Silver. The white metal is making headlines as it makes new thirty year highs. “Buy silver to avoid the coming hyperinflation.” “Buy silver because gold is too expensive.” “Buy silver to crash JP Morgan.” The reasons given to buy silver vary. At MassMetal, we don’t disagree with many of the reasons given by others to buy silver. However, in order to help our customers make a reasoned and informed decision, we would like to move beyond the hype and headlines, and focus on the fundamental reasons for storing your savings in silver bullion.
Let’s start at the beginning. Throughout five thousand years of recorded history, silver has been used as money. During biblical times, the word for money and silver were the same in the Hebrew language. In nearly every early culture, silver became the preferred unit of exchange, while gold became the preferred store of value for kings and the wealthy. The common man as well as pharaohs and kings understood that silver and gold maintained those two critical attributes. In fact, over time, silver became synonymous with money in a number of other cultures and languages as well. This in itself is a fundamental reason to save in silver — it is money. It has always been money. It always will be money.
Today however, there are many other reasons to own silver in addition to its traditional role as money. Keynesian economists do not believe that silver is money, yet they point to its increasing use in industry as a reason to invest in the white metal. Because of its unique metallurgic properties, silver is a vital component in a growing number of industries. These include pharmaceuticals, alternative energy, high tech, water purification and even textiles. Indeed, silver is finding its place in history, right now, as one of the most promising investments available during one of the most confusing investment landscapes in recent memory. That is why silver is a great investment today, whether the future brings good times or bad.
Silver in Good Times
Should we experience economic growth, silver demand from industrial use will grow rapidly, consuming an ever growing percentage of overall supply. Even during our recent economic slowdown, industrial demand has accelerated in developing economies such as China and India. As these nations “modernize,” they will introduce these new and exciting applications for silver into their economies.
Following are the areas where silver is poised to shine as economic expansion continues in various parts of the world.
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Silver in Good Times:
5.Other Traditional Uses
Silver in Bad Times
1.Debt Based vs. Honest Money
2.Revaluation of Paper Currencies
4.Paper vs. Silver Bullion
5.Supply and Demand Facts
The uses for silver in industry continue to grow each year. The primary drivers for this are twofold. First of all, use of electricity is becoming more sophisticated. As energy requirements grow and energy production becomes more expensive, delivering clean power without the loss experienced over our current copper- based infrastructure will become more important. Simultaneously, ever more sophisticated uses for electricity are being developed. They range from Maglev (magnetic levitation) trains to tiny RFID transmitters.
In each application, efficient delivery of clean power is a necessity. And there is no metal that does it better than silver. Silver is the best conductor of all metals, and as an added bonus, it does not corrode. This lends itself to unlimited electrical applications. For example, today’s automobiles have dozens of silver-tipped switches and conductors, which aid in braking, power steering, engine starting, and more.
Silver’s unique metallurgical properties do not stop there. Its strength, malleability and thermal conductivity make it perfect for such applications as printed circuit boards, high temperature ball bearings, and superconductivity. In fact, silver-jacketed superconductive wires carry nearly 150 times more electricity than copper wire at one percent of the weight. These wires consume nearly one thousand ounces of silver per mile! It is not difficult to see that the build-out of an energy efficient infrastructure will consume many tens, if not hundreds of millions of ounces of silver.
Silver is found in more electrical applications than we imagine. It is found in our cars, jets, watches, cameras, cell phones, electric tools, computers, televisions, dishwasher, clothes washers, microwave ovens and much, much more. Today, there are over two billion people in China and India who do not have many of these products, but desire to have them. Each product will contain silver.
The primary driver for alternative energy is the rising cost of fossil fuels. To be cost effective, these new source of energy must be more efficient than their predecessors. Silver is a key component in this efficiency.
Silver’s unique attributes make it perfect for alternative energy applications. Its superconductive properties make it ideal for efficient transmission of scarce electrical resources from battery powered devices. For example, silver in cell phone antennas allow them to consume less power, thus extending battery life.
Solar energy is another area where silver shines. Photovoltaic cells use silver to collect electricity as sunlight strikes silicon. It is also used as a reflector of solar heat generated by solar panels. Solar energy is one of the fastest growing segments of the alternative energy market, and the demand for silver is set to increase significantly in this sector alone. Only 7 gigawatts of solar energy have been installed worldwide at this time. It is projected that by 2020, the amount of solar energy created will be over 20 times that. That means growth of nearly 130 giggawatts of solar based power in less than ten years! Eighty tons of silver are
required to produce one giggawatt of solar energy. This means solar energy alone could generate demand of over 330 million ounces over the next decade!
Silver’s use in industry, as previous stated, is not simply increasing dramatically – it is exploding.
Reflectants. Silver has been used on mirrors for some time. Now however, new double paned windows are being manufactured which include “invisible” silver. This reflects up to 95% of the solar energy that would otherwise pass through and increase cooling requirements. Using silver in windows significantly reduces energy requirements in hotter climates, where air conditioning is needed for cooling.
Brazing and Soldering. Silver’s non-corrosive properties make it desirable in applications where smooth, leak tight joints are required. This includes air conditioning systems, refrigeration, power distribution equipment and aerospace applications.
Nextgen batteries. Increasingly, silver alloys are finding their way into battery applications. Silver based cells have a power-to-weight ratio that is superior to other battery technologies. They are also more environmentally friendly. Silver-zinc batteries feature a water based chemistry that contains no lithium or flammable fluids.
Electroplating. Silver’s malleability allows it to be installed as a coating which can be as thin as one micron. Thus, it is used on everything from Christmas tree ornaments to cutlery. This which leads to the next area where silver use is growing.
Ancient cultures knew that water and wine stored in silver vessels stayed fresh longer. In the 1800s, cowboys on the prairie would drop a silver coin into their canteens. They knew that when water was drawn from streams, lakes and ponds, the silver coin would make the water safer to drink. Even then, the antibacterial
properties of silver were recognized, if not well understood. Today, the antibacterial attribute of silver is well understood. Silver as an antibacterial agent is being leveraged in more creative ways than we can imagine.
Water purification. Today there are numerous portable water purifiers on the market. They are maybe more sophisticated than the cowboy’s canteen, but many still use silver as a component to provide safe drinking water. Silver’s use is not relegated to portable water systems. In-home purification systems are turning to silver to assist in the control of bacteria buildup on filters. The catalytic action of silver when exposed to oxygen means silver can be used as a powerful sanitizer, virtually eliminating the need to use substances such as chlorine.
Infection fighter. Silver’s use in this area is growing rapidly. In hospitals, door knobs are treated with silver to help stop the spread of bacterial infections. Wound dressings, in particular those for burn victims, are available now that have silver embedded within them for the same reason. Colloidal silver has been used for decades as a means to fight bacterial infection in the home. It can be taken
internally for ailments such as bladder infections, or used topically for problems such as pink eye.
Textiles: Clothing is now being developed and marketed with silver embedded in the fabric. This kills bacteria that causes odors. Upholstery for the airline and hospitality industries is beginning to incorporate silver to help stop the spread of disease.
Other Traditional Uses
Silver’s use also continues in the more traditional areas of silverware table settings, photography and jewelry. These last two areas account for a substantial percentage of total demand. While they are not necessarily growth markets for silver, they produce steady demand for the market. Meanwhile, the list of new uses for silver simply grows.
Silver in Bad Times
With all that silver has going for it on the industrial demand side of the equation, it also has a great deal going for it as a monetary metal. Silver shines during times of economic and geopolitical instability, such as is now unfolding around the world. Following are some of the drivers that will affect the demand for silver during these times.
Debt Money vs. Honest Money
Throughout history, nations have created unsustainable amounts of debt using fiat money. When nations operate on a fiat currency, they nearly always turn to debasing their money when their debts become unsustainable. This happened at the end of the Roman empire. It occurred in France in the early 1700s and again in the late 1700s. It occurred in Weimar Germany in the 1920s. There are numerous examples over the last hundred years alone where governments debased their fiat currencies in a de facto default on debt which grew beyond their ability to pay if off through tax revenues and spending cuts. Here are but a few of those examples:
Angola (1991-1999) Austria (1921-1922) Argentina (1975-1991, 2000-2001) Belarus (1994-2002) Bolivia (1984-1986) Brazil (1986-1994) Chile (1971-1973) China (1939-1950) Ecuador (2000) Germany (1923-1924, 1945-1948) Greece (1944-1953) Hungary (1922-1924, 1944-1946) Mexico (2004) Nicaragua (1987-1990) Peru (1984-1990) Poland (1922-1924, 1990-1993) Russia (1921-1922, 1992-1994) Turkey (1990s) Yugoslavia (1989-1994) Zimbabwe (1999 – present)
The Revaluation of Paper Currencies
Silver and gold markets have, throughout history, periodically revalued themselves relative to the paper money that has been created and is in circulation. This generally occurs when people awaken to the fact that creation of paper money has been mismanaged. They begin to pay attention to the lessons from history, which provide an indisputable track record demonstrating that paper money has never been a long term safe store of value. They then try to redeem their paper money for real money, driving its paper price skyward.
Global Investor Demand
What is unique about this period history is that every major currency in the world today is a debt based fiat currency. Furthermore, nearly every developed nation in the world has a significant problem with debt. These two factors make the potential revaluation of silver and gold against paper currencies one for the history books. People around the globe will seek to protect the purchasing power of their savings by turning to one of the few true safe-haven sources — precious metals.
During the precious metals bull market of the 1970s gold reached a price of $850 per ounce and silver saw a high of $50 per ounce. During this move, the only nations involved in the revaluation process were the United States and Western Europe. The rest of the world did not participate in this revaluation process for various reasons. Russian citizens could not buy gold or silver, as they had a state run economy with no public precious metals exchange. The economies of China, Africa, Australia, India, Mexico and South America were largely undeveloped and there was little to no disposable income for them to purchase precious metals. Thus, globally, there was no mechanism for most nations to participate in that revaluation process.
Today, there are exchanges which allow buying gold and silver nearly anywhere in the world. While our government continues to discourage investment in real money, China and India – the world’s fastest growing economies – are actively encouraging their citizens to invest in precious metals. Literally billions of people are being encouraged to participate in a market that was not open to them in the 1970s.
Within this vastly increased market of investors, only a very small segment is aware of the fundamentals driving silver which have been outlined in this paper. One reason is that many in the main stream financial press claim gold and silver are in a bubble. However, a few simple facts should dispel that myth.
A very small percentage of the population is even aware of precious metals as a historical investment. Unlike the .com bubble and the real estate bubble, the general public has not yet entered the market.
Those that are aware only have a small percentage of their assets invested in precious metals. As recent a just a few decades ago, precious metals made up 10% to 20% of the average investors portfolio. Today that percentage is well under 1%. If that number grows to only 5%, the implication for precious metals prices would be significant.
Neither gold or silver is near its historic highs, when adjusted for inflation.
Paper Silver vs. Silver Bullion
Worth mentioning is the nature of the price discovery mechanism that is currently in place in the silver market. Throughout the past twenty years in particular, our financial system has increasingly turned to trading paper contracts as the mechanism for providing price discovery of tangible assets. This includes the silver market.
Jeff Christensen of the CPM Group has publically admitted that the paper market for silver is one hundred times larger than the physical market. This means that for each one hundred dollars traded in “silver” there only exists one dollar in actual physical silver to back those trades. This produces tremendous counter party risk for those who actually wish to invest in real, physical silver.
As evidence, one only needs to look at the prospectus of vehicles recently created for silver investment. The SLV exchange traded fund (ETF) is one such vehicle, created to track the “spot” price of silver. There are many questions surrounding the wording in their prospectus. It is widely speculated that the fund is not backed 100% by physical silver. According to Mr. Christensen’s testimony, this should come as no surprise. It is possible that SLV is simply a proxy for hedge funds and individual investors to use as a means to profit from changes in the silver price, when an interest in the metal itself is not a concern.
SLV reports a list of serial numbers of bars said to belong to the fund, thus “justifying” the share-price. In reality, the amount of money needed to take delivery of a participant’s said ownership is out of reach from all but the wealthiest people in the world, which brings this claim into question. A good rule of thumb one can use to determine if the vehicle you are using to invest in silver is actually backed by physical silver is whether or not you, the purchaser, can easily take delivery.
Additionally, recent allegations surrounding price manipulation by JP Morgan and HSBC have garnered enough credibility to have caused the CFTC to launch an investigation. As of the writing of this paper, their preliminary findings have shown what they call probable “price influence” by JP Morgan.
These developments, along with the fact that the paper OTC derivative market is at the center of the global financial crisis should make one very careful about what type of vehicle they use to invest in silver.
Basic Supply vs. Demand Facts
Regardless of whether the world sees a return to economic prosperity or falls on hard times, there are some basic facts related to economics 101 – supply vs. demand – which cannot be ignored.
Between 1990 and 2006, mining supply fell short of total demand by a rather wide margin. In 1990 there were over two billion ounces of silver in above ground non-privately held global inventories. By 2006, that number had fallen to around three hundred million ounces. That is a depletion of nearly 90%! While new mine supply has recently brought the market into balance, the situation is temporary, brought about by a global economic slowdown, and it does nothing to alleviate the fact that stockpiles of silver are all but gone.
In fact, prior to the 1960’s there were over ten years of supply of above ground silver available. This simply means that if mining were completely shut down, there was enough silver already mined to supply demand for over ten years. In the 70’s and 80’s that number fell to between two and five years. In the 1990’s it continued to fall. By 2006, it had fallen to three months of supply. In reality, today there is less silver available in official stockpiles than there is gold.
Finally, there is the historical price ratio between gold and silver. For the better part of history, that ratio has been close to 16 to 1. This means that it took 16 ounces of silver to buy one ounce of gold. Just a few years ago, that ratio was in the upper 60’s. It has fallen throughout the current bull market in precious metals to where today it is around 50. This trend should continue, until the historical ratio is met, if not exceeded. If gold remained at $1,400 per ounce, silver would have to rise to $87.50 to return to that historical ratio.
With our present global financial difficulties, gold has been forecast to rise to between $2,000 and $5,000 per ounce. These forecasts are not made by those in the main stream financial press (who, by the way, missed the housing bubble, the 2008 financial crisis and our looming currency crisis). They are made by people who predicted all of those events, who understand historical precedent, and who have thus earned a measure of credibility. Thus, remaining conservative, if gold only reaches $2,000 per ounce, it would project a silver price of well over $120 per ounce at a 16 to 1 ratio. As often happens, if the ratio “overshoots” and reaches 10 to 1, the price for silver would rise to $200 per ounce.
If the global economy rebounds, growing industrial use for silver will cause an overall increase in demand. If the economy suffers a prolonged downturn, industrial uses will not disappear, and are likely to be more than made up by investment demand as the world’s central bankers combat their economic problems the same way as governments throughout history have – by debasing their currencies. With above ground silver stocks at their lowest levels in decades, a moderate increase in demand will tip the supply/demand fundamentals greatly in favor of substantially higher prices.
By nearly every historical and market perspective, silver is poised to reach new highs in the coming years. This should lead every person to consider the role silver should have in their investment portfolio. If the choice is made to take advantage of these fundamentals, the investor is strongly urged to be certain that their investment is in real, physical silver and not a paper proxy. That is what SilverSaver is here for.
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