Where is silver going?
This is perhaps the most-asked question today among knowledgeable investors as the precious metals bull market gathers momentum.
Precious metals icon, Eric Sprott, has been devoting increasing time to this question in recent weeks. He has offered some strong (well-supported) conclusions. More on this later.
Record gold prices, silver outperforming
The price of gold has hit a new all-time (nominal) high above $2,000 per ounce. That’s a very notable milestone. And the price of gold is on the way to much higher price levels.
Yet silver is increasingly stealing the thunder in this rally for two reasons.
- Silver has been massively outperforming gold for the last 6 weeks.
- Silver began this rally historically undervalued.
Why is silver massively outperforming gold? Why is it historically undervalued today?
The two questions are related.
The second question needs to be answered first. That answer came in a recent Dynamic Wealth Research article.
The World Discovers Why Silver Is MORE Precious Than Ever
The history lesson
Relative to supply, humanity has always had a slight preference for silver over gold
For as long as human commerce has existed, gold and silver were priced at ratio of ~15:1 -- until the last century.
Why did that price ratio remain intact for over 4,000 years? Because it reflects the natural supply ratio of the two metals.
Gold and silver exist in the Earth’s crust at a ratio of approximately 17:1. Silver is actually a more brilliant metal than gold. This is why it is a superior material for solar panels.
For over 4,000 years (relative to supply), humanity has had a slight preference for silver over gold
: a 17:1 supply ratio, but a 15:1 price ratio.
A preference for silver over gold
Understandable. Aesthetically, silver is actually a more brilliant metal than gold and is also more useful for industrial purposes. Arguably more “precious” than gold today.
So what is the relative supply (supply ratio) of gold and silver today?
Today, silver is only mined at an 8:1 ratio versus gold because the price of silver is so depressed. Stockpiles of silver (accumulated over 4,000+ years) are depleted and many analysts have been suggesting there is actually more above-ground gold in the world today than silver.
How did silver get so undervalued? Permanent
suppression of the price of silver by the Bullion Banks. A few of the crimes-and-misdemeanors of these banks in the silver market were covered in a recent article.
Ultimately, the Bullion Banks drove the price of silver to a 600-year low in real dollars in the 1990s. At its March 2020 low, silver was nearly pushed back (again) to that insane price level.
At only a small fraction of its fair-market value, the global silver market is microscopic
This answers the first question. Silver is massively outperforming gold because even a fraction of the flow of investor dollars (going into gold) will catapult the price of silver higher.
Eric Sprott crunches the numbers on silver
No one understands the fundamentals of the silver market better than Eric Sprott. No one is more familiar with the activities of the Bullion Banks in the silver market.
This is what Sprott had to say in his latest weekly podcast
“I think these guys are hung out to dry.”
That reference was to the ~1 billion ounce permanent short position
that these Big Banks hold in the silver market. Roughly equal to one, full year
of silver mine production.
Then Sprott addressed the price of silver.
“It’s produced at [a ratio of] 8:1. I think it’s going there. In fact, it could overshoot that."
How does this translate to a price for silver of $1,000 per ounce?
Sprott continued to crunch the numbers. He observed that once the amount of silver that is annually consumed for industrial purposes is subtracted that there is only a 2:1 mine supply ratio
of silver versus gold.
At an 8:1 price ratio (with gold at $2,000), this equates to a price of $250 per ounce for silver – today. But at a 2:1 price ratio, this implies a price for silver of $1,000 per ounce
The Gold/Silver Price Multiplier
Let’s return to the historical numbers.
There is a 17:1 ratio of silver to gold in the Earth’s crust. That is the absolute supply. But for over 4,000+ years, the gold/silver price ratio hovered around 15:1. A slight demand preference for silver over gold – relative to supply.
We can express this as a price multiplier. A 17:1 supply ratio but a 15:1 price ratio generates a price multiplier of 1.13, which must then be divided by the relative supply.
At a 2:1 supply ratio, this becomes a simple calculation.
$2,000 [the price of gold] X 1.13 [the multiplier], divided by the supply [2:1].
$2000 X 1.13 / 2 = $1,130 per ounce
Conceptually, it’s difficult to even imagine
the price of silver above $1,000 per ounce. It is currently priced below $30 per ounce and has spent most of the last decade wallowing below $20 per ounce.
It’s even difficult to represent a price move of this magnitude visually. To fit it into a size practical for viewing dwarfs all historical trading of silver in recent decades.
Play with these numbers yourself.
At an 8:1 ratio (factoring in the Gold/Silver Price Multiplier), that works out to a price for silver of $282.50 – today. That’s a ten-bagger from the current price of less than $28 per ounce.
If you subscribe to the analysis that there is more gold than silver today (above ground), that would imply a price for silver above $2,000 per ounce
Paying the price
For fun, let’s do one more calculation: how much the rising price of silver is costing these Bullion Banks – like JPMorgan.
Short 1 billion ounces, this is also a very simple calculation.
At $50 per ounce for silver, the Bullion Banks would eat a $20+ billion loss
(on top of how far they are already underwater on their short position). And these bankers have gigantic
paper-short positions in the derivatives market. Likely many multiples as large as their futures short position.
At $250 per ounce for silver, the Bullion Banks would eat an additional loss of $220+ billion
(plus their massive derivatives losses).
At $1,000 per ounce, the Bullion Banks would eat an additional loss of $970+ billion
(plus their massive derivative losses).
What goes around comes around.
Stockpiles of silver are gone. Inventories are depleted. And there is only a fraction of the necessary supply coming onto the market to satisfy investment demand.
Only a dramatically higher silver price (sustained for many years) can restore health to the global silver mining industry and restore health to the silver market.
Crunch the numbers and $1,000 per ounce silver suddenly sounds like a much more reasonable proposition.