The Silver Lining in an Economic Storm

June 28, 2011

by Christopher Neal Wyatt, president of Superior Bullion

As I begin writing from the comfort of my home office, torrential sheets of rain are pouring against the windows, and the ominous rumble of thunder can be heard approaching from the distance. There's no doubt about it- with increased flooding, tornados, and volcanic activity worldwide, weather patterns have been taking a dramatic turn to the extreme. However, my intention today is not to write about the weather; instead, the purpose of this essay is to help you prepare you for the approaching economic storm, by explaining why investing in silver may be the single best way for you to profit through this financial crisis.

For those who have read my previous essay, "Gold Shines in Tough Times", you'll understand why I believe it is actually the growing risk of global default and deflation- not inflation- which has been driving the demand for precious metals, like gold, to record highs. In the one and a half years since then, gold has continued its rally- providing investors with an 18% annual return, when measured in U.S. Dollars. Globally, 2010 marked the first time in decades that the world's central banks became net buyers of gold bullion, while the President of the World Bank, Robert Zoellick, called for the return of a gold-backed reserve currency.

While gold has continued to capture the headlines, it would be a mistake to overlook the simultaneous rise of "the poor mans gold", silver, which has increased in value some 89% during that same time frame. In fact, the price of silver has actually been gaining on that of gold for more than 20 years, as evidenced by the falling ratio between the prices of the two metals- from a high of over 100:1, achieved in 1991. Moreover, at no time in recent history has this gold/silver ratio fallen more dramatically than over the past twelve months, as illustrated in the chart below:

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Figure 1: One Year Gold/Silver Price Ratio, provided by goldprice.org

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With the price of silver now rising faster than gold, it would seem that "the poor mans gold" is actually the wise mans investment! In the face of year-on-year increases in both consumer and investment demand, some market observers are now asking the question: is silver the new gold?

Gold vs. Silver: a Chemist's Perspective

Gold has remained a highly prized and valued commodity throughout human history. The appearance of gold is both beautiful, and distinctive, which makes it immediately distinguishable from any other naturally occurring element or compound. Furthermore, gold is also much more rare than silver, by an approximate factor of 10:1. [source]

In terms of chemistry, gold is a substantially denser metal than silver. To put it more precisely, the specific gravity of silver is only 53.3% that of gold. For this reason, it is possible to store a much greater mass of the metal in a limited amount of space.

Gold also possesses the advantage over silver in that it is more highly inert- that is to say, gold does not readily react with other substances commonly found in the environment. For this reason, pure gold does not easily tarnish in the way that silver sometimes can; consequently, gold is widely preferred over silver for use in jewelry.

In almost all other respects, however, silver is actually the more useful of the two elements. Silver offers the least electrical resistance and highest thermal conductivity of any metal. Moreover, in certain industrial applications, the use of silver as a catalyst has no known substitute; for this reason, silver has been called "the indispensable metal".

The unique chemical properties of silver have encouraged its use in a growing array of electronic devices, including cell phones, and photovoltaic solar panels. The anti microbial and antiviral properties of silver have led to its use for purifying drinking water for the NASA Space Program [PDF], as well as a growing range of health & consumer products including first-aid gels, ionized silver laundry machines, and nano-tech underwear.

Given the wide range of uses for the mighty silver atom, it should come as no surprise that both consumer and industrial demand for silver consumes approximately 90% of annual mining production. In contrast, the majority of all the gold that has ever been mined- estimated at some 160,000 metric tons- is simply stored in bank vaults, gathering dust.

Gold and Silver as Money: A Brief History

J. P. Morgan (1837-1913), the prominent banker and financier, famously testified before the Congressional Pujo Committee that "Gold is money, and nothing else". Nearly a century later, those same words have taken on a new level of meaning, as the Wall Street investment firm which bears his name, JPMorgan Chase & Co., recently made the announcement that it will now accept gold bullion as collateral.

The trading activities of central banks and Wall Street titans not withstanding, the use of silver as money actually supercedes that of gold by many orders of magnitude. Silver was first used as a medium of exchange in Ancient Mesopotamia, a practice which is thought to have began well over 6,000 years ago. In contrast, the first known use of gold for this purpose did not begin until many centuries later, around 3100 BC. The founder of the first Egyptian Dynasty, Menes, established the first known reference to a gold/silver ratio, by declaring gold to be worth two-and-a-half times its weight in silver. [source]

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Figure 2: The world's first coins were minted from electrum, a naturally occurring mixture of gold, silver, and other trace elements. [image source]

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The minting of coins for use in daily commerce began in Ancient Lydia (present-day Turkey) around 2600 BC, with the use of electrum- a naturally occurring mixture of gold, silver, and other trace elements. As the science of refining metals became more advanced, later civilizations- including both Greece and Rome- began the large scale minting of pure silver coins as currency. In contrast, the issuance and use of pure gold coins has been a comparatively infrequent phenomenon, up to and including the present day. Contradicting the above-cited testimony of J.P. Morgan, the words for 'silver' and 'money' are actually one and the same in at least 14 major languages!

Supply, Demand, and the Myth of the Free Market

Any economics student could tell you that there are two primary factors which affect the price of a commodity: supply and demand. In the case of the precious metals marketplace, it is clear that there are now other factors at play as well- an issue which I will attempt to explain shortly. Regardless, when comparing the relative investment potential of either gold and silver, it is helpful to understand the theory of how the market forces of supply and demand could affect your potential profit (or loss) in the future.

The fact that gold offers us so very few industrial uses is actually a huge advantage for those who prefer price stability. The vast majority of gold that has ever been mined is stored as a reserve asset, and for this reason, annual mine production seldom contributes in any significant way to the overall supply. As a result, the price of gold has remained remarkably constant throughout much of human history, when measured in terms of other goods and services. [source]

On the other hand, silver is one of the most historically volatile of all commodities. Because silver has seen such widespread use as a medium of exchange for thousands of years, human civilization has seen numerous periods of both economic expansion and contraction, as a direct result of either silver surplus or shortages. In Medieval Europe, for instance, Venetian bankers became fabulously wealthy by trading their stockpiles of silver coins for gold bullion from China, where silver was in extremely short supply. [source]

Today, silver is in as short of supply as ever! Above-ground reserves of silver have been dwindling for decades, as exploding industrial and investment demand continues to outpace annual mine production. What's worse, our government-owned reserves of silver, once estimated at over 3.5 billion ounces, have been completely depleted to make up for the ongoing production shortfall! [source]

In the absence of official government reserves, it is now very difficult to know precisely the total amount of above-ground silver which remains available for immediate delivery. Here in the U.S., the most well-known, privately-held reserve of silver bullion is stored under the supervision of the CME Group- owners of the New York Mercantile Exchange. As recently as twenty years ago, this exchange maintained a silver reserve of over 101,450 million ounces of silver in their vaults. Today, this figure is down over 3400%- to just over 29 million ounces. [source]

This extreme and unprecedented silver shortage would seem to render the economic laws of supply and demand null and void. In fact, some market observers have estimated that the actual supply of above-ground silver is only 1/7 that of gold! [source] If this is true, then why is the current gold/silver price ratio skewed so radically in the opposite direction? In other words, why is silver so cheap?

Due to the amazing courage and determination of Wall Street whistle blower Andrew Maguire, we now have an answer to this question. Just as market observers have long suspected, Mr. Maguire has given us iron-clad proof that today's gold and silver markets are vastly oversold through fraudulent short positions- traded endlessly in a massive, coordinated fashion by some of the largest banking and investment firms on Wall Street, including HSBC and JPMorgan Chase. [source]

Meanwhile, our most influential market regulators- including the president of the CME Group, Jeffery M. Christian- remain firmly opposed to any departure from business as usual. The following testimony given by Mr. Christian at a March 25, 2010 CFTC hearing allows us to understand how this fraud has been perpetuated for so long:

In summary, the president of the largest metals exchange in America is "not at all concerned" about the massive short positions being traded between entities like HSBC and JPMorgan Chase, because, among other reasons, "it's been persistently that way for decades". When pressed by Adrian Douglas, an independent market analyst, as to how a bullion exchange can run on virtually nothing except "paper backing paper", Mr. Christian readily admits that metals exchanges around the world are routinely trading gold and silver that does not exist, and cannot be delivered... by multiples of 100 times the underlying metal!

In October of 2010, Commodities Futures Trading Commission (CFTC) commissioner Bart Chilton stated officially his belief that "silver markets are being, and have been, manipulated", while also encouraging legal prosecution against the parties responsible [source]. To date, no criminal charges have yet been filed by the CFTC; however, a number of civil suits have been filed based on these charges, including a massive class action suit [PDF], all of which have yet to be brought to trial.

Silver Crisis = Golden Opportunity

As global currency and debt crises have driven millions to pour their entire life savings in to the safe haven of precious metals, we now learn that these same investors are being swindled for untold billions- through the most brazen and successful price suppression scheme in the history of finance! Clearly, an unprecedented crisis is brewing in the silver market, when so many investors- perhaps as many as 99 out of 100- are holding silver positions which exist only on paper.

It is often said that every great crisis presents us with an even greater opportunity. For those who are informed enough to prepare accordingly, the profits to be realized from the coming silver crisis are incredible- both for investors, and for the criminals who prey on them. Therefore, before investors buy into the silver mania, it is very important that they fully understand the numerous pitfalls which exist in the market today.

As any portfolio manager will be happy to tell you, a brand new way of investing in silver- called the Exchange Traded Fund (ETF)- has exploded in popularity since their introduction in 2006. Unlike traditional silver investments, these ETF's can be easily rolled over from any individual 401k tax-sheltered retirement account, thus contributing to their immense popularity.

By far the most popular of these ETF's has been the iShares Silver Trust (SLV). This fund claims as of April 27, 2011, to hold approximately 79 million ounces of silver- nearly three times the bullion currently held by the New York Mercantile Exchange! Just who is in charge of watching over all of this silver? According to the SLV prospectus [PDF], the custodian of this bullion stockpile is none other than- you guessed it- JPMorgan Chase!! If you are naive enough to think that the same firm which has been defrauding investors in the futures market for decades could somehow manage to keep their filthy hands off of all that ETF silver, then we've got some oceanfront property in Cincinnati to sell you!

Trusting any Wall Street firm to manage your silver investment is a very risky proposition. Regardless of how savvy an investor you may be, trying to out-trade both HSBC and JPMorgan Chase is like gambling on a massive game of musical chairs- with only one chair for every hundred players! A day of reckoning is indeed approaching for the silver market, as investors everywhere grow weary of the Wall Street chicanery. Rising demand for physical silver has increasingly limited the degree to which the Ponzi scheme can continue, and we predict that this trend will accelerate in the coming years.

So Where is Silver Headed? To the Moon, Alice!

There is no doubt that ongoing currency and debt crises around the world will continue to drive demand for gold and silver to record levels. Trying to predict the coming price of either metal, in dollar terms, is actually very difficult, as there is essentially no limit to the amount of money which can be printed by the Federal Reserve. We can only be certain that the price of both gold and silver will be many multiples of what we see today. The more relevant question is, where is the gold/silver ratio headed?

After centuries of mineral exploration, we now know that gold and silver are found in nature at an approximate ratio of 1:10. Today, due to the fraudulent trading activities of Wall Street insiders, this price ratio now stands at approximately 1:44. It seems inevitable that this massive price suppression scheme will soon prove unsustainable. The end result will be a dramatically higher price for physical silver, regardless of whether you choose to measure its value in terms of dollars, or gold.

UPDATE [7.20.2011]:

In order to help you understand daily changes to the Gold/Silver price ratio, we have included an interactive chart displaying this in real time on our News Home Page.

If you wish to study changes to this metric over longer time frames, here is a more detailed chart which allows you to track changes to the Gold/Silver price ratio over several decades:

Christopher Neal Wyatt

President & Founder, Superior Bullion

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