New Sprott Newsletter

A little holiday treat from the nice folks at Sprott Asset Management.

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Why are (Smart) Investors Buying 50 Times More Physical Silver than Gold?
By: Eric Sprott

As long-time students of precious metals investing, there are certain things we understand. One is that, historically, the availability ratio of silver to gold has had a direct influence on the price of the metals. The current availability ratio of physical silver to gold for investment purposes is approximately 3:1. So, why is it that investors are allocating their dollars to silver at a much higher ratio? What is it that these “smart” investors understand? Let’s have a look at the numbers and see if it’s time for investors to do as a wise man once said and “follow the money.”

Average annual gold mine production is approximately 80 million ounces, which together with an estimated average 50 million ounces of annual recycled gold, totals around 130 million ounces available per year. In comparison, annual mined silver production has averaged around 750 million ounces, while recycled silver is estimated at 250 million ounces per year, which adds up to approximately 1 billion ounces. Using this data, there is roughly 8 times more silver available to buy than there is gold. However, not all gold and silver is available for investment purposes, due to their use in industrial applications. It is estimated that for investment purposes (jewelry, bars and coins), the annual availability of gold is roughly 120 million ounces, and of silver it is 350 million ounces. Therefore, the ratio of physical silver availability to gold availability is 350/120, or ~3:1.1

Now, let’s examine how investors are allocating their investments between gold and silver. The data below is from the US Mint showing gold and silver sales in ounces:

Source: US Mint (www.usmint.gov)

As you can see, investors are choosing to buy silver at a ratio to gold that is well above what is available. This uptrend doesn’t show any signs of slowing either. The ratio of the physical silver to gold is both rising and extraordinarily above the availability ratio of 3:1.

We can also use other data such as the most recent issues of the Sprott Physical Gold and Silver Trusts. The last Gold Trust issue in September 2012 raised US$393 million and the last Silver Trust issue raised US$310 million. On the basis of prices for each metal at the time of issue, we could purchase ~213 thousand ounces of gold and ~9.1 million ounces of silver. This represents a purchase ratio of 43:1.

If we examine ETF holdings in both gold and silver, we note that in the period from 2007 to 2012, the increase in silver holdings amounted to 12,000 tonnes, compared to 1,200 tonnes of gold – meaning, investors purchased ten times more silver than gold.

These are only three factual data points to consider, but there are other indications that silver investment demand is way out of line with availability. Our favorite question to the bullion dealers we meet, is to ask the ratio of their dollar sales in gold versus silver. The answer is that dollar sales are equal, which means that physical silver sales relative to gold are greater than 50:1.

A recent news headline on Mineweb read, “Silver Sales to Outshine Gold in India.” It went on to quote a bullion dealer that “investors and jewelry lovers prefer silver jewelry these days.” As the largest importer of gold in the world, it would be impossible for India to purchase an equivalent amount of silver, as it would require more than one billion ounces, essentially more than the current annual mine production.

While these last two confirmations of silver demand are anecdotal, the statistics from the US Mint, the ETFs, and our Physical Trust issues, are factual.

For the time being, the silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading Commission stated on October 26, 2010, “I believe there have been repeated attempts to influence prices in silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in the silver market and any such violation of the law in this regard should be prosecuted.”

Which brings us back to the phrase “Follow the money.” In our view, it is almost inconceivable that investors would allocate as many dollars to silver as they would to gold, but that is what the data shows.

The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). This is a ratio of 60:1 in dollar terms.

How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold. Historically, the price ratio between gold and silver has been 16:1, when both were currencies. Today the ratio is 55:1, so what are the numbers telling us? We believe this is one of those times when smart investors will be well rewarded to “Follow the money.”

On behalf of all of us at Sprott, I wish you safe and happy Holidays and a prosperous New Year.

P.S. – US Mint Sold Out of Silver Eagle Bullion Coins Until January 7, 2013
The Mint recently informed authorized purchasers that all remaining inventories of 2012-dated Silver Eagle bullion coins had sold out and no additional coins would be struck. Since the 2013-dated coins will not be available to order until January 7, 2013, this leaves a three week void for the Mint’s most popular bullion offering.

134 Comments

Zoltan's picture

First Baby

Merry Christmas.

Z

atarangi's picture

first after zoltan - - -

Good article.

Abraham Bernanke's picture

Stacking.. and I just cant say Txurd sorry!

There was a time when I used to trade the metals market but I am seriously concerned that if I don't stack and hold I am going to miss all the fun when it comes!

Turd, thanks for all you do and to the community of excellent posters here on what is undoubtedly a most valuable site to follow.

May 2013 bring us all our price prediction wishes!!

Another GREAT article and informative link!

If there is at least one New Years Resolution we should all follow, it should be to feed the Thurd and support this excellent site ;-D

Mudsharkbytes's picture

Seldom first

But often in the top ten.  I must be doing something right cause I only check in here infrequently.

Silver Alert's picture

This is an official Silver Alert

Beware of falling prices.

I took advantage of Provident's free shipping on any order that includes a silver dollar - use promo silver12.

p.s. - 5th is a good start for after Christmas. 

Left Field's picture

Top ten

Years of lurking .,..quite an education. Thank you all.

Family,member asked my opinion about silver today. he sees the problems brewing in the economy and is old enough to recall the inflation of the 70s. But he could not make the leap to how stacking could benefit him.
I even showed him some qtrs I bought in 08, With the receipt to show the purchasing Power protection it provided. Still no real motivation on his part to learn or do more. He called the learning a "big time suck". Yet he did tell me he pays $400 a month in water to have a green lawn in the summer in So Cal. Lawn. ...can't eat that!

Perhaps I at least planted a seed.

GS

Hagarth's picture

Anonymous Donor Gifts Two Gold Coins to Salvation Army

WAYNESBORO, Va. -- The Waynesboro Salvation Army received two gold coins, each valued at about $1700, this week thanks to an anonymous donor who wanted to help out. The donor also left two notes with the coins.

Lt. John Blevins, with the Salvation Army, said the donation is an incredible blessing.

“It's a wonderful occurrence, something that's never happened here in Waynesboro,” said Lt. Blevins, “I think, again, it just speaks to the generosity of this community. No matter what the occasion is, no matter what the need is, this community always arises to help us meet it.”

One note reads, “With wealth comes responsibility to help others,” and the other coin reads, “Helping others is what God wants us to do.”

The Salvation Army was about $4,000 short of its fundraising this year and this donation will help fill that financial gap.

The coins will most likely be sold at a place that can trade coins for cash. That money will go straight to help the Waynesboro Salvation Army.

The money collected in the kettle keeps the army running throughout the year, not just during the holidays.

===============================

This helps to keep everything in perspective, HHs and best wishes during the season!

alwaysbullish's picture

My First message

Hi,

Have been reading this blog for last 1.5 yr. Will post a bigger message later. Now i want to be in top ten

Mudsharkbytes's picture

Hey, what about

the delta bravo linked from the previous thread that says if silver can't hold $28 it go down to the low 20's.  He's sure he's right because he's been right in the past, which strikes me as circular reasoning.

http://seekingalpha.com/article/1078781-silver-will-28-hold-or-are-we-going-down-to-22

Dagney Taggart's picture

Merry Christmas

Sneak attack on Turdville while nobody is looking. kiss

Merry Christmas to all.

Regarding the Mint data, is something wrong with the 2008 figure?

old tradesman's picture

#11

ok Lucky #11  old tradesmans going back to reading again.   too old for to keep up with you,  but will be reading.  Im with santa. HO HO HOs  just joking I have a lovely young wife. 

microwaveablekitten's picture

Anyone know how to post YT videos?

Any usable information is appreciated.

atarangi's picture

My gut feeling on silver - - -

My gut feel is that the potential for a massive price rise in silver has never been better.     -     -      -    AND  MY   GUT  IS  BIG !     -      -                                               kl4g38a8ctm8vgcmiyh2b151haeakecjc60x.jpg

old tradesman's picture

to all turdites

Nick Elway's picture

Silver Institute flow 2002-2011

http://www.silverinstitute.org/site/supply-demand/

Quote:

Each year, the Silver Institute works with Thomson Reuters GFMS, a leading research company that is based in London, to prepare and publish a comprehensive report on that year’s silver supply and demand trends, with special emphasis on key markets and regions. This annual survey also includes current information on prices and leasing rates, mine production, investment and fabrication.

World Silver Supply and Demand

(in millions of ounces)

  2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Supply
Mine Production 594.5 597.2 613.6 636.6 641.1 665.9 683.6 716.1 751.4 761.6
Net Government Sales 59.2 88.7 61.9 65.9 78.5 42.5 30.5 15.6 44.2 11.5
Old Silver Scrap 197.3 196.0 197.4 201.6 206.0 203.0 200.9 200.0 228.7 256.7
Producer Hedging 9.6 27.6 50.4 10.7
Implied Net Disinvestment 17.4
Total Supply 868.3 881.9 882.4 931.7 925.6 911.4 915.0 931.7 1,074.7 1,040.6
 
Demand
Fabrication                    
Industrial Applications 355.3 368.4 387.4 431.8 454.2 491.1 492.7 405.1 500.0 486.5
Photography 204.3 192.9 178.8 160.3 142.2 117.6 101.3 79.3 72.1 66.1
Jewelry 168.9 179.2 174.8 173.8 166.3 163.5 158.7 159.8 167.4 159.8
Silverware 83.5 83.9 67.2 67.6 61.2 58.6 57.4 59.1 51.2 46.0
Coins & Medals 31.6 35.7 42.4 40.0 39.8 39.7 65.3 78.8 99.4 118.2
Total Fabrication 843.5 860.1 850.6 873.6 863.7 870.5 875.3 782.0 890.1 876.6
Producer De-Hedging 24.8 20.9 6.8 24.2 8.5 17.4
Implied Net Investment 0.9 31.8 58.1 55.1 16.6 31.2 132.2 184.6 164.0
Total Demand 868.3 881.9 882.4 931.7 925.6 911.4 915.0 931.7 1,074.7 1,040.6
 
Silver Price
(London US$/oz)
4.599 4.879 6.658 7.312 11.549 13.384 14.989 14.674 20.193 35.119
SOURCE: World Silver Survey 2012

I'm not the first to notice that "Implied Net Investment" does NOT include coins!!

Silver above ground 5 billion ounce estimate (from Sprott? or from US Mint?)

Quote:
the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce).
Silver Alert's picture

Re: Silver Institute

Isn't it amazing how supply always exactly meets demand?  Those miners and recyclers are really sharp, not an ounce more or less than what is needed for going on 11 years now. They even knew exactly how much each of us was going to buy so they could plan for our needs.

Mudsharkbytes's picture

@MWK - Posting YT videos

Take the code you get when you hit the 'share' tab on youTube & past it in the "Comment:" window.

Pretty straightforward.

The code looks like this 

"

"

When pasted in without the quotes you get this:

Edit:  Since I've already broken the Porky Pig quota for today I might as well post this video too - this'll probably the last Christmas video posted for this season on TFMR.

microwaveablekitten's picture

This pretty much sums up the situation

Thank you very much MSB

Time to start over

Nick Elway's picture

Why? Maybe equal $ worth of each?

From ZH  ...me too

Quote:

Matt

Matt's picture

"Why Are Investors Buying 50 Times More Physical Silver Than Gold?"

Is it because it is 50 times cheaper, and they buy equal $ worth of each?

Watcher's picture

Why the price of gold....and

Why the price of gold....and silver....did not do well pricewise in December....  and why many analysts missed their calls.

"Light at the End of the Tunnel for Gold" - Frank Holmes 321gold 

silver66's picture

Must keep perspective :-0

WJHC has just started, all is right with the worldsmiley

Silver66

Ernie Pantusso's picture

Silver Institute Report

Thanks Nick

There is a figure in this report which makes it lose every credibility.

2012 net implied investment apparently decreased compared to 2011.

Investors bought 20 Mio oz less compared to 2011.

Who is going to believe that? I'm not speaking about silver bugs or turdite. I mean, even cnn bimbos won' t buy it.

Silver investment decreasing while gold investment increasing?

(With Sprott telling us that investors are buying from him 50/silver to 1/gold...)

But the Silver Institute report itself gives us a concrete argument against the idea of a decreasing silver investment: we know that "coins & medals" is represented mostly by investment coins. Now, guess what: coins investment increased 2011 to 2012 from 99 Mio to 118 Mio.

Just think as an instance of it about Chinas Pandas. The chinese mint increased their production 2011 to 2012 from 600,000 to 8 Mio.

So, the silver Institute report is telling us that while investors are eagerly looking for investment coins, they are sneezing on investment bars.

A blessed 2013 to everyone!

Thanks Turd

SRSrocco's picture

REPLY @ SILVER INSTITUTE...

Looks like there are a few clarifications about the Silver Institute's Figures.

First... GFMS now owned by Thomas Reuters is the organization that produces the World Silver Survey.  All that data reproduced on the Silver Institute's website comes from the World Silver Surveys.  So in all actuality, GFMS should get the blame for putting out incorrect data.. and not the Silver Institute.

Second...  We all make mistakes... me especially with all the damn numbers that I have to crunch.  However poor Eric Sprott must be getting some email responses for inputting incorrect data for 2008 U.S. Mint gold & silver figures.  Looks like he put platinum figures for gold and gold's figures for silver in 2008.  Should read as follows

2008

Gold Eagles = 860,500

Silver Eagles = 19.5 million

Ratio = 23 to 1

Third... yes that implied net investment figure is a bit strange.  In that total of 164 million oz in 2011, the 2012 World Silver Survey states that 96 million was in the form of silver bar investment.  So that only leaves about 70 million left over for all the other silver investment demand (besides official coin & medal).. that doesn't sound close at all to me.

Fourth... the Chinese Silver Pandas increased their production in 2011 from 600,000 to 6 million (not in 2012).  They minted 8 million in 2012 and are supposed to mint 8-10 million in 2013

Lastly... you will notice that NET GOVT SALES have been trending lower.  China & Russia have been the two largest sellers of silver over the past decade.  I would imagine they will no longer be selling their silver for fiat money.  We will probably start to see Govt's actually buying silver and adding it to their reserves.   One of the top members in the Chinese Govt had stated this year that China should start added silver to its reserves.

Things are going to get a lot more interesting in 2013 as it pertains to silver...

ivars's picture

GSR was flat but that does

GSR was flat but that does not mean anything as yesterdays trading in Asia did not move prices at all:

But it looks like consolidation over last 3 days of trading, so the potential to move up (silver down) in coming days remains.

Bollocks's picture

Interesting to see this in the MSM!

A rare look inside a Swiss gold refinery

As the global economic crisis continues, there is a rush on gold, as it is increasingly regarded as one of the only safe commodities around.

The world's four major gold refineries are in Switzerland and most of the world's gold is processed there.

Last year a record 2600 metric tonnes or almost $100bn-worth (75.9bn euros) was imported and refined in Switzerland.

Imogen Foulkes gained rare access to one of the refineries for a look at this highly secretive industry.

2 min video report: http://www.bbc.co.uk/news/world-europe-20797917

"Investment analysts are predicting that next year will be the golden age of gold"

Monedas's picture

Do as ye say !

My lovely ex-wife #2 (An important number for us Turders ?) gave me a Christmas card with a 1 trounce .999 Ag heart shaped medallion !  She has only been hoarding less than a year .... and that medallion represents 1/300th of her hoard .... a very generous porcion !  I thanked her profusely, sealed it with a kiss and told her I was touched by her generosity .... but, that I couldn't .... in good conscience .... keep her gift .... I therewith pocketed the medallion and returned the sloppy, sentimental card  !         Monedas    1929        Comedy Jihad Katie Rose Moment World Tour    devil     

Bollocks's picture

@Mr. Fix

Regarding your post to this article (and the follow-up) in the last thread:

http://www.homelandsecurityus.com/archives/7305

I raise my concern about who the "Northeast Intelligence Network" really are.  They are strongly pro-Israeli (see the left of every page) and believe 9-11 was orchestrated by Muslim terrorists (see the About Us page).

Not that I disagree with what is in that article, but this seems to be a dis-info site.

 

Groaner's picture

Are we going to get one more major slam major Tom?

silver into the $28 range?

How  about that take down last night at the open? scary.. thought that was going to be a start of real humdinger of a fall.

metalboy's picture

A Rare Look Inside a Swiss Gold Refinery

Groaner's picture

Someone like to explain what the gold price has to do with

all this fiscal cliff mumbo jumbo? Why is gold being pegged to what they do or not do? Just more MOPE?

People should be flocking to the metals more than ever.

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