Silver Supply Crisis Looms, Part 1

By Jeff Nielson of Bullion Bulls Canada

I have spent a considerable amount of time discussing how a supply crunch is looming in the gold market. With retail investment demand soaring, and central banks switching from large, net sellers to large net buyers, the world's gold-shortage will continue to intensify -- despite the fact that nearly every ounce of gold ever mined still exists (in some form) around the world.

Of course, countless thousands of tons of this gold are incorporated into some of the world's most-revered artifacts and religious symbols -- and thus (for all intents and purposes) it is gone forever.

Meanwhile, mine production has remained essentially flat -- despite a quadrupling of the price of gold over the last decade. While there has been a slight hiccup in supply in 2009, it is difficult to see this as a sign of a changing trend -- given that with the exception of China, production of gold for all the world's major gold producers has been flat or falling.

This comes in a world with both rapid population growth and rapid income growth in many of the world's "developing economies." This is of huge significance to the precious metals markets because a) these economies represent the majority of the world's population; and b) they are cultures with strong, historical attachments to precious metals. With both population growth and income growth exceeding the increase in supply of precious metals, these rare commodities are literally becoming more precious every day.

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.

Regular readers are familiar with the key differences between the gold market and the silver market. 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 has the same malleability and aesthetic appeal of all other "precious metals," which is why it has been widely used (equally with gold) for jewelry, and as the best "money" our species has ever devised (see "What Is Money?". This has been the case for nearly 5,000 years.

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.

Because silver is so truly "precious," in many of silver's industrial uses it is used in trace amounts. In such tiny quantities, there is no practical/economic way to recycle this silver. It is because of the enormous industrial demand for silver that decades of price-fixing by the anti-gold cabal of Western bankers has had a much greater impact on the silver market than the gold market.

It is elementary economics that any good that is underpriced will be overconsumed. 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 (see "History of Silver, Part III: Inventories Gone").

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.

The price-fixing in the gold market is leading to an obvious "squeeze" -- which is becoming more and more difficult for the banksters to hide, even with their bogus, "bullion-ETFs" radically diluting the investor dollars flowing into this sector (see "Even Gold Experts Fooled by Bullion-ETF's"). However, this will be purely a "market event," in that the consequence will be a massive rise in the price of gold and the destruction of the "gold shorts" -- who are sitting with the largest concentration of "short" positions in the history of commodities, but it will have little direct impact on our economies.

In contrast, when the looming silver supply-crisis strikes this will produce a global, industrial crisis. Unlike gold, which must only satisfy investment/monetary demands, silver is becoming an essential raw material of the 21st century global economy. This can be illustrated by simply listing some of the current and future industrial uses of this most precious metal (Check back tomorrow).

Jeff Nielson studied economics for four years at the University of British Columbia, before going on to attain a law degree from that same institution in 1989. He came to the precious metals sector around the middle of last decade as an investor, but quickly decided this was where he wanted to focus his career. After publishing his own, amateur blog for a year, in 2008 he founded Bullion Bulls Canada: a web-site providing information and analysis to precious metals investors. Today, bullionbullscanada.com reaches a global audience of precious metals investors in more than 120 countries.

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