The recent turn of events regarding our financial systems in America has been dramatic. Indeed, one can even say beyond any historic comparison. Not only has the definition of a “bank“ been changed but even more strange, the relationship between banks and the very government that supposedly regulated them has been turned on its head. After passing legislation enabling the Treasury to infuse some 700 billion dollars into the financial markets (it still remains questionable whether this amount will suffice) the government has now told us that it will have to “invest” in ownership of some banks to help free up capital for the credit markets to flow again. If someone had told me 5 years ago that this would come about, I would have doubted it. Who amongst us foretold that the Federal Reserve would borrow dollars to broker-dealers? Let alone on what everyone agreed was worthless collateral. Who envisioned the same Fed loaning our money to corporations? Using corporate paper as collateral? Things have changed and we need to change in order to not just survive but prosper in this new financial environment.
One of the most successful market prognosticators of recent times (a Mr. Cramer) who is well known and viewed by millions on the financial networks has recently concluded – and told his constituents –that they simply had to own gold and that he would no longer deal with any portfolios that did not place 20% in gold. His reasoning (and we believe it to be sound) is as follow: if Treasury Secretary Paulson’s plan doesn’t work, gold will rise as a haven of safety and if Paulson’s plan does work, gold will rise simply as a result of the inflation brought about by the massive growth of money issued by the Treasury to guarantee the full faith and credit of the U.S. Simply put, gold will win under both possibilities. It’s simple and obvious according to Cramer. And, he has a pretty good track record.
WHAT ABOUT SILVER?
Historically, silver rises when and as gold rises. The primary influence seems to be the destruction of the buying power of currency (inflation). However, as we said earlier, things have changed. It’s these changes that make silver particularly attractive now.
THE RATIO
Historically, the ratio of silver to gold is 10:1; that is to say that 10 ounces of silver is equal in value to 1 ounce in gold. However, at the recently achieved prices (at the highs) of this current bull market, the ratio of silver to gold became 50:1 with silver at $20.00 per ounce and gold at $1,000.00 per ounce. Even more interesting is the fact that as prices have corrected in this recent pull back in the metals market this ratio has achieved 80:1. To approach the historic ratio of 10:1, silver must rise dramatically to come to equilibrium with gold.
HOW MUCH SILVER IS THERE?
Each year approximately 650 million ounces of silver is produced by mining. Additionally, 200 million ounces are recovered through recycling, 100 million ounces from government and investor sales. It is widely agreed in the metal domain that the yearly production of silver (by all means) is less than 1000 million ounces. So, where does it go? Let’s look at the generally agreed upon distribution of the annual silver production.
42% Industrial Usage
28% Jewelry
20% Photography
05% Coins & Medallions
95%
This leaves only 5% of the supply for investment demand (or approximately 50 million ounces). At $20.00 per ounce, that’s only $1 billion.
The silver market is very tight and thin. Expect volatility and remember, forewarned is forearmed. So, take advantage of price pullbacks to add to your holdings.
Since 1986, only 186 million Silver Eagles have been produced. The COMEX claims to hold 136 million ounces in 1,000 ounce bars and industry sources indicate that 51 million of those ounces are being held for investors’ inventory. That leaves 85,000 1,000 ounces bars or 85 million. That’s it and that’s not much to say the least.
In fact, recently, silver has been reported to be in short supply and in many instances, simply not available. Many dealers are not only unable to deliver silver to existing clients, but it is reported that they are actually unable to replenish their own inventory.
Thankfully, here in America, there are still remnants of our original money supply in the form of silver coins. Dimes, quarters, halves and dollars were minted by the millions and used in commerce throughout our history into the early to mid 1960’s. These coins are available both in circulated and mint condition. For the purposes of investing and acquiring silver, focus in on the circulated coins as they trade readily and are widely recognized as a store of value. Indeed, 90% silver U.S. coins are traded on a commodity basis at a premium to their face value.
Typically purchased in $1,000.00 face value bags, they represent both survival qualities and silver value. As the market price moves, so also does the price of bag of 90% silver coinage. While bags of dollars carry the highest premium (and potential for gain) the smaller denominations represent equal amount of silver and will move with bullion prices as well. Indeed, there is nothing quite like having a hoard of U.S. 90% silver coins in inflationary times. They are as liquid as any other form of silver and additionally have some particular product specific qualities that can enhance the returns in a strong move. Simply stated, the premium over face value rises as price rises.
IN SUMMARY
Silver needs to rise dramatically to return to historic levels in regard to gold. A marginal rise in investors demand will push silver due to its scarcity. Keep in mind that silver is a by-product of gold, copper, zinc, and lead mining; even higher prices may not increase the amount of silver brought online in production. Higher prices may not cause much reduction in industrial demand as silver is consumed in tiny increments in each application (film, electrical contact, etc.) therefore, rising silver prices will not slow down industrial demand. The effects of inflation, now or future, can only be postulated. But, it certainly appears to be “in the cards” as a result of the actions being taken by the Treasury Department of the United States, along with the Federal Reserve. By adding silver to ones holdings in precious metals, one can achieve not only survival but serious gains potentially in this new financial world we find ourselves in.
-From The Desk of the CEO
da best. Keep it going! Thank you
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