July 20, 2016
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,
, gold/silver price
. 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
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
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
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
Putting aside the reason for the relentless
decline in the price of silver, the
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
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
, 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
. 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
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
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
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
As noted in a previous commentary, it has
now been established that the silver market has had a
for roughly 30 consecutive
, 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
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
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
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
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
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
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
(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
price-manipulation taking place in this sector.
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.
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.