Understanding the dynamics and the differences between
the silver mining industry and the gold mining industry is simple. It’s all
in the numbers. What is somewhat more challenging is to decipher what these
numbers really mean.
A reader recently made a valid observation in
endeavouring to “explain” the current, extremely
skewed , gold/silver price
ratio . Historically (for more than 4,000 years), this ratio hovered at
around a 15:1 level. Over the last 100+ years; this price ratio has exploded,
at times exceeding a ratio of 80:1.
It was noted by the reader that on a cost per ounce basis
today, it is more expensive for the mining companies presently in
operation to mine their gold deposits, versus the relative cost-per-ounce
for companies presently in operation to mine their silver. Thus,
according to this reasoning, gold/silver prices should be skewed to such an
absurd degree.
It seems like a reasonable argument. Indeed, at first
glance the logic seems almost irrefutable. It is only when we step back, and
view precious metals mining from a broader, long term perspective that we see
that what this observation actually proves is something quite opposite to its
surface appearance.
First, some context. Gold and silver are deemed to be
“precious” metals because in relative terms they are much, more scarce than
industrial “base metals”, such as lead, zinc, iron, and even copper. However,
gold, in particular, is found in most regions of the world, in varying
concentrations. Silver, for reasons known only to the geologists, is more
abundant in the New World: North and South America. On average, silver exists
at a 17:1 ratio versus gold in the Earth’s crust.
Humanity has mined these metals for well over 4,000
years. Until approximately a century ago; the world has always gotten most of
its silver from silver mines. Similarly, we get most of our iron from iron
mines. We get most of our copper from copper mines. And we get most of our
gold from gold mines.
This is elementary logic. We require metals for
industrial purposes, or (in the case of gold and silver) also for use as money
and jewelry. The most efficient means to acquire these metals is to search
for where they are found in greatest abundance, and then mine those deposits.
Then, suddenly, a little over 100 years ago, the dynamics
of precious metals mining began to change, for the first time in more than
four millennia. While the world continued to get the vast majority of its
gold from gold mining, we began to get a smaller and smaller percentage of
our silver from silver
mines .
Instead, we began getting a greater and greater
percentage of our silver as a “byproduct” of other mining. Many of the
world’s richest ore deposits are polymetallic, meaning the ore being mined
contains several metals, in significant percentages. Thus the world began to
get more and more of its silver from, in particular, copper mines and
lead/zinc mines.
Eventually, we started to get a majority of our silver
via this byproduct production. For the past, several decades, we have gotten
at least 75% of our annual supply of silver as byproducts, and often more
than 80%. How and why did this happen? It’s all in the numbers.
Look at the chart above, and what do we see, starting a
little over 100 years ago? We see the price of silver, in real dollars, start
to go lower and lower and lower. The reason for the steadily falling price of
silver 100 years ago is the same as the reason for the steadily falling price
in recent years: price manipulation. Those readers wanting/needing more
education in this area would be well-served by reviewing Charles Savoie’s
chronology, titled “The
Silver Stealers” .
Putting aside the reason for the relentless decline in
the price of silver, the effect of this relentless price-destruction
was obvious. It became more and more “expensive” to mine silver (because of
the perpetually declining price). Thus, one by one, the world’s silver mines
began to close.
When prices hit their despicable bottom in this Century
of Manipulation, the banking
oligarchs had driven the price of silver to a 600-year low, in real
dollars. The result of this systemic crime was that well over 90% of the
world’s silver mines were driven out of business, and the mines were
mothballed, or simply abandoned.
As the world’s silver mines were driven out of business
by the perennial price-manipulation of the banking crime
syndicate , a greater and greater percentage of the world’s silver came
as a byproduct of other mining, by default. This is the only reason why we do
not continue to get most of our silver from silver mines, just as humanity
has done for more than 4,000 years.
Obviously, this is a dynamic which could/can be reversed.
If the price of silver began to steadily rise, and even approached its
fair-market value, we would see this trend completely
reverse . More and more silver mines would go into production. A steadily
rising percentage of our silver would come from silver mines, and soon the
vast majority. Equilibrium (and sanity) would be restored to precious metals
mining
The price of silver is no longer below $4/oz, as it was
at the original 600-year low. Today, after a slight recovery, the price of
silver teeter-totters around the $20/oz level. Many readers may look at this
elevated nominal price for silver and ask why we have not seen this
dynamic already start to reverse.
There are two facets in response to such thinking. First
of all, if silver was priced at an historic norm (versus the cost of labour),
a fair-market
price for silver today would be somewhere around $1,000/oz. Some readers
may choose other metrics for estimating their own “fair-market value”, but by
any rational calculation, we would still be dealing with some three-digit
number as a price for silver.
Relative to those numbers, the current $20 (USD) price is
pathetically low, which is why most of the world’s silver mines remain
closed, and many large deposits of silver (at lower grades) remain un-mined.
The dearth of silver mining is further evidentiary proof that silver is
grossly under-priced – and proof that this under-pricing can only be
the result of price manipulation.
As noted in a previous commentary, it has now been
established that the silver market has had a supply
deficit for roughly 30 consecutive years , if not longer. This is
unprecedented, throughout history, anywhere else in the world’s spectrum of
commodities.
What is supposed to happen, when any commodity
experiences a supply deficit? Elementary supply/demand analysis provides us
with the answer. The price rises. This rise in price discourages demand,
while it stimulates supply (because it becomes more profitable to produce).
The price continues to rise until the deficit is eliminated, and equilibrium
is restored. The economics term for this principle is price discovery.
This is what happens in all legitimate markets.
The fact that this has not happened, the fact that we have not had real “price
discovery” in the silver market for three decades, is absolutely
conclusive proof of systemic price-manipulation. There could never be any
legitimate explanation for the complete absence of price discovery in any
market, for three decades .
There is only one reason why it has been possible to
sustain this price-manipulation, at such an extreme level, for three decades
and more. It is because as “precious metals”, both gold and silver tend to be
conserved. Thus, over a period of more than 4,000 years, humanity accumulated
tremendous stockpiles of gold and silver. How the oligarchs acquired
control of much of these stockpiles, and how much (silver) remains
is the subject matter of another discussion.
The bottom-line is that it is only through bleeding these
massive stockpiles onto the market, year after year, decade after decade,
that silver price-manipulation could be sustained, at a cost of decimating
the global silver mining industry. The other reason why a $20/oz (USD) price
for silver is not remotely sufficient to restore the world’s silver mining
industry can be seen by looking at the (familiar) chart below – of the
Bernanke Helicopter-Drop.
The point here should be obvious. After the most-extreme
episode of monetary dilution of any major nation in our modern history; in
real dollars, today’s $20/oz US nominal price for silver is lower than
the sub-$4/oz (nominal) price which we had twenty years ago. In real dollars;
the price of silver remains mired at a 600-year low – yet we have some people
referring to recent, modest price action as “a
rally” .
The perversion here should be obvious to most readers,
even without the benefit of the preceding analysis. Ask the bankers (or their
media sycophants) why we get most of our silver as a byproduct of other
mining, and you’ll get some variation of the response that there are not
enough high-quality deposits of silver to support more silver mines.
This is absurd. If there is “not enough” silver to
support more silver mines, why do we continue to get the vast majority of the
world’s gold from gold mines – even though the price of gold is also manipulated
lower (to a lesser extent)?
As previously noted, silver is 17 times as abundant as
gold. If it was gold where most of the world’s supply came as a
byproduct, this might be rational – because of gold’s considerably greater
scarcity. There can be no rational/legitimate explanation as to why we get
most of our gold from “gold mines”, while the same is not true with silver.
Price silver at $1,000/oz (USD), or price it even at
$200/oz, and keep it there (in real dollars), and we would see a return to
sanity and legitimacy in precious metals mining. Once again the world would
get the vast majority of its silver from “silver mines”.
The near-extinction of silver mining around the world is
absolutely conclusive evidentiary proof of the extreme, sustained, downward
manipulation of the price of silver. Equally, if (when) the world once again
is getting most of its silver from silver mines, this will be evidentiary
proof that silver is at or approaching its fair-market value. Until we see
this occur, we will continue to have irrefutable proof of the criminal
price-manipulation taking place in this sector.
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Jeff Nielson is co-founder and managing partner of
Bullion Bulls Canada; a website which provides precious metals commentary,
economic analysis, and mining information to readers and investors. Jeff
originally came to the precious metals sector as an investor around the
middle of last decade, but with a background in economics and law, he soon
decided this was where he wanted to make the focus of his career. His
website is www.bullionbullscanada.com.
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The views and opinions expressed in this material are
those of the author as of the publication date, are subject to change and may
not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does
not guarantee the accuracy, completeness, timeliness and reliability of the
information or any results from its use.