Silver, the Stepchild of Gold
By Heide B. Malhotra On October 17, 2012 @ 3:22 am In Global Markets | No Comments
With the value of gold skyrocketing, silver has been viewed by investors as the stepchild of gold, which reached the New York spot price of $1,778.40 on Oct. 3, while silver lingered around $34.60, according to the Kitco website.
In contrast to silver, even platinum, palladium, and rhodium were selling at a much higher price than silver on Oct. 3, at $1,684, $650, and $1,200 respectively.
The cumulative average gold price was $279.11 in 2000, reaching $1,224.53 in 2010 and $1,653.57 on Oct. 3, while the cumulative average silver price was $4.95 in 2000, $20.19 in 2010, and $30.69 on Oct. 3.
Silver is “commonly referred to as ‘the poor man’s gold” and gold’s ugly cousin and other derogatory phrases. And since the age of electronics has set in, 90% of it is used for such inglorious things as connections in our gizmos, which wind up at the bottom of our landfills,” an Oct. 1 article on the Seeking Alpha website states.
“Physical gold and silver stand alone and could be used directly (or at least stand outside the system), so in a worst-case scenario during a panic sell-off or even a panic buying spree, these two assets do not need a bank, broker, or middle man to turn them into something liquid to spend,” a SilverSeek.com article states.
According to the SilverSeek article, gold and silver are the only financial assets that are owned by the holder of the commodities and not a liability to anyone else. At the same time, both commodities are deemed to be a monetary asset and freely useable in the market.
Referencing a chart plotting silver versus gold from June 2003 to September 2008, a 2010 Market Force Analysis article states: “This chart is absolutely shocking. It shows that gold and silver prices are almost perfectly correlated with an R squared value of 0.96 (1.0 is a perfect correlation).”
For the layman, the above suggestion indicates that silver prices are governed by gold price movements, and it is absolutely impossible that such a clear-cut correlation exists naturally. Given this correlation, the Market Force article suggests that “not only is the price of silver manipulated and suppressed but it is done so almost perfectly algorithmically.”
In short, if the silver price had been governed by market forces in 2010, the long-term silver price could have risen to $900 per ounce or more.
The above contention was published in 2010. An analysis by the same author, published on the SilverSeek website in February 2011, states, “Since September 2010 silver has broken its golden shackles. The algorithmic trading that kept the price of silver subdued for seven years has been completely annihilated.”
“The narrowing of the trading range in the gold and silver prices tells us that demand and supply are just about in balance. This usually precedes a strong move either way,” according to an Oct. 3 comparison of gold and silver movements on the SilverSeek website.
The SilverSeek comparison suggests that silver trading could outpace gold if gold continues to move up at an accelerated pace.
However, a Sept. 27 article on the Seeking Alpha website suggests that investors should stick with gold because of the volatility that silver prices have displayed. But given historic fourth quarter performance by month, investors who are not that risk averse could invest more so in silver than in gold during October and November and then reverse this strategy in December, holding more gold than silver.
“For those more active and willing to take on more risk, a strategy might include overweight silver to gold in October and November before switching to a gold overweight for December,” the Seeking Alpha article advises.
Investment analysts suggest that because of the Federal Reserve System’s latest stimulus, investors jumped onto the silver bandwagon, driving the silver price to $35 an ounce since mid-September.
Silver prices have been volatile this year, starting at $28.78 an ounce on Jan. 3 and moving to $34.72 by Oct. 3, with an exceptional high price of $37.23 on Feb. 29.
“There is a large amount of resistance for silver prices on their way back up to $40.00. I would suggest that, due to the rapid rise in silver prices, one should be patient,” an Oct. 3 Profit Confidential article advises.
“The Greeks honored silver 2500 years ago by making it into coins, and, in fact for the next 2400 years, silver was the main means of exchange in daily commerce. … It was today’s ugly cousin who was the belle of the ball back then,” an Oct. 1 Seeking Alpha article explains.
Silver and gold are considered scarce earth elements. The gold to silver ratio has changed a few times, and the ratio represents how much silver one can purchase with 1 kilogram of gold, according to the Fisher Precious Metals website.
Fisher Precious Metals states that in 1980, the gold to silver ratio was 17, suggesting that one had to turn over 17 kilograms of silver for 1 kilogram of gold. The ratio jumped to 90 in 1991 and then decreased to 51 in 2007. In historical times, the ratio was 15.68 in 1800 in the United States and 14.29 in 1806 in Great Britain. Back in ancient Rome, the ratio was 12, and in Greece around 323 B.C., it was 12.5.
According to the 2012 U.S. Geological Survey Mineral Commodity Summaries, the United States produced 1,160 tons of silver extracted from 35 U.S. base- and precious-metal mines in 2011. During the same year, 1,700 tons of silver were salvaged from all types of scrap, which includes 60 to 90 tons extracted from photographic wastewater.
In 2010 about 25,463 tons and during 2011 close to 26,235 tons of silver were extracted worldwide, and there were a little more than 584,215 tons underground, still to be extracted.
In 2011, the majority of silver was mined in Mexico (more than 4,960 tons) and Peru (more than 4,409 tons), while Canada was the country where the least silver was mined globally (about 772 tons).
Gold generally is not produced from byproducts, but only about 20 percent of silver is directly mined, while 80 percent are the byproducts of some other metal.
“Silver was obtained as a byproduct from lead-zinc mines, copper mines, and gold mines, in descending order of production. The polymetallic ore deposits from which silver is recovered account for more than two-thirds of U.S. and world resources of silver,” the U.S. Geological Survey states.
Besides jewelry and tableware, silver is used by the world’s industries to produce catalytic converters in automobiles, electronics and digital products, solar cells, and even bandages for the health industry.
According to a 2010 article on the Market Force Analysis website, 90 percent of the world’s silver is used in industrial applications. Investors hold only 10 percent of the world’s silver.
Yet, substitutes for silver have been found over the past years. “Surgical pins and plates may be made with tantalum and titanium in place of silver. … Nonsilver batteries may replace silver batteries in some applications. Aluminum and rhodium may be used to replace silver that was traditionally used in mirrors and other reflecting surfaces,” the U.S. Geological Survey explains.
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