Silver AS AN INVESTMENT Fundamentals
Used in more physical transactions all time than any other currency. Silver is historically cheap compared to gold and other financial assets. Precious and limited in supply, silver is a required industrial precious metal for our modern lifestyles. Come learn why this is so.
Why buy Silver Bullion?
For many thousands of years, silver has served as a trustworthy store of value, specie money for day to day transactions, and as a vehicle for long term savings.
Silver is the most common and least expensive of the various precious metals (compared to gold bullion, platinum bullion, and palladium bullion). Often referred to as the poor man’s gold, silver got first minted in Lydian coinage around 600 B.C.
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Silver coins throughout history got mostly struck in sterling silver. Sterling silver coins typically have copper added to achieve further durability during monetary circulation. Virtually every thriving culture since the end of ancient times issued or had sterling silver coinage in their financial system.
Examples include ancient Lydian silver coins, Greek drachma silver coins, the silver Roman denarius coin, British pound sterling silver coins, US silver circulation coins, and Canadian silver circulation coins.
“The major monetary metal in history is silver, not gold,” that was according to Nobel Prize-winning economist Milton Friedman in 1993. He was most likely referring to the fact that based on an overall historic human to human transaction volumes, silver coins have served humanity more as money than any other past commodity money or fiat currency issued today.
Silver literally or figuratively means money or cash in various languages spoken by over 1 billion people across the globe (e.g., French, Thai, Greek, Portuguese, & Spanish).
Today millions of silver investors privately hedge their wealth against economic disruptions, bank bail-ins, fiat currency devaluations, and systemic financial crisis by acquiring either old formerly circulated silver coinage and as well 100% pure privately minted modern-day silver bullion rounds, newly issued government-guaranteed silver coins, and silver bullion bars.
Since the beginning of this 21st Century, the world has witnessed a pronounced general increase in silver’s value-priced in every single national currency issued by any government worldwide. Compared to gold, silver’s price performance vs. fiat currencies tends to be more volatile to both the downside and upside.
More so than merely a monetary metal, silver today is a heavily used industrial metal.
Silver remains 2nd only to crude oil in the amounts of real-world products and applications for this shiny precious commodity.
Why is silver so valuable?
By its inherent nature, the element silver:
- Has an extremely high reflection for light hence its usage in mirrors.
- Is the most electrically conductive metal of all.
- Is the best thermal transmitter of all metals.
- It's germicidal and thus used in various antibacterial applications.
- Easily malleable and ductile, only slightly harder than gold.
- Is only produced in star supernova, very rare and precious on Earth
Silver’s industrial applications are vast and highly variant. From silverware, jewelry, dentistry, in air conditioning, water filtration, mirrors, solar panels, car windshields, various electronics, photography, and further applications we will examine in the silver demand section to come.
For now, here is a look at silver supply and demand data over the past decade:
Silver Supply
Based on the fact that silver is found in the ground at a rate of about 8 parts silver to 1 part gold, it is conservative in estimating we humans have mined approximately 1.5 million tonnes of silver throughout history (or just over 48 billion troy ounces).
All-time gold mining output is almost all entirely with us today (187,200 tonnes), yet conversely, much of the near 50 billion silver ounces ever mined are not.
A good portion of the silver ever mined is now in landfills or slim unrecoverable amounts in industrial applications, artwork, and jewelry.
The total annual silver supply currently reaches around 1 billion troy ounces per year.
Annually less than 20% of silver supplies come from recycling programs.
Where is Silver Mined?
It could get argued that actual annual addition to the above-ground silver supply is only around 800 million ounces per year. Silver mining operations yield about 80% of the yearly amount while again, silver scrap recycling yields about 20% of annual silver supplies.
Most silver (about 70% of it) gets mined as a byproduct of other industrial and precious metal mining efforts. Only a tiny amount of silver comes from ‘silver-only’ mining efforts. The reason for this has much to do with the difficulty in profitably executing silver mining only efforts.
Respectively speaking, the nation-states of Mexico, Peru, and China produce the most significant silver mine outputs in the world today. In total, they bring over 1/2 of the world’s annual silver mine supply to the market.
According to Thomson Reuters, world silver demand has outstripped annual silver supply levels 7 out of the last 10-years running.
Private silver bullion bar and coins buying increased dramatically, especially since the 2008 financial crisis. Between direct silver bullion buyer holdings, exchange-traded funds (ETFs), silver mutual funds, futures exchange warehouses, etc. some 3 to 3.5 billion troy ounces exist today in .999 fine investment-grade silver bullion form.
Hence conservatively about 6 to 7% of the all-time silver ever mined remains owned in .999 fine bullion coins, rounds, or bullion bars form above ground today. Much of this silver will not get converted into industrial silver supplies without much higher spot prices.
While $60 USD billion in worldwide physical silver bullion holdings may sound like a lot, silver bullion is extremely small as a percentage of the more than $350 trillion USD of assets (stocks, bonds, real estate, etc.) held worldwide. Even total cryptocurrency values today ($600 USD billion total) account for almost ten times the full amount of investment-grade silver bullion held across the world.
Mathematically worldwide silver bullion holdings account for about 1 / 6000th of all the world’s wealth in today’s valuations.
One lone former large silver bullion buyer alone currently has enough estimated wealth in 2017 to theoretically buy all the worlds above-ground silver bullion holdings at today’s valuations.
Unlike world government’s Official Gold Reserves which hold over 1/6th of all the gold ever mined under direct government ownership, government silver reserves are a tiny portion of the current silver supply.
How much silver bullion in the world?
Expert estimates of government silver supplies total 89.1 million oz or about 2.5% of the 3.5 billion troy ounces of silver bullion likely above ground in .999 investment-grade form.
By 1964, the US government, for the most part, ended using silver in much of its circulating coinage due to years of deficit spending and lessening silver bullion reserves.
Other foreign governments such as Britain, Canada, Australia, Mexico, as well as the United States, all moved away from striking and circulating silver coinage for essentially the same reasons.
Silver Demand
For the past 10-years, annual worldwide physical silver demand has averaged 1,042,100,000 troy ounces per year according to the Silver Institute World Silver Survey.
Silver Jewelry Demand
About 1/4th of annual silver demand is used in silver jewelry and for the production of silver eating utensils. Silverware has long gotten utilized in cutlery due to its brilliant luster, anti-germicidal properties, and easily malleable characteristics, making it conducive for silver artisan’s designs and production.
Higher gold prices have also helped sustain and grow new markets for mid-priced silver jewelry items as many jewelry buyers have begun to choose small sterling silver jewelry items over more costly higher value precious metal jewelry items (gold, platinum, palladium).
Silver Industrial Demand
Just over 1/2 of the yearly silver supply gets used in industrial applications. Silver demand is driven significantly more by industrial demand than gold (roughly 50% of demand is for industrial silver applications vs. only about 10% demand for industrial gold applications).
During economic downturns, silver’s more significant industrial demand role can contribute heavily to its downward volatility and spot price sell-offs. As futures contract traders sell looking for fiat US dollar liquidity and often assume less silver requiring products will be in demand during economic recessions.
Although negative bearish cases for weakening industrial silver demand can quickly reverse as central bank intervention and monetary accommodations now generally follow economic downturns (e.g., 2008 financial crisis resulted in various central bank QE programs spurring a near $50 USD oz silver spot price in April 2011).
Like crude oil, without silver, our modern way of life would be impossible to maintain.
The amount of industrial applications for silver is surpassed only by crude oil itself. Silver has thousands of modern-day industrial uses in which replacement with other less precious metals is unlikely given silver’s current price point and its superior elemental attributes compared to possible base metal replacements (e.g., copper).
What is silver used in today?
Industrial silver uses include the following real-world applications within:
Industrial demand for silver in many cases may also be inelastic to higher price spikes due to the tiny trace amounts of silver utilized in many of the aforementioned industrial applications.
Thus even if silver were to get priced many multiples higher than it is today, silver usage in smartphones or other electronics, for example, will most likely continue.
How much silver is in a computer?
A personal computer desktop generally contains about 1 gram of thinly placed silver coatings, some of which I am typing upon as I write this document.
How much silver is in a cellular phone?
A cell phone typically uses just 0.37 grams of silver (priced about 20¢ USD at $17 USD oz silver). Companies like Apple actively seek to recycle their expiring product lines to retrieve precious metals like silver before being lost to landfills.
Recycling programs aside, future additional costs per unit due to higher silver prices will likely be passed onto consumers rather than being replaced with inferior base metals.
One of the fastest-growing uses of silver is found in the solar panel industry (PV systems). It gets estimated that silver solar demand could eclipse 140 million ounces in 2018 alone, much in large part to growing demands for solar energy in both China and India respectively.
How much silver is in a solar panel?
The average solar panel uses about 2/3rds of a troy ounce of silver (or about 20 grams).
Silver’s unique elemental attributes guarantee that industrial silver applications shall remain robust and grow as the developing world continues to demand a more modern way of life ahead.
Silver Investment Demand
In 2016 alone, investor’s .999 fine silver bullion bar and silver bullion coin buying accounted for just over 1/5th or 23.3% of the year’s new silver mine supply.
This silver bullion buying segment of silver demand growth has exploded over the last decade much in part due to the 2008 financial crisis, where the median middle-class US citizen lost over 40% of their wealth on paper.
The burgeoning internet’s influence on investor action has also helped people learn fundamental investment factors for silver.
In 2006, just over 7.5% of that year’s new silver mine supply went into silver bullion product manufacturing while by 2016 over 32.6% of newly mined silver was being used to produce new silver bullion products for investors.
Starting the 21st Century, silver’s price was slightly over $5 USD oz and had risen to nearly $50 USD oz in the spring of 2011. Currently, most popular silver bullion products as well as virtual derivative proxies (futures contracts, ETPs, ETFs, etc.) trade at prices below $20 USD oz.
The following chart encapsulates silver’s US dollar price throughout the fully floating fiat currency standard beginning with the end of the Bretton Woods agreement on August 15, 1971.
During the 1980s, many large government mints began striking silver bullion coins. For instance, the US Mint began producing the 1 oz American Silver Eagle bullion coin in 1986.
Following in 1988, the Royal Canadian Mint began producing the 1 oz Silver Maple Leaf bullion coin began producing guaranteed Canadian legal tender bullion coins which are sold both domestically and internationally still today.
These two highly traded government-guaranteed legal tender silver bullion coins have respectively become the 1st and 2nd most popular silver bullion products investors buy in terms of overall sales volumes (#1 USA, #2 Canada).
Since the 2008 Financial Crisis, virtually all government silver bullion coin mints have consistently reported record silver bullion coin sales year after year.
Private silver mints have also been contributing a fair share of investment-grade silver bullion product supplies often at lower prices closer to the fluctuating silver spot price.
Unlike government mint which produce legal tender silver bullion coins, private silver mints produce millions of ounces of silver bullion rounds and silver bullion bars.
Often more experienced silver bullion buyers prefer to purchase privately minted silver bullion products given the typically lower price premiums privately minted silver bullion products carry versus more expensively priced government-guaranteed legal tender silver bullion coins.
Over the last 3 decades of rampant financialization and fiat currency creation, silver’s anemic overall growth in value compared to credit and new monetary aggregates make this comparatively affordable precious metal likely poised for another price mania to come.
How the Silver Price is Determined (Silver Price Discovery)
Commodities like silver (as well as crude oil, palladium, platinum, gold, wheat, coffee, cotton, and others) have forwards or futures contracts trading on various futures exchanges throughout the world to ascertain their real-world prices.
Specific acronyms like the NYMEX, TOCOM, CME Group, CBOT, SHFE, and COMEX, etc. represent several futures exchanges which are purportedly overseen by their national governmental (or semi-governmental) regulatory agencies.
Formal futures contract markets date as far back as The Code of Hammurabi. The original intention of multi-millennial old futures contract usage was to give the producers of commodities (e.g., silver miners), end-users (e.g. silver refiners or silver bullion dealers), and commodity price speculators (those who simply trade on futures exchanges for short term gains) ways or means to respectively manage their price risk, buy and potentially take actual delivery of the real-world goods, or simply to make bets on a commodity’s price movement up or down in the near future.
For a commodity like silver, its futures contract price gets based on the ongoing price discovery for optional future delivery of it (although nearly often settled in cash, sometimes futures contracts are settled in the real world tangible good based on the stated contract’s exact quantity).
Silver Spot Price – (n) the current notional price of 1 troy ounce of silver available for immediate delivery before being minted into a bullion product (e.g., bar, round, or coin).
The spot price for silver is actively determined by the commodity’s most highly traded futures contract at the time. The highest traded futures contract for silver can be the current month, or it might be two or more months into the future.
Today the silver spot price is a combined index or aggregate using many of the world futures market prices and trading volumes. Based on current silver futures contract trading volumes, the silver spot price is currently mostly influenced by the highly fractionally reserved COMEX and London Bullion Market Association.
As ass-backward as it may sound, the price of silver today (not the long term historical silver price) is mostly almost all found via the selling and buying of virtual contracts representing the underlying potentially deliverable physical precious metal fractionally reserved.
Source: http://www.silverinstitute.org/wp-content/uploads/2017/08/WSS2017.pdf
In 2016, the COMEX alone traded over 90.6 billion ounces of representative silver contracts (the vast majority of which get settled in US dollars).
The LBMA averaged over 218 million theoretical silver ounces traded each day in 2016 alone (that is approximately 55 billion ounces of representative silver sold in 2016).
In 2014, Bloomberg estimated the silver derivative market totaled $5 USD trillion in notional value. With only about 3 billion ounces in above-ground silver bullion supplies and an average price of about $20 USD oz in 2014, the derivatives market used estimated leverage of about 83 oz of silver derivatives vs. 1 oz of investment-grade bullion in existence.
The positive news for physical silver bullion buyers is that future price discovery for silver appears to be moving back towards physical reality as the trend of more and more investors demanding physical investment-grade silver bullion products over derivative proxies continues onwards.
Silver Bullion vs. Silver Spot Price
Virtually all competent online silver bullion dealers host a dynamic silver spot price displayed live on their websites. Generally, silver dealers quote silver spot prices and their respective silver bullion product prices in the fiat currencies of the markets which they serve (US dollars, Canadian dollars, euros, etc.).
Most popular silver bullion products available to purchase on silver bullion dealer websites get priced per troy ounce at a few percentage points (2 to 15%) above the fluctuating silver spot prices. This additional premium for silver bullion products is generally due to the costs associated with refining, manufacturing, minting, hedging, warehousing, marketing, buying, and selling various silver bullion products to investors and collectors.
When investors and individual silver bullion owners sell silver bullion to online silver bullion dealers, most silver bullion products will typically yield a sell or bid price either slightly above, at, or just below the fluctuating silver spot price.
In calm market periods, investment-grade silver bullion product prices are set slightly over the fluctuating silver spot price. In other words, if the silver spot price is $20 oz, most physical silver bullion products will be priced slightly above $20 per troy ounce.
Silver bullion prices range from as low as a few percentage points above the silver spot price for large silver bullion bars to typically a few percentage points more above the silver spot price for government-guaranteed silver coins.
When outsized silver bullion market demand hits (like it did during the 2008 Financial Crisis), silver bullion prices for products available for immediate delivery tend to climb exorbitantly higher (often both on the sell and buy-side) to levels at a time both hovering above the world’s fluctuating silver spot prices.
For example, see how the world’s most popular silver bullion coin was priced as high as +80% over the fluctuating gold spot price in the fall of 2008 on the far left side of the following chart.
In summation
Silver’s spot price relation to deliverable physical silver bullion currently functions like this:
- Futures traders buy or sell silver futures contracts on worldwide futures exchanges, this trading’s ‘price discovery’ determines fluctuations in global silver spot prices in various fiat currencies.
- Miners of silver extract and typically sell mixed silver ore and doré bars to silver bullion refiners at prices just below the fluctuating gold spot price.
- Refiners of silver smelt and purify the silver ore or scrap into .999 fine bullion or grain then sell these products to governments, mints, or silver bullion dealers at or just above silver’s spot price.
- Both government mints and private mints strike silver bullion coins or manufacture silver bullion bars and rounds, selling them to silver dealers or the public at large at prices typically above the silver spot price.
- Retail and wholesale bullion dealers like us at SD Bullion, both buy and sell silver bullion products for discreet fully insured delivery to door or professional fully insured segregated non-bank bullion storage facilities at prices just over silver’s fluctuating spot price.
When one learns how highly leveraged fractionally reserved futures markets currently operate and derive the various fluctuating silver spot prices, they often choose to bypass electronic silver derivatives and elect to buy and take physical delivery of their silver bullion.
In 2 minutes, you can hear a highly successful hedge fund manager explain why the trust he serves as fiduciary chose to acquire physical bullion over virtual derivatives or futures contracts. According to him and perhaps informed common sense, price does not solve everything.
By securing silver bullion physically and owning it directly, you can potentially take advantage of future scenarios when silver bullion premiums spike over fluctuating silver spot prices while simultaneously reducing the myriad counterparty risks associated with either virtual or indirect silver proxies like futures contracts, ETFs, mining stocks, mutual funds, etc.
The last ten years of silver industry data prove that more individual investors across the world want to buy and hold silver bullion directly, own it first hand entirely unencumbered to help ensure the fact that they indeed own it moving forward.