Silver: As Close to a No-Brainer Investment as It Gets

Silver: As Close to a No-Brainer Investment as It Gets

By Jeff Clark

By Jeff Clark, Hard Assets Alliance Contributor

Jim Rogers once quipped that he waits to invest until “there’s a pile of money just sitting there in a corner and I can walk over and pick it up.”

In other words, an asset that’s deeply undervalued, widely ignored, with potent fundamentals ready to kick in.

Is there such an opportunity in any of the precious metals right now?

One could make a case for all of them, given the likelihood of high inflation and the mainstream largely ignoring the industry.

But there’s one metal in particular that I think will deliver the most fireworks…

Why the Silver Price Could Easily Double or Triple

Silver is selling at less than half its 2011 high, is ignored more than gold, and as you’ll see, has explosive fundamentals that point to a possible runaway price scenario.

To assess silver’s potential, let’s first ignore short-term factors that you might see in mainstream headlines, such as net short/long positions, fluctuations in weekly ETF holdings, or the latest open interest. Data like these fluctuate regularly and rarely have long-term bearing on the price.

Let’s instead consider the big-picture forces that could impact silver over the next several years. Here are the data that tell me “there’s a pile of money sitting in the corner…”

#1: Monetary Abuse. The most significant catalyst for silver is the government’s abuse of our monetary system. In a world of endless fiat money printing and unsustainable debt, silver (like gold) represents a wealth protection against systemic risk.

At no time in history has a government printed this much money. And not one currency in the world is anchored to gold or any other tangible standard. This unprecedented setup means that whatever fallout results, it will be historic and affect each of us personally. Silver will be one refuge from that storm—and given its higher volatility, could rise more than gold.

#2: Inflation-Adjusted Price Has a Long Way to Go. One specific indicator of silver’s potential is its inflation-adjusted price. I asked John Williams of ShadowStats to calculate the silver price in May 2014 dollars (current data are not yet available).

Shown below is the silver price adjusted for both the CPI-U, as calculated by the Bureau of Labor Statistics; and for ShadowStats data based on the CPI-U formula from 1980 (the formula has since been adjusted multiple times to keep the inflation number as low as possible).

The $48 peak in April 2011 was less than half the inflation-adjusted price of January 1980, based on the current CPI-U calculation. If we use the 1980 formula to measure inflation, silver would need to top $470 to beat that peak.

I’m not counting on silver going that high (at least I hope not, because I think there will be literal blood in the streets if it does). But clearly, the odds are skewed to the upside—and there’s a lot of room to run.

#3: Tight Production Margins. Producers have been forced to reduce costs in light of last year’s crash in the silver price. Some have done a better job at this than others, but look how far margins have fallen.

Relative to the cost of production, the silver price is at its lowest level since 2005. Keep in mind that cash costs are only a portion of all-in expenses, and that the silver price has historically traded well above this figure (all-in costs are just now being widely reported). That margins have tightened so dramatically is not sustainable on a long-term basis without affecting the industry. It also makes it likely that prices have bottomed, since producers can only cut expenses so much.

Although roughly 75% of silver is produced as a byproduct, prices are determined at the margin; if a mine can’t operate profitably or a new project won’t earn a profit at current prices, output would fall. Further, much of the current cost-cutting has come from reduced exploration budgets, which will curtail future supply. Sooner or later this supply deficit will serve as a catalyst for higher prices.

#4: Low Inventories. Various entities hold inventories of silver bullion, which were high when US coinage contained silver. As all US coins intended for circulation have been minted from base metals for decades, the need for high inventories is thus lower today. But this chart shows that little is available.

You can see how low current inventories are on a historical basis, most of which is held in exchange-traded products (ETPs). This is important because these investors have been net buyers since 2005 and thus have kept that metal off the market. The remaining amount of inventory is 241 million ounces, only 25% of one year’s supply—whereas in 1990 it represented roughly eight times supply. If demand were to suddenly surge, those needs could not be met by existing inventories. In fact, ETP investors would likely take more metal off the market. (The “implied unreported stocks” refers to private and other unreported depositories around the world, a number that also has shrunk strikingly.)

If investment demand were to repeat the surge it saw from 2005 to 2009, it would leave little room for error on the supply side.

#5: Conclusion of the Bear Market. This snapshot of six decades of bear markets signals that ours is near exhaustion. The yellow line represents silver’s price action from April 2011 through July 11, 2014.

The historical record suggests that buying silver now is a low-risk investment.

#6: Cheap Compared to Other Commodities. Here’s how the silver price compares to other precious metals, along with the most common base metals.

Percent Change From…
  1 Year
5 Years
10 Years
Gold 0% 41% 241% -29%
Silver 2% 46% 266% -56%
Platinum 6% 23% 87% -34%
Palladium 16% 257% 243% -20%
Copper -1% 40% 152% -30%
Nickel 30% 25% 16% -64%
Zinc 16% 37% 109% -51%

Only nickel is further away from its all-time high than silver.

#7: Low Mainstream Participation. Another indicator of silver’s potential is how much it represents of global financial wealth, compared to its percentage when silver hit $50 in 1980.

In spite of ongoing strong demand for physical metal, silver currently represents only 0.01% of the world’s financial wealth. This is one-twenty-fifth its 1980 level. Even that big price spike we saw in 2011 pales in comparison.

There’s an enormous amount of room for silver to become a greater part of the mainstream investment community.

#8: Watch Out For China! It’s not just gold that is moving from West to East…

Silver market trading volumes rose sharply last year, mostly a result of the Shanghai Futures Exchange (SHFE) initiating overnight trading.

Don’t look now, but the SHFE has overtaken the Comex and become the world’s largest futures silver exchange. In fact, the SHFE accounted for 48.6% of all volume last year. The Comex, meanwhile, is in sharp decline, falling from 93.4% market share as recently as 2001 to less than half that amount today.

There’s more…

  • Domestic silver supply in China is expected to hit an all-time high and exceed 250 million ounces this year (between mine production, imports, and scrap). By comparison, it was less than 70 million ounces in 2000. However, virtually none of this is exported and is thus unavailable to the world market.
  • Chinese investors are estimated to have purchased 22 million ounces of silver in 2013, the second-largest amount behind India. It was zero in 1999.
  • The biggest percentage growth in silver applications comes from China. Photography, jewelry, silverware, electronics, batteries, solar panels, brazing alloys, and biocides uses are all growing at a faster clip in China than any other country in the world.

Walk over to the Corner…

Based on this review of big-picture data, what conclusion would you draw? If you’re like the Hard Assets Alliance team and me, you’re forced to acknowledge that the next few years could be a very exciting time for silver investors.

I say it’s time to walk over to silver’s corner and add some bullion to your portfolio. The team at the Hard Assets Alliance can help—their intuitive online trading platform lets you buy, store and sell precious metals with the ease and liquidity of an ETF, they offer ultra-competitive pricing, and you can chose to take delivery or store in any of their six non-bank domestic and international vaulting locations.

If you haven’t looked at the services offered by the Hard Assets Alliance, now would be a good time to do so. It really is a better way to buy, store, and sell precious metals.


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17 thoughts on “Silver: As Close to a No-Brainer Investment as It Gets”

  1. While the information seems sound, I definitely don’t think “holding” it through a 3rd party is the way to go.

    When the wheels come off the bus, I have the feeling the ETFs, and the like, are going to be showing ZERO assets. Bye-bye diversification.

    I like my silver cold and hard, and in my hands.

    Plus, there are two bonuses to holding my silver. 1. When antibiotics are scarce, some distilled water and a little electricity, and presto-chango, colloidal silver to the rescue. and 2. I can afford it. An ounce of “junk” silver from my local jeweler, is still less than the price of two tickets to the movies with popcorn.

    I love using that example to prove to even my “poorest” relatives that protection from out and out monetary destruction can be had by us all.

  2. I entered the rare coins and bullion game in 1965. The article is thus an update of what many of us have known for a long time.

    As with TE, physical possession is the only way for us, the little guys.

  3. a lot of what the author writes is compelling, particularly the last bit where product, and one hopes, the whole market are moving east. this may free up the price, though it hasn’t thus far, which is disappointing to say the least. from my amateur perspective, there are a few points that i doubt many consider when buying silver:

    1. the author rightly considers the increasing industrial use of silver. you’d think this would make prices rise. yet it hasn’t. the run up to $48 and then the plunge down to $18 was entirely due to traders, speculators, and their computer programs. physical demand has nothing whatever to do with price.

    2. further, the important industrial use of silver leads one to believe that if you are known to be buying loads of silver, the less popular you will be for sure, perhaps even in the eyes of the guberment. try hoarding crude oil and copper, or wheat, also immensely important. that wouldn’t work out so well. so it will be with silver. it goes without saying that there will be no hunt brothers event this time around.

    3. the author points out the following: “Although roughly 75% of silver is produced as a byproduct…”. yes, usually a byproduct of copper mining i believe. do you think this is bullish for price? i’ll have to think that one over a bit but my initial instinct is to say no.

    4. if silver becomes truly scarce, and it might, the mint will not get any supply. the few times in the past when the mint didn’t have supply, they just stopped shipping the coins. no change in price. again, physical demand had no effect on price.

    5. silver is too important for industry for its price to go up substantially. it will be in no one’s interest for the price to rise except for the “greedy” coin holders. my guess is the price will be what it costs to mine it, whatever that is, plus a little profit. it may well be $18 or $208 in the future. who knows. of course, the real concern is what $18 or $208 will buy you in the future.

    6. i think the only way silver will shoot to da moon is for it to be re-monetized. i think the likelihood of that happening is next to zero, if only because there’s not enough of it.

    still, i like junk silver because it may have some collector value in the future. it may help out in a bartering situation also. i may get flamed for suggesting this but if you have an extra, say $250, and you don’t own any gold, for heaven’s sake buy a few grams of gold! gold has little to no industrial use whatever, and nearly every ounce ever mined is still above ground, sitting quietly in vaults. quite the opposite from silver. and yet that is why it is valued!

  4. @TE I use the following example: In 1960, a quarter would buy my parents a gallon of gas and a soda-pop. Today, that same 1960 quarter’s value (around $3.50) will get me a gallon of gas, but I’ll have to drink water, which is better for me anyway.

    And my husband and I like our bullion and junk in the ground.

  5. archie, just a couple of points. The law which authorizes the production of silver eagles states that they must be made from “newly mined, domestic silver”. The mint had trouble sourcing blanks made in accordance with this law which I think has only limited sales for one year. The other times they appear to run short has more to due with production schedules at the end of the year when they have to get ready to strike the next years run of eagles. I don’t think the availability of silver eagles has ever affected spot price but just ask anyone who is a diehard silver eagle investor and they will tell you that premiums skyrocket when this happens. I don’t know about you but I consider the premium to be part of the price and therefore physical demand has a big effect on price. However, I’m flexible and smart enough to buy Eagles when premiums are low and other forms of silver when they are not.

    During SHTF periods I doubt that the masses will be clamoring for industrial/recreational goods made with silver. They will be clamoring for physical, investment grade silver and demand will surely have a dramatic effect on price. Most of that demand will come from the idiot big investors who currently believe that paper silver is just as good as physical and we all know that paper silver is severely oversold compared to physical. Silver may eventually become so important to industry that private ownership will become illegal for anyone but the govt and .01% but I doubt that will happen during this 4th turning. I also doubt that PM’s will be monetized this time around. I’m sure TPTB will attempt a digital currency first as this will give them absolute control of EVERY…..SINGLE…..PENNY at every minute of the day. Ooo look! archie failed to pay his traffic ticket or forgot to declare that .89 cents he made from his yard sale! They simply delete some or all of your digital currency and transfer that to themselves! Physical will always rule if only for the black market barter environment that will spring up in an oppressive system like that.

  6. It should be a clue that the annual world demand for all purposes is greater than the annual mine output. The difference comes from above-ground supplies. At some point, Economics 101 will become far stronger than JP Morgue’s price manipulations.

  7. Much of the silver mined, and used in industrial applications, is actually “used up.” I read that somewhere years ago, and that little factoid first compelled me to start buying junk silver.

    I’m not buying silver as an “investment,” I’m buying it as a hedge to disaster.

    The “value” of the market silver can be whatever it will be. $10, or $1000, it really doesn’t matter much to me.

    The “value” of my silver is that I can buy it under the radar, it will survive a market/fiat crash, the wise will always know it has real value, and, if I have to, I can hop on over to Canada and turn in my “junk” for their fiat, as I mainly try to buy Canadian Maples and the like because they have both face value and the purest silver construction.

    In the end if nothing happens, my kids are going to get it, and I’m making sure it will all be listed in my will at face/stated currency value. Or, we can melt it down and make jewelry to use to grease the wheels of the jack-booted-thugs left enforcing regulations and laws. It has worked in other failed countries, I have faith it will here too.

  8. TE, if getting the purest silver concerns you you might try to snag a couple of the Bolivian Andean Cat coins as they are seven nines five pure. (99.999995)

    A friend of mine here snagged several thousand ounces when they first came out in the off chance that the collodial/ionic silver people would pay a premium for them. I think he only paid a $2 premium over spot so it was just a good way to protect his considerable wealth.

  9. I just keep on stockpiling it and watch the price go lower, but I know it’ll turn around big time before long as I appreciate its real world values relative to gold, but not on the riding-high-on-a-wave-of-hype “go to the Moon” B.S. talked by Silverdoctors…
    Maybe a factor of 5..

  10. “I’m not buying silver as an “investment,” I’m buying it as a hedge to disaster.”

    Bingo. Me, too. And it’s mine, all mine. Nice and shiny and heavy and purty and in my hands. Mine, I tell you, all mine. Bwahahahahaha.

  11. @IS, well, now if any such coinage turns up in my dealer’s junk silver box, I’ll know.

    I don’t remember ever seeing anything other than US and Canadian coins, but now my eyes will be open a bit wider. Thanks.

    SSS, funny, when I “play” with mine, that same voice is running through my head, “….mine, it’s all mine…”

  12. Sound advice Hagar, and the exact reason why I gift mine to nieces an d nephews.

    All gifts fall well below the gift tax limits imposed by our thieving gubment, ‘er I mean patriotic duty enforcers.

  13. I-S, you say:

    “During SHTF periods I doubt that the masses will be clamoring for industrial/recreational goods made with silver. They will be clamoring for physical, investment grade silver and demand will surely have a dramatic effect on price. Most of that demand will come from the idiot big investors who currently believe that paper silver is just as good as physical and we all know that paper silver is severely oversold compared to physical.”
    well, you may be right. we’ll have to see. my take is that the “idiot big investors” will want gold, if they haven’t any yet. and they probably won’t be able to buy either metal in size when the SHTF. if the silver market is reduced to a cash market, surely the price will go up. i wonder if that will ever happen.

    you are of course correct in noting the difference between spot price and buying premium on coins. i was simply talking about the quoted price.

    and i’ll be damned if my stash isn’t at the bottom of the allagash river when i was viciously attacked by turtles last year during an otherwise fine canoe trip.

  14. archie, I’d bet that the price of both metals do a moonshot. It might be very short lived but both will get crazy stupid when the big boys and plebs rush in at the last minute. Price in dollars don’t matter though. It’s the number of ounces that count. I’m aiming for my body weight in both metals!

    “viciously attacked by turtles” LOL! All I an picture is thousands of those little silver dollar sized turtles mounting a sustained attack! Alligator snapping turtles would put a hurtin’ on you though!


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