By: Dr. Jeffrey Lewis
Posted 27 October, 2010
Silver has dominated the commodity and precious metals explosion through 2009 and 2010 with returns that meet and exceed any other precious metal. However, why is silver still a top investment? For two very important reasons: its volatile supply and its stance as gold’s little brother.
Silver’s Volatile Supply
As you probably know by now, silver production usually occurs as a result of mining for other metals. Today’s miners aren’t just going out to the mines to find silver, but instead looking for other metals like copper and gold, and they just happen to bring up silver in the process. This doesn’t seem like that much of an important factor, as even the beloved gasoline is a byproduct of oil refining (and was once thrown away!), so it wouldn’t seem to be so important that silver is a secondary concern for miners.
However, the fact that silver is a byproduct of other mining interests is very important. The first reason is because the total value of metals mined is only a fraction made up of silver. Because the total value of these metals is only made up of a fraction of silver, a rapid change in silver price does little to influence the amount of metals that are brought to the ground.
Supply cannot in any way, shape or form possibly keep up with demand. When demand for silver increases, so does the price, but the producers, who have a greater financial interest in other metals, cannot bring large supplies of silver to the market unless the numbers for the other metals makes sense. Perhaps the best scenario for silvers value would be a drop in the value of gold, nickel, lead and zinc. If the price of other metals fall, the amount of silver found in tandem with other metals would too.
Little Brother Effect
Silver and gold dominate the scene for stores of value and inflation hedges. However, for many, a proper collection of gold bullion at $1350 an ounce is out of reach, and fractional pieces are marked up 10-20%. So where do these people turn? To silver!
This, I believe, is one of the largest reasons why silver continues to rally higher and higher than other precious metals. While only a few wealthier, or overleveraged, investors can afford to purchase ounce after ounce of gold each and every week, silver investing takes a far smaller toll on an investor’s bank account. This proves to be even more true in emerging markets like China and India, where a full ounce bar of gold would be out of reach for most workers, skilled or unskilled.
This effect will become even more prominent with the onset of 1099 reform. Such reform will make all gold coins of a half ounce or greater reportable to the IRS through a 1099 form. However, reaching the same threshold with silver would require the purchase of 24 ounces of coin, a very dramatic difference.
While demand for silver will continue to grow as gold investors swap for untraceable silver, the supply side of the equation will fail to catch up due to silver’s secondary status in the hearts of the mining companies. Stock up because the best days are still ahead.
Dr. Jeffrey Lewis