotten this skewed. In fact, this couldn't be further from the truth.
 
In the modern era of silver production, annual mine production now amounts to more than 600 million ounces per year. However, while industrial and investment demand for silver are soaring, production is leveling off. Annual production in 2008 only increased by roughly 2%, despite the price of silver reaching its highest level in nearly thirty years.
 
Annual production is almost certain to decline this year. While the ratio varies year-to-year, roughly 2/3 of the silver that is mined is a "by-product" of the mining for other metals - such as copper, lead and zinc. With base metals production dramatically reduced this year due to a temporary plunge in demand, it is virtually impossible for silver production to increase.
 
One of the unique aspects of gold, as a commodity, is that almost no gold is "consumed" (i.e. used up) in any of the applications we have for gold - either now, or throughout history. As a result, if a concerted effort were made, almost all the gold that has ever been mined could be collected, and melted down into bullion.
This is not the case with silver. Silver is not simply a much more versatile metal than gold, it is the most versatile of all metals (see "Increasing demand for Silver comes from MANY sources"). In recent years, there have been more new patents issued for products containing or using silver than with any other metal. Because of this amazing versatility, most of the so-called market "experts" (especially in North America) have branded silver an "industrial" metal.
 
In a follow-up commentary ("Silver's WIDE range of uses continues to push demand higher"), I discussed one of those new industrial applications: in polyester sportswear. The popularity of this material is soaring because silver's anti-bacterial properties dramatically reduce bacteria build-up on the skin - which dramatically reduces odor, since it is bacteria which actually create the odor when we sweat.

There is another aspect of silver which separates it from virtually every other commodity: in most of the countless "industrial" applications of silver, silver is used in trace amounts - amounts too small to be recovered. Referring to the previous example, 1,200 tons of silver (each year) are used to fabricate 20 million tons of polyester sportswear. There are two hugely important economic implications to be drawn from this fact.

One of these implications has been discussed by numerous, precious metals commentators (myself included). Silver is "consumed", literally. Thus, every year, we permanently lose large amounts of silver, and permanently alter the supply ratio between gold and silver.
 
Polyester sportswear already consumes 1,200 TONS of silver per year, which (at 32,000 ounces per ton) works out to over 38 million ounces of silver permanently consumed every year - in just one application. To put this into context, there are supposedly only 600 million ounces in total, global inventories at the moment.
 
However, as I pointed out in "Silver market fundamentals distorted by bullion-ETF's", there is every reason to believe that this number grossly exaggerates actual inventories. As will be evident by the end of this commentary, silver's amazing versatility has not made it less "precious", but rather more so.
 
No one is more tireless in his research into silver than Ted Butler. I have cited him often, in my own previous commentaries, and do so again. In Part II, I noted that Butler had made a comparison between current silver inventories today and those of 50 years earlier (thanks to "Bullion Bulls Canada" contributor, Claude, for bringing this to my attention).
 
In 1959 there were 9 BILLION ounces of known, global stockpiles (at a time when our planet had less than half the current population). Butler observes that 90% of that silver is now gone - even making a generous allowance for 100's of millions of ounces of "scrap" silver which could appear on the market (given a significant increase in price).
 
Thus in a world with twice as many people, and with an ever-increasing number of uses for silver, we have 90% less silver to divide among us. How can this possibly make silver "less precious"?
 
Just ask the "experts". Because silver is an "industrial metal" this means it's no longer a "precious metal". This is nonsense. If we discovered a cure for cancer tomorrow which required gold as an input, would anyone suggest this made gold less of a "precious metal"? Obviously not.

Beyond that, is the even less-intelligent 'wisdom' of the market: silver is no longer deemed to be a "precious metal" because "people don't think of it as a precious metal, any longer". Who are these people?
Certainly not the people of China and India, who make up nearly 1/3rd of the global population, between them. Yes, in India, rising incomes fueled a greater level of demand for gold for several years, because people could afford it. However, now, with the price of gold having risen rapidly, and the price ratio with silver so extremely warped, the pendulum is swinging back in India - with silver demand rising while gold demand is stagnant.
 
It's certainly not the people of Germany who no longer see silver as a precious metal. Silver developed deep cultural significance to Germans when they experienced the hyperinflation of the Weimar Republic - and silver became a crucial store of wealth and real money for an entire population.
 
It's not the people of Mexico, where only a couple of years ago the government openly contemplated the possibility of reintroducing a silver currency to replace the peso.
 
In the United States, the Constitution still defines the U.S dollar as a measurement of silver. Of course, many deem this an archaic document which hardly anyone pays attention to any more.
 
The fact is that apart from a lot of "experts", it's hard to find any significant group of people who don't think of silver as a precious metal. Yet, with the price ratio of gold and silver currently nearing 70:1 the actual amount of available silver and gold in the world is likely no more than 6:1 - with many actual experts (including Ted Butler) convinced that this ratio is even lower.
 
This brings me back to the second, huge implication derived from the fact that silver is consumed (in most applications) in trace amounts. This is something which (to the best of my knowledge) has not yet been discussed by anyone else.
 
It is basic economics that when an input of production is used in small amounts, then the price of this input is very "inelastic". To explain this without the economic jargon, I'll refer one more time to the example of polyester sportswear. As I pointed out earlier, 1,200 tons of silver is enough to fabricate 20 million tons of polyester.
 
This means that (by weight) silver only represents a little more than 1/20,000th of the inputs in this product. Thus, if the price of silver were to double, this would have such a tiny impact on the final price of sportswear that demand would not change at all. In reality, the price of silver could likely increase 1000% with little to no effect on demand.
 
Obviously not all applications of silver use such tiny amounts of silver, but with the rapidly increasing use of silver in nanotechnology, many of these new applications will use even smaller amounts of silver.
 
Therefore, unlike almost any other commodity on Earth, even with an extremely large and rapid increase in price there will be a relatively small decline in demand.
 
The world is currently facing the largest silver-shortage in centuries. Meanwhile, the Manipulators have deceived the market into believing that global silver inventories have tripled in a little more than three years - because the phony, "paper promises" of (so-called) "bullion-ETF's" are included in those inventories!
Intelligent people will soon begin to realize (in growing numbers) that with the current dynamics of the global silver market, it is totally absurd to even suggest that current inventories could have increased by 200% in 3 years. As this realization grows in size (and vehemence), several events are certain to occur.
First of all, large investors are going to start hoarding silver again. Think: "Hunt Brothers" except that now there is hundreds of times as much capital floating around - and 90% less silver.
 
Secondly, pressure will mount on the various forms of silver fraud currently taking place. Consider this: it is the Manipulators (the fraudulent, bullion-banks), themselves who are telling us that 2/3 of global silver inventories are held in bullion-ETF's.
 
Meanwhile, these same criminals are holding a short-position in the Comex market somewhere greater than half of global inventories (based upon the Comex "Commitment of Traders" report). This raises the obvious question: what is backing this short position? Obviously (by definition), the Manipulators cannot hold more than 100% of all silver.
 
If they could somehow manage to cover their own short positions, there assuredly would be little or nothing left for the bullion-ETF's - sitting there with their paper promises.
 
When the current surge in demand for silver turns into a frantic rush to grab as much bullion as possible while it is priced at no more than ¼ of its current value, that will be the end of the Manipulators - and the end of all those "bullion-ETF's" who don't physically possess their own bullion.
 
The only remaining question is whether this will occur next decade, next year, next month, or next week. Got silver?

[Disclosure: I hold no position in bullion-ETF's. I do hold "physical" silver.]
History of Silver, Part II: The Great Build ~ Jeff Nielson

History of Silver, Part II: The Great "Build"
by Jeff Nielson June 14, 2009
 
In Part I of this series, I provided a brief exposition on the birth of silver mining, and explained how and why silver came to be universally considered a "precious metal" (and "money") by humanity.
 
In Part II, I will provide an outline of the development of silver mining, and the huge growth of global, silver stockpiles which accompanied such production-growth - and which ended in the last century, when modern technology came up with an endless list of new applications for silver.
 
As humanity entered the "Middle Ages", production of silver had been hampered by two constraints: the lack of new deposits/mines to offset the depleted reserves of older "First World" mines, and the primitive technology of that era - which made only rich, near-surface deposits feasible to mine.
 
Concurrently, two changes occurred, which allowed a dramatic increase in the amount of silver produced in the world. First, in the 15th century, the Americas were "discovered" (a very large historical "slight" to the indigenous peoples of these continents, along with the Nordic explorers who had reached North America centuries earlier).
 
Nevertheless, it was the highly-publicized expeditions of 15th century explorers (and those who came after them) which allowed the economic "development" of the Americas (i.e. the exploitation of their vast wealth of natural resources). Among the most-highly prized resources of the "New World" were precious metals.
 
Meanwhile, with science emerging from the Dark Ages, improvements in mining technology allowed a vast expansion in the production of silver and other metals. Bolivia was the first New World target for silver mining. According to data from the Silver Institute, between 1500 - 1800 A.D. Somewhere around 1 billion ounces of silver were extracted there.
 
However, while Bolivia was the initial destination in the Americas for silver mining, Mexico soon became the largest silver producer. Over the same time frame, there was an estimated 1.5 billion ounces of silver produced in Mexico, with the majority of that production occurring in a single century: from 1700 - 1800.
The third, principal producer in the New World was Peru. Silver mining in Peru did not commence until significantly later than in Bolivia or Mexico. However, by 1600 it is estimated that annual production in Peru had reached roughly 3 million ounces per year, with more than half a billion ounces extracted by 1800.
 
To provide some perspective as to how important these new centers of silver production were, from a global perspective, between 1500 and 1800 these three New World producers accounted for roughly 85% of the global silver trade - despite the fact that in 1500, silver production was just beginning there.
 
By 1800, silver production was moving north - into the United States. Large deposits were discovered in the United States, most notably the "Comstock Lode" in Nevada. With these new mining capitals providing vast quantities of ore for miners, and with the steady improvement in mining methods and technologies, global production continued to rise. By the latter half of the 1800's, annual production fell somewhere between 40 to 80 million ounces per year.
 
Naturally, gold mining and the global production of gold followed a similar trajectory to that of silver mining (but that's a whole story unto itself), and large stockpiles of gold and silver were accumulated in the form of jewelry and other ornamental applications (in the hands of private entities), and large inventories of bullion (held by governments) - which formed the basis of our global monetary system (in an era when people actually possessed real "money").
 
Throughout this era, the amount of mined and refined metal continued to increase even faster than global population growth. This continued on into the early part of the 20th century. And then things changed!!
In our own modern era, rapidly evolving technology and mass-production of an enormous array of goods altered silver's value in our society from being only a precious metal (and "money") to becoming an ever more important "industrial metal".
 
Noted silver researcher and commentator, Ted Butler, provides us with some information as to how huge those global stockpiles were, at their peak (in "A good time to buy Silver"): "In 1959, there were about 9 billion ounces of silver bullion-equivalent in the world population of 3 billion...a per capita amount of 3 ounces for each of the world's citizens..."
 
In just 50 years since then, these numbers have changed enormously. The paradigm where silver production produced global stockpiles of silver which continually rose faster than our global population ended - permanently. This was a market trend which had been intact for over 2,000 years.

To find out how dramatically this trend has been altered (and reversed), you will have to read Part III (or do your own research!). In the conclusion of this series, you will see why "silver bulls" are so rabidly enthusiastic about the future - for those who are buying silver bullion products (real bullion - not "paper promises"), and accumulating positions in quality silver miners now.
 
Gold may seem to shine brighter for most people looking at precious metals investments today. However, the Metal of the Moon is poised to "eclipse" the Metal of the Sun in the future, and most likely, the very near future. When that day arrives, silver will completely shed its label as "poor man's gold".
 
[Author's Disclosure: I hold "physical" silver, and shares in several silver mines.]
History of Silver, Part I: the Metal of the Moon ~ Jeff Nielson
 
History of Silver, Part I: the Metal of the Moon
Written by Jeff Nielson
Wednesday, 10 June 2009 09:02
 
This is the start of a three-part series.
 
Part I discusses the dawn of silver mining and the recognition of silver as a precious metal - and "money".
Part II looks at the gradual build-up of global silver stockpiles over a period of centuries
Part III looks at the rapid depletion of those stockpiles.
 
Somewhere around 5,000 years ago, humanity began to master the process of extracting "precious" metals from ore. According to the Silver Institute, the first "sophisticated processing" of silver occurred with an ancient tribe known as the Chaldeans - at approximately 2500 B.C.
 
There were several properties of gold and silver which attracted our primitive ancestors. First, there was the aesthetic beauty of these metals. Secondly, these two metals were particularly malleable - making them ideally suited for a wide range of artistic and ornamental uses.
 
Finally, these two metals were scarce (or "precious"), but not so scarce that it was impossible to amass large quantities of these metals. It was these considerations which soon led to gold and silver becoming the first universally accepted "money" to have been devised by our species (and today they stand out as being the best forms of money ever devised by humanity).
 
Glittering gold was equated with being "the metal of the Sun", while shining silver was considered "the metal of the Moon". Thus, our "primitive" ancestors quickly established the first gold/silver price ratio. Each year, there were thirteen cycles of the moon for each full, cycle of the sun, thus the original price ratio between these two, precious metals was 13:1.
 
Science has subsequently determined that silver is approximately 17 times as plentiful in the Earth's crust. Therefore, our early ancestors either stumbled upon a ratio that just happened to coincide very closely with the natural abundance of these metals, or they had a much more sophisticated understanding of geology than we give them credit for. For roughly 4,000 years, the average gold/silver ratio was 15:1. These ratios are especially interesting today, given that the price ratio is currently, extremely skewed in gold's favor - at more than 60:1.
 
For roughly two thousand years, the center of silver production was the "Cradle of Civilization": the various ascending (and descending) cultures which were located around the perimeter of the Mediterranean Sea.
A thriving, silver trade among these tribes developed, reaching its zenith some time after the 8th century, B.C. Most of this early, silver production came from the Larium mines - located near the ancient capital of Athens. Annual silver production in this era was estimated at about one million ounces per year.
 
As the mines of Larium were gradually depleted, ancient production shifted its focus to newly-discovered silver deposits in Spain. For the next 1,000 years (until roughly 800 A.D.), Spain became the leading source of silver in the world.
 
With production of the earlier mines steadily declining, the production from Spain did little more than offset lower production from the Larium mines, and the handful of other, early sources of silver. Thus, total production leveled off at a plateau of approximately 1.5 million ounces per year.
 
While silver was never equated with gold in value (due to its greater abundance), throughout the first 2500 years of silver production its status as "money" never diminished. This is yet another piece of data to "file away", given that the majority of market commentators today (especially in North America) disparagingly refer to silver as simply an "industrial metal".
 
The "logic" of these neo-"experts" is that because silver also has superior chemical and metallurgical properties in countless applications (in addition to its aesthetic beauty) that this somehow makes silver less "precious".
 
Such infantile reasoning would never have fooled our ancestors who lived a thousand years ago (or 2,000 years ago, or 3,000 years ago, or 4,000 years ago...). In fact, with most of the global stockpiles accumulated over a period of 4,000 years now consumed (literally) in various "industrial" applications, silver has literally never been more "precious" than it is today.