Silver America

Raw Peruvian SilverAbove ground silver is now likely scarcer than gold. The primary solution to alleviate this scarcity is through mining where the majority of the world’s silver production and known reserves are – the Americas. The chart below shows 2009 silver production by country. The location of known silver reserves substantially approximates the location of current silver production.

2009 Silver Production by Country

A year ago I provided an in person overview of Peru and its historical function as a primary crossroads for South America. At that time global financial pressures temporally appeared to abate and precious metals research was a secondary focus in the broad context of global finance and economics.

My, how the world has changed in just a year. Various monetary authorities have dealt out incredible amounts of money through additional stimulus programs, debt issuance, and unfortunately the now familiar ‘quantitative easing’ (i.e. printing of money). Terrible natural calamities and collateral infrastructure catastrophes combined with growing popular revolution have radically destabilized financial and governmental systems in a way that a collapse, or great depression, is now moving from a possibility to a significant probability. In short, governments and monetary authorities of the world’s largest economies have nearly run out of ammunition in the battle for status quo – the remaining ammunition is increasingly being called upon to merely pay the interest for past offensives. Thus, the world stands confronted with a perfectly unstable system.

Notably, during the primary heat of this battle from 2006 until now, precious metals have risen significantly. However, when compared to the mountains of monetary ammunition that have been expended, gold has grown at about the same rate as the monetary base. On the other hand, silver has shown growth in excess of dollars printed, but this is after being severally depressed – many say artificially – for the first part of the decade. Thus in terms of the monetary base expanding through the printing of money both of these precious metals are not in a rarefied ‘bubble’ that many commentators would have the public believe. More on this in just a bit.

Monetary Base Increase Compared to Gold and Silver

For at least 7,000 years precious metals have been the basis for measuring wealth – of which monetary value, otherwise known as money, has then been comparatively assigned. The only difference today is that for roughly the past 80 years people have accepted paper money priced as a ‘promise to repay’ rather than priced in gold or silver. The USA, at least, is nearing the point in which this is likely to change. As implied above, it is not so much that gold and silver are rapidly appreciating; it is that the value of the USA dollar and other major currencies are falling.

Many have asked what steps are required for healing the USA economy and restoring confidence in the dollar. To begin with, a stable economy must have a sound currency. Empirical evidence details that such a currency needs to be backed by a bare minimum of 40% in precious metals* and/or an economy firmly ensconced in the production of resources**. The USA has either exhausted, or disallowed further extraction of, natural resources. So, of the two, the practical option is for the USA to return to some semblance of a precious metals standard. If such a course is pursued then gold would be presently ‘revalued’ to $8,340 per ounce assuming 100% backing, or $3,336 per ounce for the more precarious 40% backing (this is calculated by simply dividing the current USA monetary base of $2,393,636,000,000 by 287,000,000 ounces of USA gold reserves). Please note that as more money is printed, the dollar valuation of gold per ounce will increase. In fact, according to the very reliable Tudor Group, at current rates the banks are creating $2,130,000 per minute in new money, while in the same minute only 89 ounces of gold are produced. This works out to $24,000 in new money per ounce of new gold – truly astounding. The ancient truism of waste what is plentiful (USA dollars) and conserve what is dear (gold) comes to mind.

Log-Scale Consumer Inflation

The chart above, created by John Williams of, shows USA inflation for several centuries. Inflation is a way to measure price stability, and thus the soundness of a currency. From 1665 through 1913 the economy trundled along with some semblance of price stability. Regardless of other more recently stated goals, price stability is supposed to be the primary goal for central bankers. From 1914 on the USA’s third (the first two failed) central bank, aka the Federal Reserve, the chart shows rising inflation. As inflation rises the dollar directly experiences a decline in purchasing power. Since 1914 only precious metals and generally sound currencies such as the Swiss Franc have retained their purchasing power. Depending upon the precious metal referenced, the USA dollar has lost roughly 95% of its purchasing power over the past 80 years. During this same time period, the USA dollar has lost more than 80% of its purchasing power against specific ‘sound’ currencies. Thus rather than providing price stability, the USA has witnessed value destruction of its currency. While informative regarding the necessity of a sound currency, this side discussion takes us away from the analysis of silver and its relationship therein.

According to the USGS and GFMS the crustal abundance of silver is about 16 ounces for each ounce of gold. Since reliable records were kept from about 500BC, we find that market forces have similarly priced silver at 13 to 17 ounces per ounce of gold. These two data series are good reason to assume that silver should be valued somewhere in this range. So, assuming some sort of precious metals standard is adopted, a 15:1 ratio of silver to gold implies $222 (40% backing) to $556 (100% backing) per ounce of silver given the current monetary base. At publication of this article, silver is roughly $39. There are a couple of reasons for the current price, wherein the silver to gold ratio stands at approximately 37:1, but the explanations are beyond the available space and scope of this article.

Production of silver has been about 1,370,000 tons versus about 150,000 tons of gold over last 7,000 years – this actual ratio works out to an observed 9 ounces of silver obtained for every ounce of gold. The difference between the expected ratio of 13:1 to 17:1 and the observed ratio of 9:1 is due to silver mostly being found alongside zinc, lead, copper and, fortunately, gold. In fact at least 65% of the global supply of silver is largely a byproduct of base metal mining. Most of the remaining 33% is found interspersed with gold. There are very few silver only, or even silver predominate, deposits on the planet. So if it is not profitable to mine for zinc, lead or copper, then by its natural distribution there will not be as much silver being pulled from the earth. Thus, higher silver prices do not necessarily imply new silver mines will be built.

The extraction of silver occurring alongside base metals is not just an economics issue; it actually has another serious supply constraint. Normally silver accounts for less than 45% of the extracted material value. Fortunately, in the Americas, this is not so. Here there are several silver only mines, and, when it is found alongside the above-mentioned base metals it occurs more often in the 55% to 60% of the extracted material value. Recall that it was the Cerro Rico silver mine in present day Bolivia that provided Spain with funding of its conquests for 235 years from 1556 to 1791.

There is one more interesting facet in an analysis of silver. According to silver analyst Theodore Butler, of the many tones ever brought to the surface, well more than 90% have been consumed in non-recyclable industrial uses (for new production it is estimated at 95%). Further, available stockpiles are actually lower than gold due to the increasing use by industry as well as demand for investment purposes wherein the silver becomes locked away. This is where the claim that silver is, or at least nearly, scarcer than gold emerges. Considering this together with all the other difficulties in procuring silver alliterated above, silver has a very bright future before it.

In closing we are delighted to report that identification of those few companies that are located in the Americas, which produce, or are expected to produce, silver at 55% to 90% of their operations has been completed. In some cases, the positions are already snugly set in client portfolios. In other cases, we continue our due diligence and are readying funds for investment. We believe that each of these companies will be important for positioning portfolios against the likely compounding and debilitating economic issues of our day.  We equally believe that these same companies exhibit the possibility for providing some of the best returns for portfolios over the coming decade.

* Mexico is actively considering adopting a silver standard. Silver is their precious metal of choice due to plentiful amounts found there (please see chart at top of this article). The Peso has strengthened on the serious consideration of the proposal. Needless to say, demand from the Mexican treasury will put upwards pressure on the price of silver.

** With a rapidly rising resource centric economy, it is no coincidence that the Mongolian Tugrik was the strongest currency in the world for 2010.