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Is Silver a Better Value than Gold Right Now?

JS Kim
|
Friday, March 17th

Earlier this month, I wrote that we would have a window of a few more days to weeks in order to get on board with gold and silver mining stocks at a good price for the first half of this year. I also have written extensively this year about the necessity of using hedges during raids on gold and silver combined with temporary moves to cash to balance out any downside exposure during these raids, and mentioned that again we had applied some hedges against paper gold and paper silver during this last raid. We unwound one hedge last Friday, and we unwound the others earlier this week. If you follow us on SnapChat (SKWealthAcademy), I also stated on the morning of the 15th that there was a good possibility of the interest rate hike that was to happen later that day being already priced in to the current price decline in gold and silver assets and that the announcement could cause a spike higher in the prices of gold and silver assets. And this is exactly what happened.

So now with a substantial spike higher in gold and silver asset prices on the back of the US Central Bank’s interest rate hike, has the reversal now begun? It’s a little premature to state the reversal is on its way now, but if you’re new to the gold and silver game, and want to know if now is the time to get on board, visit us at smartknowledgeu.com for more information on how to identify the best junior gold and silver mining stocks and for information on a more conservative gold and silver mining stock portfolio.

Now back to the subject at hand. Is silver underpriced compared to gold? Let’s take a look at the facts. Silver currently is $17.28 a troy ounce and gold currently is $1225.66 a troy ounce, meaning the gold: silver price ratio is 71:1. Of course these are spot prices, which don’t match up with actual physical prices, so let’s take a look at the prices of real gold and silver, not paper gold and silver. This morning, the lowest price of a 10-oz gold bar I could find on one dealer’s site per 1-oz of gold was $1,251.29. For silver, the lowest price of a 10-oz silver bar per 1-oz of silver was $18.16. This ratio of gold: silver price still is an enormous 69:1, meaning that you can choose to either buy 10 troy ounces of gold, or for the same dollar amount, purchase 690 ounces of silver. Some people state that Central Bankers don’t care about the price of silver and they only care about controlling the price of gold, but this statement is just flat out wrong, in my opinion. If Central Bankers didn’t care so much about controlling the price of silver, then they wouldn’t flood the market with boatloads of silvers futures contracts to suppress the price of silver as they do with gold, during the periods they create rapid declines in the prices of these two precious metals. Since we know the mechanisms by which they create these waterfall declines in paper markets (as I’ve discussed these mechanisms extensively in the past and provided documented proof with Nanex provided data), there is no argument that Central Bankers are concerned with controlling the price of silver as well as the price of gold.

Most people look at the paper price of silver and if it is falling, they mistakenly believe that physical silver is not a good buy because a falling price means too much supply and not enough demand. The supply and demand assumption is true, but only true of the paper market where hundreds more paper silver weight is traded than actually physically exists. So then people turn to physical silver prices, and if physical silver prices are falling, they assume this also means too much physical supply and not enough demand, and conclude that physical silver is not a good buy either. However, physical silver prices only fall when paper silver prices are raided by bankers, because bankers have set up a false system that ties physical prices to paper prices that works spectacularly well for them for now. However, there will come a time when physical silver prices actually reflect what is happening with physical supply of silver and physical demand of silver versus the supply and demand determinants of paper silver markets.

And as an investor, or even someone just seeking to preserve purchasing power of one’s savings, one doesn’t want to consider what is happening with silver prices right now, that are still being controlled by the ties to paper market prices, but one wants to consider where silver prices will be heading in the future. There is a lot of deception and opacity with global gold and silver production numbers and demand numbers every year released by “official” world silver and gold associations, as most of these associations are run by bankers, so it’s not possible to blindly accept this data as truthful. For example, much of the supply data is compiled from self-reported data, and if a nation is building up its silver inventories, it may falsely report its real numbers of mined silver annually if its leaders do not want to reveal its hand to the rest of the world, which is a strong possibility. And those that have closely looked at the demand data provided by banker-run global associations have always discovered very significant errors in data compilation and misleading underreported demand data for gold and silver as well.

Why would these associations want to “officially” provide bogus demand data? The answer is easy. If they produce the perception that much less demand exists for physical gold and silver worldwide than actually exists, than they can use this false perception to more easily control paper prices, and since paper prices for now still are heavily tied to physical prices, ultimately control physical prices as well. Remember it is not the control of reality that bankers ever seek. It is the control of perception, as perception sets prices. In order to control prices, what would you do? The answer would be to deliberately overinflate supply figures and underinflate demand figures as rising supply and falling demand will suppress prices. So even were these assumptions of mine true, and physical demand of silver is underreported and physical supply of silver is overreported, according to one of these global associations, the Silver Institute, in 2015, physical demand exceeded physical supply by about 130 million troy ounces. Remember, if supply is overreported and demand underreported, then the real deficit may even be greater than this.

If, moving forward, silver continues to run at a supply-demand deficit with demand outstripping supply, then physical inventories of silver will continue to tumble, and eventually, as this realization outstrips the fake perception bankers create in paper silver derivative products, then physical supply demand determinants will start having a larger influence over silver prices than paper supply demand determinants. Of course, there is a wide array of many factors that come into play as far as whether or not this situation will manifest in the future, but there are many factors that seem to point towards this development. Number one, a large amount of silver supply produced by the world’s silver mines is consumed every year, with roughly 60% of annual production consumed for industrial purposes.

If, and this is a big if, but if the solar energy industry continues to grow, silver is a huge material component of solar panels, and the growth of solar energy needs in India, China and other countries with massive global populations would keep industrial consumption of silver as a percentage of total production every year strong. Silver, despite hugely volatile prices, has been attracting more and more attention as a wealth preserving precious metal, and whereas investment demand only ate up about 5.5% of supply just a decade ago, investment demand for bars and coins, in 2015 consumed 28% of total annual supply. Again, these figures must be taken with a grain of salt as they originate from banking provided data, but I think it is safe to say, given the data we know about explosive demand for silver coins in recent years in the United States, Canada, and other countries, that investment demand is growing sharply. Thus, I expect investment demand for bars and coins to continue to diminish physical supplies of silver in future years.

Given the above trends, and my future forecasts of growing worldwide demand for silver coins and bars, since I can buy 69 ounces of silver for every one ounce of gold, I would have to conclude that the upside price potential for silver is greater than gold in the next few years.

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