By MoneyMorning.com.au
The silver price has always been volatile.
It hit an end-of-trade high in Aussie dollars of $44.31 in April. Today it’s trading around 30% below that level.
But it was never the price that drew me to silver…
By Sprott Asset Management’s calculations, there are just over one billion ounces of silver above ground. And just over two billion ounces of gold.
We used to have far more silver in storage. But while it was cheap, we discovered hundreds of industrial uses for it in: electronics; solar panels; ID tags; medical uses; wood preservatives.
Today, the world’s whole silver stash is worth just $47 billion. That’s a lot less than the $3,400 billion worth of the gold bullion in the world.
After industry takes its share, investors get just 340 million new ounces of silver each year. Compare that to 125 million new ounces of gold. Until production levels change, newly supplied gold will be 2.7 times rarer than silver. In other words, the gold-to-silver ratio in the medium term should trend towards 2.7:1. So at a gold price of $1350, for example, silver should trend towards $500.
But is that possible?
Well, you have to remember why investors were piling into silver in April – and will continue to. Silver is HARD MONEY. It protects your wealth from inflation and currency devaluation.
The common man in China is getting nervous about the steady rise in inflation. China recently swung from supplying 10% of the silver market to importing 10% of the world’s silver.
Inflation is also up in India. And silver imports to India DOUBLED in 2010 to 97 million ounces, taking another 10% of annual production. The Bombay Bullion Association expects demand to rise.
The US Mint, Royal Mint and Perth Mint have set record sales in 2011. The US Mint even suspended sales of some of its lines. In my own experience, I’ve found that Australian bullion dealers are rationing sales.
Everything is pointing very clearly in one direction.
Up.
Just don’t expect it to follow a straight line!
Commentators in the media will keep saying that each pullback on silver’s way up is the end – we’re hearing it right now.
Don’t forget that most of them know less about silver than your neighbour’s cat. And ask yourself how many of them were calling silver to go up before the rally?
Alex Cowie
Editor, Diggers & Drillers
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