Silver Metal – TWICE as Rare As Gold

Silver’s recent performance has been spectacular. On 25 April it hit an all time high of $49.80 – at which point it had quadrupled in price in just two years. This has been exciting. But you have to expect a pullback after a monster rally like that - it’s just how the market works.
The price nearly doubled in three months and investors are taking easy profits. We’ve already seen one big pullback this year. The silver price fell 16% in January after rallying for three months. Once this was done, it was off to the races again.And now history is repeating itself. The price has just fallen 20%, and after some time to settle, I believe this will be the staging post for the next leg up.
So silver has pulled back quickly, but as the saying goes – ‘the best time to buy is when there is blood on the streets’.
So why am I still so bullish for silver after such a rapid doubling in price? Good question. The answer is because some precious metals are more precious than others.
Here’s the key point here -
SILVER BULLION IS TWICE AS RARE AS GOLD BULLION.
Of course, you’d think that it would be the other way round. But you’d be wrong. By Sprott Asset Management’s calculations, there are just over one billion ounces of silver, compared to just over two billion ounces of gold.
Let’s just think about that for a second. If silver bullion is twice as rare as gold...then SHOULDN’T SILVER BE TWICE THE PRICE OF...GOLD....?



Silver – quick pullback but still trending up strongly 

Throughout history, it has been the availability of the two metals that has defined their relative prices. Gold is roughly 15 times rarer than silver in nature, so for thousands of years one gold coin was worth about 15 silver coins. No need for central bankers for this one to work. Today we describe this relationship as the ‘gold-to-silver ratio’. It’s like asking ‘how many ounces of silver do I need to buy an ounce of gold?’ This ‘gold-to-silver ratio’ was around 15 for centuries. But last century it started rising as we started our doomed experiment with fiat money. As recently as two years ago it was still sitting at 80. So you needed as many as 80 ounces of silver to buy one ounce of gold. Gold-to-silver ratio – still falling like a stone as silver enters a bull market
This then started changing drastically last year. Now you need less than 40 ounces of silver to buy one ounce of gold. The ratio is heading back to where it belongs, driven by an epic shortage of silver bullion. We used to have far more silver in storage. But we have blindly painted ourselves into a corner by consuming nearly all of it. It was cheap for decades and we discovered hundreds of industrial applications for it; electronics, solar panels, ID tags, medical uses, wood preservatives. The list keeps getting longer. This short-sightedness has left us with just over 1 billion ounces of silver bullion. So if silver bullion’s now twice as rare as gold...then
why is silver not $3000 / oz? Probably because no one could get their heads around paying that much for silver! But the stark shortage of silver can only continue to send the silver price parabolic, leaving commentators completely speechless. I think silver could easily reach $500 ounce. Is that so unrealistic?
Not when you realise that the total global silver inventory is a fraction, of a fraction, of a percent of global financial assets - just 0.005%. Put another way, the world’s entire silver stash is worth just $47 billion – less than ANZ Bank’s market capitalisation. That’s small change on the global playing field, and it’s also a lot less than the $3,400 billion worth of the gold bullion in the world. So with so little silver available, it won’t take much demand to swamp the silver market and drive prices into the hundreds. You have to remember why investors are piling into silver – and will continue to do so. It is HARD MONEY, providing protection from the ravages of inflation, and brazen currency devaluation. The saying goes that ‘Gold is the currency of kings,
while silver is the currency of the common man’. Well the common man in China is getting very nervous about the steady rise in inflation, and silver is being purchased as rapidly as it can be imported. China has now rapidly swung from supplying 10% of the silver market to IMPORTING 10% of the world’s silver.
There isn’t even enough silver bullion in the world to supply one ounce per Chinese citizen! It doesn’t take much imagination to see where this is heading. The next biggest consumer of silver, India, already has inflation of 9%. Annual silver imports DOUBLED in 2010 hitting 97 million ounces, taking another 10% of annual production. The Bombay Bullion Association expects demand to keep rising fast. The US Mint, Royal Mint and Perth Mint keep setting record sales. The US Mint has even suspended sales of some of its lines. In my own experience, I’ve found that Australian bullion dealers are rationing sales. Everything is pointing very clearly in one direction.
Up.
Just don’t expect it to follow a straight line!
Diggers and Drillers 4 Commentators in the media will keep saying that each pullback on silver’s way up is the end - we’re hearing it right now.
Don’t forget that most of them know less about silver than your neighbour’s cat! And ask yourself how
many of them were calling silver to go up before the rally?

Why the silver price could hit $500 within two years 

The shortage of bullion will be the driving force of the rally this year, but in the next few years, the supply will be the important factor. In total one billion ounces of silver each year is produced. But investors don’t get their hands on much of it - Industry gobbles up almost two-thirds of it. This leaves just 340 million new ounces of silver each year coming into the market for investors. If you compare this to the 125 million new ounces of gold available each year to investors, it suggests that until production levels change, newly supplied
gold will be 2.7 times rarer than silver. Or in other words the gold-to-silver ratio in the medium-term should trend towards 2.7:1. So at a gold price of just $1350 for example, then silver should be trending  towards...$500.