Friday, April 22, 2011

We have liftoff...

If you click on the above image to enlarge it, you will see a side by side comparison for the closing price of silver over the past three weeks.  The first is on Friday April 8th ($40.01),  the second is on Thursday April 14th ($42.09) and finally you have closing price yesterday, Thursday, April 21st ($46.61).

What can you say other than... "Wow!" 

Last Thursday's close came after an impressive climb and this week Silver's charge continued unabated with a stunning gain for the week of more than $4.50.

But on the heels of such impressive and dynamic gains I would suggest, dear reader, that you haven't seen anything yet.

Last week I was having coffee with two colleagues in a local Tim Horton's (famous Canadian coffee/donut franchise), when our silver conversation was interupted by a patron sitting at the table next to us.  He enthusiastically gushed about the prospects for silver and gold.

This marks the first time I have observed the general public keen to not only talk about the opportunities in silver, but have Joe Q. Public actually quote the current spot price of the metal.

The next day, one of those two colleagues was at the Vancouver Bullion Exchange at Granville & Broadway to buy some silver bullion.  Silver had just surged over $40 an ounce and he was keen to purchase some physical.  He couldn't get close as there was a line-up of over 100 people eager to do the same.

This growing public awareness comes on the heels of Bank of Montreal (BMO) issuing a report talking about the "New Paradigm in Silver", which we commmented on in this post.

The BMO reports outlines the reason both investment demand and industrial demand are surging. Understanding the twin demands are essential to understand what is happening in Silver right now.  As I have often suggested,  people should take a look at this youtube video clip that, while a bit sensational, outlines the silver case quite well.

Increased industrial demand is coupling with declining supplies of silver. Both factors are coming to a head with the surging investment demand resulting from concerns about sovereign debt.

It's the perfect storm, a confluence which the commentors in mainstream media and on Financial TV have simply failed to grasp and understand.

But that dynamic has not escaped the attention of Eric Sprott of Sprott Asset Management. In his latest 'Markets at a Glance' newsletter, these factors are articulated and laid out extremely well.

  • The fact remains that most commentators have failed to grasp the monetary shifts that silver is signaling today, and in doing so they’ve failed to appreciate just how high it could actually go.  The financial media’s failure to grasp the benefits of precious metals ownership continues to perplex us, and it’s not just the commentators who are prone to perpetual disbelief. The sell side analysts are equally as irresolute. According to Bloomberg, the ‘expert’ consensus silver price forecast for 2011 is $29.50, representing a 31% discount from the current spot price. This same group of analysts also predicts prices will decline another 25% in 2012 and a further 9% in 2013 to $20 an ounce.  When you consider that the silver price has appreciated by over 21% annually over the past 10 years, these forecasts suggest a very dramatic change in the long-term trend. Will this reversal come true? Probably not. These were the same analysts who predicted that spot silver prices would average $18.65 this year - so they’ve missed the mark by over 100% thus far.
Sprott notes that many are evaluating Silver with financial models that dictate equity valuations but they are ignoring the most rudimentary of economic principles – supply and demand.

This phenomenon means that Financial TV is often providing backward-looking forecasts that completely miss the mark for the future of Silver.  As the greater investment community gradualy comes to appreciate what is happening, the herd will  follow behind in due course as forecasts get ratcheted higher.

Sprott outlines why he can be so confident that the price of silver will continue on its upward trajectory while 'the Street' continues to forecast a price collapse.

One of the key indicators is the gold/silver ratio.

The last time money was synonymous with defined amounts of gold and silver, the ratio was set at 16-to-one. For most of the past millennium, one ounce of gold would have been convertible to somewhere between 10 and 16 ounces of silver - an amount roughly in line with the relative occurrence of each mineral within the earth’s crust.

For the better part of the past century, due to the world’s abandonment of bimetallism and then the gold standard, the gold/silver ratio has fluctuated widely, twice reaching lows near the 15-to-one mark and a high of 100-to-one back in the early 1990’s.

The most recent high reached in the latter part of 2009 was nearly 80-to-one. Since then the ratio has been tumbling to where it stands now at 35-to-one.  Sprott believes this ratio will continue to move lower, driven by nothing more than basic supply/demand fundamentals.

One of those fundamentals is mine production. In 2010, the world mined approximately 736 million ounces of silver and 85 million ounces of gold. The world also produced an additional 215 million ounces of silver and 53 million ounces of gold from recycled scrap. When you add both together you have a ratio of production where only 9 ounces of silver are being produced for every 1 ounce of gold. 

Interestingly, this 9-to-one ratio is very similar to the ratio of available in-situ (on-site) silver and gold reserves. The U.S. Geological Survey estimates that there are current in-situ reserves of approximately 16.4 billion ounces of silver versus 1.6 billion ounces for gold, or about a 10-to-one ratio.

It all says that mining production is not keeping pace with consumption. And when you add in the industrial demand for silver, you begin to appreciate the huge supply/demand squeeze that in being placed on silver right now.

  • Last year, non-investment demand for silver (which includes industrial, photographic, and silverware demand) totaled approximately 610 million ounces. This represents approximately 64% of primary supply, leaving approximately 341 million ounces to satisfy investment demand. On the gold side, industrial usage totaled 13 million ounces, or about 10% of primary supply, leaving approximately 125 million ounces left over for investment demand. So, after netting out the industrial usage the primary supply left over for investment demand is about 2.7 times that for gold. However, if we convert those ounces to dollars at current prices, we’re left with $15 billion worth of silver available for investment versus $186 billion worth of gold, or a one-to-13 ratio of silver to gold! This means that in terms of primary supply, silver only has 8% of the capacity for investment that gold does despite having equal if not more dollars flowing into it.
Some critics note that as the Silver spot prices rises, some investors will start selling thier physical silver back into the market. But even if all the silver/gold held by investors was suddenly sold back into the market as the price leaps higher and higher, there is a  one-to-63 ratio of silver to gold inventories in the investment community. Under these conditions, Silver still remains extremely scarce.

As Sprott asks, how then is silver still priced at a 35-to-one ratio with gold?! The answer is... it can't remain at this level. Demand is going to collapse that ratio.

Current investment statistics show that there is an equal amount of money being currently being invested in Silver as there is into Gold on a dollar for dollar basis.

This is placing MASSSIVE demand on Silver, causing Sprott to observe:
  • Although the price ratio of silver to gold has fallen substantially since the highs of 2009, our analysis strongly suggests that this ratio must move lower to restore a fundamental balance between supply and demand. Only time will tell how much lower it will go, but we would not be surprised to see it hit single digits before settling into a more sustainable equilibrium. 
As the Silver to Gold ratio drops to around 10:1 or less, it means that Silver, assuming that Gold doesn't rise a single penny, will hit $150/ounce as that Silver/Gold ratio narrows (Gold currently sits at $1,504/ounce).

But as we have talked about constantly on this blog, Gold’s continued appreciation vis-à-vis every currency is assured because of the great flight from fiat currency that has only just begun.

And on that note, mainstream media has been slow to comment on the latest statement from China. If you missed it, China's central bank Governor Zhou Xiaochuan made a significant statment this week.

After a speech at Tsinghua University in Beijing on Wednesday, Zhou spoke of the need to reduce an excessive accumulation of foreign-reserves as those 'reserves' have exceeded a “reasonable” level and the management and diversification of the holdings should be improved.

This, btw, is the way you diplomatically say “we are sick of the US Dollar and will be taking steps to lower our holdings.”

Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).

This comes on the heels of China deciding (along with Russia) to trade in their own currencies, NOT the US Dollar. Not to mention the numerous warnings Chinese politicians have been issuing to the US over the last 24 months.

In simple terms, China is done playing nice and is now actively moving out of US Dollar denominated assets.

It means Gold is about to soar and the price could easily go to $2,000 an ounce. With the Silver/Gold ratio collapsing, that means Silver will not only leap up to $150/ounce, but will blast through that as Gold leaps higher. If Gold hits $2,000/ounce, Silver could well hit $200/ounce or higher.

Like Gold, Silver nvestors are now buying Silver as protection from the ravages of fiat currency debasement. Bring all the factors together and Sprott observes why you will see Silver soar over the next few months:

  • When compared to gold, it is silver that offers the most attractive value proposition by virtue of the gross mispricing of its scarcity, which, we might add, has existed for many years. Thus, in our opinion, as this new bimetallic standard takes root, silver investors will continue to be justly rewarded with marked outperformance. We truly believe that this is the investment opportunity of a lifetime, and increasingly so, others are taking heed. What is clear to us is that with equal investment dollars now flowing into silver and gold, the current 35-to-one ratio is unsustainable and has only one direction to go: lower.
At just under $47/ounce, Silver is still very cheap. And with the Gold/Silver ratio closing (and the fact that, on a doller-per-dollar basis, equal amounts of money are flowing into Silver as into Gold) Silver has a much higher upside potential than Gold does. It means the foundation is being laid for some dramatic gains in Silver in the coming months and all eyes are now keenly focused on the COMEX delivery month of May.

How long before the wider investment community realizes this huge upside advantage that exists if you invest in Silver over Gold? How long before investment money, on a dollar-per-dollar basis, start flowing primarily into Silver instead of Gold?

It could be that the gains of the last two weeks are nothing compared to what may happen next month.


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  1. There has not been a financial commentator in Canada more contrary to Eric Sprott than Garth Turner of the website Greater Fool. Mr Turner has been dead wrong about gold and silver for years, while he continues to ignore commentators such as Eric Sprott and John Embry. Turner vigorously disagrees with the arguments in favor of precious metals and consequently well lives up to his moniker, as Canada's Greater Fool.

  2. Van RE investors will be dumping their condos to buy silver. RE will melt-down and silver will melt-up!

  3. Turner has spoken out against Gold/Silver, but it should be noted that on September 29th, 2010 I made a post referencing an interview on where Turner conceded he could see Gold going to $3,000... but not $5,000 or $10,0000.

  4. Thank you so much for all your information Whisperer, it is much appreciated. Because of you, I've found the whole Ted Butler, Harvey Organ, Turd Ferguson crowd, and I've since invested in physical silver! :)
    Long live the SLA!!!

  5. Welcome to the blog, RumbleGuts. I'm glad you have found it worthwhile.

  6. That's right Turner did concede $3000 gold on HoweStreet. However, his blog is so negative on precious metals, one could easily mistake him for a banker wanabee.

  7. Turner has commented in the past that he believes Bernanke is a smart guy. He is confident the Federal Reserve will not allow the US dollar to collapse.

    In the late 1970s people thought the dollar would collapse and hyperinflation would ensue. The Federal Reserve artfully dodged through the crisis and 'managed' policy to trigger 30 years of stunning growth.

    Betting against the Federal Reserve in the late 1970s killed you (especially if you piled into Gold in 1980).

    Turner has been conditioned by his past.

    I can understand his thought pattern (although I disagree with his conclusions).

  8. Of course, The Bernank is smart. However, so is Bernie Madoff.

  9. From what I've read on his blog and books, Garth only objects to gold and silver if that's all you are invested in...He actually recommends 5-10% of your assets in gold and silver

  10. Shadowfax, I think what bothers some posters about Garth is the manner in which he derides those who speak in favour of Gold/Silver.

    Gold/Silver fans believe ardently that soveriegn debt will drive Gold/Silver up signficantly and so they wish to invest heavily to take advantage of that.

    Turner adopts the position that Gold/Silver remain barbarous relics and shouldn't attract that much attention.

    As it becomes apparent they will go up, he has conceded you should have 5-10% in the asset. But at the same time he continues to deride those who think it will go way up, is adament there will not be a significant dollar crisis (and hence no bond crisis).