Physical Silver Market Analysis

Following silver price’s correction since its 2011 April peak, many have predicted the end of silver’s bullish run. But silver’s performance since January 2012 is proving them wrong, and I’m going to explain the reasons for it.

As is also the case for gold, no serious work is being done in those “mainstream” analyses. They base their conclusions solely on the price fluctuations of gold and silver in euros without analyzing long term ratios, which are the only yardsticks that we need for staying confident when correction phases occur.

A fundamental basis when analyzing the real value of an asset consists of eliminating the monetary factor and comparing the assets to each other because, in today’s financial world, the buying power of “paper” money is being destroyed by inflationist politics. The growth of an asset, measured in euros, doesn’t necessarily mean real growth in value.

It might be misleading to see your asset grow in terms of euros if, at the same time, euro’s buying power is eroding due to inflation. That reason would explain why so many people thought they were getting rich with real estate these last years, when actually the real estate market was but reflecting a gigantic inflation made possible by the biggest credit bubble in history.

The Silver Case: an Update

The Gold/Silver Ratio:

This ratio helps determine the value of silver in relation to gold.

Today, the ratio is around 1/40, meaning that an ounce of gold will buy 40 ounces of silver.

Historically, that ratio has been 1/16 for 873 years (from 1000 to 1873), which means an ounce of gold could buy 16 ounces of silver.

In the last 100 years, the ratio hit the 1/16 mark twice.

Thus today silver is under-valued compared to gold, and it will get closer to that 1/16 ratio or even to a 1/10 ratio within the next ten years, since the total silver ever produced in all of History only exceeds gold by a factor of ten. It would be quite logical for silver to reach that ratio of 1/10.

There is no reason for silver to remain so much under-valued in relation to gold (gold itself being much under-valued with all the paper money in circulation).

Silver Price Adjusted to Real Inflation Rate

In 1980, silver reached an all-time high of 50$ an ounce. When adjusted to the real inflation rate since 1980, silver should be worth 400$/oz today, considering the augmentation of the monetary mass since that time.

Physical Silver Scarcity :

There is not enough physical silver to satisfy industrial demand. Almost all of silver produced is used up by industries, which doesn’t leave much for investors’ demand.

Silver is being used in thousands of products (computers, cameras, solar panels etc.), is not being recycled (being used in tiny quantities in each product), and vanishes forever.

There is a whole list of fundamentals justifying a much higher price for silver, and I could argue some more… then why is the price of silver still only around 30$ an ounce ?

With Fundamentals Pleading for Higher Prices, Why Is Silver So Low Today ?

As far as I’m concerned, one cannot fully understand the silver market ( and live with such volatility) without becoming aware of the manipulation taking place. Certain banks and other powerful interests are holding colossal short positions that actually create a ton of virtual metal that investors think can be redeemed in real metal.

Secondly, one must understand that silver and gold constitute the declared enemies of the actual monetary system, which is based on fiat money, un-redeemable in real assets. (Read my last article on the political/strategic role of gold to understand my point of view).

JP Morgan has a “naked short” position equivalent to 122.5 million ounces of silver. The bank has been “naked-selling” millions of ounces of silver that it doesn’t own… One day it will have to buy silver on the market for its clients wanting delivery, which in turn will drive the price sky high.

Those short positions create an offer of virtual silver, which depresses the price, because supply becomes greater than demand. As long as investors accept buying those “paper” certificates, there is no scarcity, and the above-cited fundamentals cannot apply in determining the price of silver.

ETFs and silver certificates are also suspicious, I would say, because those financial “tools” help in creating yet an even greater quantity of virtual silver, distracting away the investors from the physical market.

There is no refutable proof that the issuers of those ETFs and other silver certificates actually own the metal they say own. One only has to read the fine print of those contracts to realize that, in case of a “problem”, they reserve the right to reimburse their clients in euros or dollars… paper money.

If all holders of those ETFs and other certificates wanted to have their metal delivered, I doubt that all investors could get theirs.

But, with investors and individuals alike losing faith in the actual monetary system (loss of buying power, bailout plans, bankruptcies, MF Global etc.), a movement is taking place towards tangible assets. There is an actual rush for gold, silver and real assets.

The recent case of MF Global, one of the greatest US brokers, is quite revealing: All its clients, who thought they had invested in gold and silver when they bought certificates or futures contracts (to be converted in physical later), lost everything.

If they had owned quantities of gold or silver in their name, they wouldn’t have been subjected to a counterparty risk of default.

It is this trend of global lack of trust in non-tangible assets that will make prices skyrocket.

When there won’t be anybody left to invest in silver through ETFs, certificates and others that do not guarantee direct physical ownership, then the price of silver (and gold) will really take off. Just remember how tight the physical market really is.

This analysis goes for physical gold as well: the price of gold, when adjusted for inflation (given also some manipulations), should be much higher than it is today.