Silver: Stupidly Cheap, and Simple to Leverage
I’ve written before that silver is the “Rodney Dangerfield” of metals—it can’t get no respect. But at the end of the day, it’s as good as gold, and in some ways even better…
It’s estimated that 17oz. of silver exist for every ounce of gold on our entire planet. This 17:1 ratio fits in with the ratios of between 16 and 20 to one under bimetallic standards. The ratio was closer to 10:1 in Europe before Spanish silver discoveries in the New World.
So, if we were completely logical as investors, we’d say that with gold at $1,100, silver should trade for at least $64.00 per ounce…not $17.00…
That, or we’d have to argue that gold is significantly overvalued at $1,100. But there are trillions of reasons—hot off the printing press—why that just isn’t so.
Silver isn’t just cheap, it’s so compellingly cheap it’d be crazy not to load up on the metal…
This Geology Fact Rocks!
Geologic estimates, like the one that estimates the silver to gold ratio at 17:1, don’t take into account the fact that a lot of the silver we’ve mined has been outright destroyed.
Gold, meanwhile, is nearly impossible to destroy. That’s partly why gold is such an incredible store of value. You might have a gold filling, for example, that was once a ring, that was once a doubloon, that was once a pharaoh’s ornate headdress. When that’s taken into account, we get an unusual situation: there’s actually less silver bullion available than gold.
I might sound like a broken record, but I love the fact that physical silver is rarer than gold. And that it’s only going to get worse in the future.
Silver stockpiles have been declining for over a decade. And new silver supply is mostly a by-product of mining for other metals, which still remains depressed from the 2003 peak. 10% of silver supply comes from gold mining, about 33% from lead/zinc mining, and another 30% from copper.
And since silver is used in everything from mirrors to optics, dentistry to silverware, electronics to photography, physical silver is going to continue declining in supply, especially as the demand for modern electronics continues to rise.
It’s a perfect storm for silver.
Ready for Some Leverage in Your Portfolio?
Leverage destroyed many an investor in the last market crash— but that’s because they were using the wrong kind. Outside of the physical stuff, owning shares of silver mining companies gives you leverage. How? Thanks to fixed mining costs!
Let’s say it costs a company $10.00 per ounce of silver to extract it from the earth. These costs would include labor, technology, mineral rights, and so on. That’s not important. The fact that these costs are fixed is important.
At $17.00 per ounce, that’s a straight $7.00 or profit, a princely margin of 41%. But say the price of silver shoots up to $35.00, leading to a profit of $25.00 per ounce. That bumps up the profit margin to 71.43%!
And if gold goes nowhere and silver moves to its historic price ratio of 17:1, at $64.00, our company’s profit would soar to over 84%.
So, while it’s nice to hold the physical metal, and I suggest you do (junk silver premiums are still quite low), you can gain substantially more from the leverage provided by owning shares of mining companies.
Stay Sovereign,
Andrew Packer
Managing Editor of The Sovereign Individual
P.S. Our friends at Sound Profits have uncovered a silver mining company that’s sitting on what could literally be the mother lode. And since this company has sole access to it, the market won’t get saturated with gold’s forgotten cousin. Click here to read about this fascinating company.
Tags: globalinvesting