Silver as an investment

Guest Post: The Dawning Of a Silver Demand Mania

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

GUEST POST submitted by Dr. Jeffrey Lewis, Silver-Coin-Investor / By Dr. Jeffrey Lewis / November 1, 2012

Precious metals have historically reflected two different aspects to investor, first, the emotional aspect, which is largely held by gold and monetary demand. The second aspect that makes up the reasonable/rational part of the equation consists of the industrial uses of precious metals aptly represented by silver.

Because of their long history as a store of wealth and medium of exchange, gold and silver have often been considered part of our DNA. Setting aside its economic uses, gold and especially silver have been used medicinally for thousands of years and play a role in the health of everyone.

Unbeknownst to many, the human body contains about 0.2 milligrams of gold on average for a person weighing 155 pounds. The role of gold in the body’s physiological processes was unknown until recently when it was determined that gold not only aided in the transmission of electrical signals throughout the body, but also in the health and maintenance of joints.

Silver also plays an important role in the human body as it has the capacity to absorb and transport oxygen and supports several oxygen dependent functions of the body. According to the book, The Body Electric by Robert O. Becker published in 1985, silver not only plays a role in transporting oxygen, but also in stimulating the immune response in humans.

Besides their role in human health, precious metals used in industry — especially silver — have become so prevalent in the developed world that no one can complete a 360 degree turn without looking at something that contains silver.

Gold will Lead

Since gold has traditionally led precious metals prices due to its character as a commodity and monetary metal, the coming explosion in metals prices will most likely be led by the shiny yellow metal. Because of its mostly monetary value, trading in gold is based on perceptions and emotion more so than with silver.

This should by no means discount its value, as the entire study of economics is at base a study of human behavior. Gold is simply a rational check on that unpredictability, politics and the media simply serve up what aligns best with these belief systems.

The current mindset and belief systems of the great majority of people only want to hear about economic “recovery”, the retention of impossible to honor benefits and that debt truly doesn’t matter. These same people can only see the paper money (fiat) price as a determinant of supply and demand and not the other way around.

The financial press for its part, reiterates this point of view, reflecting the mindset of the great majority — which it has cultivated — for the purpose of its own survival.

The Gold/Silver Ratio

The graph below illustrates the Gold/Silver price ratio from 1687 until 2012. As can be noted, the ratio held steady below 20:1 from 1687 until it started creeping up in 1893- 1895. After 1895, the ratio began showing considerably more volatility than it had in the previous 200 years.

Figure #1: Gold/Silver Price Ratio in ounces of silver per ounce of gold.

Chart courtesy of Seeking Alpha.

The reason that the ratio was at around 19 for so long has to do with the fact that silver is 19 times more abundant than gold in the Earth’s crust. This would put the price of silver at around $90 per ounce with gold priced at $1,715 per ounce.

Reserve and production ratios make silver look even more attractive. The U.S. Geological Survey’s Mineral Commodity Summaries of January, 2012 indicated that reserves for silver were ten times that of gold, while silver production was nine times more than gold.

According to some estimates, adjusting silver to its 2011 reserve ratio to gold would indicate a silver price of $165 per ounce. Adjusting for the silver/gold production ratio in 2011, silver would have to rise to $195 per ounce at gold’s current price level to account for the production ratio.

Add to this the constant depletion of above ground silver supplies with its multiple uses in industry and you have the necessary ingredients for a run-up in silver prices unprecedented in recent memory. It is only a matter of time.

The signs are already there with the German Bundesbank repatriating 150 tons of gold held by the New York Federal Reserve and recalling its gold holdings in London. In addition, the U.S. Mint continues selling silver coins at a frantic pace.

The U.S. Mint reported last Monday that they had sold 430,000 ounces of silver over the weekend, bringing the total sales for U.S. Silver Eagle coins to 2,449,000 in the month of October alone. This contrasts sharply with Gold Eagle coin sales at only 43,500 so far in October.

With the ratio at 55:1 for silver over gold coin sales, the U.S. Mint will soon be unable to meet the massive demand for silver. The October purchases of 2.5 million ounces of silver versus 43,500 ounces of gold will soon be unsustainable with the production ratio at nine to one.

Rounding it All Up

Even after rising over 820 percent from its low in 2001, silver is still heavily undervalued when compared to a slew of other commodities, setting the stage for a continued explosion in price regardless of the changes in other commodity prices.

Moving forward, silver has not only the fundamentals driving growth in consumption, but also investment, as more and more investors realize the untapped potential. Given the fact that gold is trading over 54 times the price of silver, many smaller investors will undoubtedly be more likely to buy silver than gold.

There is little time to wait, as silver’s explosion could be just around the corner.  Should silver prices make a modest move from 1/54 of the price of gold to 1/40; investors will be rewarded with a healthy 50% in returns.  The time to invest is now, long before Wall Street realizes what a true bargain silver is.

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Thanks to BrotherJohnF