3/7/10 A Technical Look At Silver

Precious Metals Market Analysis, By Michael Pennington (Copyright 2010 Pennco Coins)

As I have also discussed, the supply/demand dynamics of the silver market are vastly different from the gold market. It is those differences that guarantee that the looming spike in the price of silver will be several multiples greater than the increase in the price of gold.

First, silver is the world’s most versatile metal. It has been the source of more new patents than for any other metal. This has resulted in many market Neanderthals mistakenly concluding that silver is an “industrial metal,” not a precious metal. There can be no absolutely no doubt that silver is a precious metal, in every respect.

It is because of the vast uses for silver in a nearly infinite number of current and future industrial applications that the second, different dynamic exists in the silver market: Most of the world’s refined silver has been effectively “consumed” and is gone forever.

It is elementary economics that any commodity that is underpriced will be over consumed. The more radically undervalued the good, the more extreme the overconsumption. The consequences are clear: more than 90% of the world’s silver stockpiles and inventories are gone forever.
Thus, at a time when decades of overconsumption have nearly totally depleted the world’s available silver, the gold/silver price ratio remains near an historical extreme — in gold’s favor. With the amount of elemental silver in the Earth’s crust approximately 17 times the amount of elemental gold, it is no surprise that for 5,000 years the gold/silver price-ratio has averaged 15:1.
Today, the gold/silver price-ratio has been ranging between 60:1 and 70:1. This ratio would be totally unsustainable even if all of the world’s silver were still available for demand — rather than gone forever. However, with 90% of the world’s available silver gone, what this means is that the gold silver price-ratio is at its most-radical extreme (by at least a factor of 10) than at any other time in 5,000 years.

This comes at a time when all of the world’s (respected) gold commentators are stating unequivocally that the current price of gold dramatically undervalues that metal, as well. While it is very difficult to come up with estimates of total, available gold vs. total available silver, some analysts have attempted to make such estimates. They vary widely, and thus do not have much analytical value — except to observe that the highest ratio of available silver to available gold that I have seen is 6:1. At the other extreme, some analysts are suggesting there is now more available gold in the world than silver.

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