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Silver Shortage Logic - Silver Futures

Updated on March 13, 2011

Silver Shortage? The Future of Silver

I have been seeing a lot of articles predicting that silver could become more valuable than gold. I am highly skeptical and I believe there is a flaw in their logic and here is why.

First of all, lets look at the data supporting their arguments. According to the World Gold Council there is 2 billion ounces of gold bullion, or 3 billion ounces if we include coins. On the other hand there is only 0.5 billion ounces of silver bullion, or 1 billion ounces if we include coins. Also we are only mining about 0.67 billion ounces per year of silver, while consuming .89 billion ounces of it. So not only is there less bulk gold than silver, but we are slowly using up whatever remaining bulk silver there is. At the rate we are going, we should have a silver crunch in the coming decade.

Silver Futures - Silver Price Explosion?

Here is my problem with all of these calculations. Of the .89 billion ounces of silver used every year, only 75% of that is actually used by industry. The rest is used in jewelry, silverware, and coinage. This means that only about .67 billion ounces of silver is actual used up by industry. Silver that goes elsewhere can easily be recycled and used again. Basically the .67 billion ounces of silver used by industry is replaced by mining. There is no net loss of silver in the overall market.

The second thing is that there is probably at least 25 billion ounces of silver in jewelry and silverware. That is a lot of silver. At the current price it isn't really worth it for people to melt it down for scrap value. But once prices hit $50-$100 per ounces, a lot of that excess silver will flood the market. Just 5% of that would be over a billion ounces of silver. Remember the Hunt brothers? Most of the blame for their huge losses was blamed on a change in rules on margin positions, but I also suspect a lot of problem was caused by the huge number of people selling all those silver coins they saved from the sixties. It seemed like everyone I knew was selling their silver coins in 1979 just to survive the high unemployment and gas prices. I bet if silver hits a $100 per ounce, we would see the same phenomena. The market would be flooded with recovered silver and then prices would drop back down for a couple of decades till the excess silver got used up.

The third thing has to do with production. We may be mining only 670 million ounces of silver right now, but if prices go up, I bet a lot more silver would be produced. That is one of the basic laws of supply and demand. When prices go up on something, businessmen figure out a way to produce more of it. Old mines re-open, new mines start, and it becomes more profitable to go after silver byproducts when mining other metals.

Now some of the less extreme articles do make one point that I suspect may turn out true. Historically, Gold to silver prices have been around a 15 to 1 ratio. Right now it is in excess of 40 to 1. I wouldn't be at all surprised to see the value of silver rise compared to gold. There is one unlikely possibility that could push up the value of silver to within a 5:1 ratio. If a lot more countries start using silver and gold for basic exchange, then the 25 billion available ounces of silver divided by the 5 billion ounces of would result in a 5 to 1 ratio. I think that scenario would take many decades, and it would only take one or two major countries to start a major gold based money standard to completely undermine that particular future for silver.

Of course, only time will tell if I am right or wrong. Political decisions can change monetary futures for decades or even centuries. I will say one final thing though. Make sure you keep your savings in precious metals. Prices will continue to rise in the long run as governments continue to devalue their fiat currency. I keep all my savings in silver and gold. If you prefer investing in stocks, then I would choose some mining stocks. That is advice you can bank on.

For a contrary viewpoint, see the video below.

Contrary Viewpoint on Future of Silver


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