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Silver Mining vs. Gold Mining: The Dynamics Explained - Jeff Nielson

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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, 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.


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.

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Comments

XC Skater
July 22, 2016 at 7:39 PM
Thanks for writing a whole new article around my questions Jeff, I'm flattered! "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." What about old-fashioned demand? By-product silver and gold just manifest themselves based on how much and where there is base metal mining. Silver and gold prices nor demand affect that. In gold we see that twice the mining+scrap supply is going to new buyers. In silver, while there are disagreements to how long now and to which extent, demand is pretty much matching supply or vice versa. There is no great incentive to mine more silver. And while it doesn't help that little or no money can be made, issuing stock does seem to keep these primary miners afloat. At higher demand for silver relative to supply, prices might rise and make mining it more attractive. In gold mining they are not getting rich either, but at least there is (extra) solid demand. And since gold mines can issue fresh stock and keep the business afloat, why not continue? Management is being paid, workers are having jobs, the market is eagerly buying the gold, and shareholders are filling the gap to break even as needed. I don't say this is how a business should be run, but for years we've seen it run in this way. The dispicably low prices over the past years have not exactly caused enough mines to close for us to feel a diminished supply. Some clse, others ramp up. I don't see why silver mines should somehow produce more silver to get a similar shared from primary mines compared to gold, just for the heck of it. In silver, the demand is not there to justify doubling output. And yes, this output would be mined at higher cost due to current high grading to combat low market prices. If primary gold miners were to merely increase production for the whole market to meet demand, it would also cause huge cost increase. I could argue that gold production is too low, and its price even more suppressed compared to silver. Gold miners don't have the faintest shot at meeting demand and break even. Silver miners are doing it already, helped by solid output from base metals. If a metal should be mined twice its demand, eventually the streets will be paved in it. It seems everyone can still obtain all the silver they want, at spot, so above ground reserves seem to be at least sufficient to service the market. And that's without the now vast reserve among individual stackers. Several billion ounces (annual productions) are in stackers' hands. And those are strong hands, judging from diminishing scrap figures these meagre years. Where-ever the supply is coming from (alleged deficit), it's not coming from them it seems. I'm by no means an expert, but I understand that over the past 100 years, primary silver mines have been able to upscale and streamline their operations better due to technical advancements and bigger equipment. It's still a surface mining business, correct? In gold, I see more vertical shaft mining which is highly labour (health risk) intensive. What's there to scale up? "Thus, according to this reasoning, gold/silver prices should be skewed to such an absurd degree." This line makes the author seems prejudice on the matter. Why is a ratio absurd, based on what? If current cost dynamics (for the next ounce to be demanded from the miners) are so nicely aligned with the current price ratio, what exactly is so absurd about it? Price ratios fluctuate for huge irrational reasons. Cost ratios are just that, the relative mining cost between 2 minerals. If somehow 20:1 is "fair market ratio" , what is a fair markup for a mining operation? If we adjust prices to $60 and $1320 (22:1 rather than 66:1 now), we'd see primary silver miners either doubling or tripling their costs into sales. Gold miners would still be fighting to not make a loss, while demand is twice their supply, and silver is just about in balance (depending on whose figures you take). I just cannot reconcile that. I can see the silver ratio falling as prices go up, even ignoring the daily reality of leveraged price relationship between it and gold. But what it takes is physiical shortage due to unwillingness to sell at any price below, say $60/oz. As long as the "price finding" platforms come up with some metal, any price seems to work. This supply must fail first, then the physical market can start deciding on which prices are fair. Gold has 60 years of current production above ground. Silver, maybe 5 right now? It could take a century of consistent deficits to deplete that. Unless holders will decide to not sell below X. In general I feel we (the stackers) have failed this market 2012-2016. Demand for bullion has been up, but in the grand scheme of things, not really worth mentioning. If there was ever a chance to run the market dry of silver, this was it. If prices find themselves around $50 soon, it will take a lot of extra cash to just keep the reserve level, let alone try and run it dry. A thought: those who have the demand may actually be involved in creating supply, at any cost. China is a prime example, and more than significant. My little contribution to help fate a bit, advance the timeline while giving money back to the people: http://www.silverdoctors.com/gold/gold-news/silvers-long-lost-monetary-role-lets-make-some-real-money/ Anywith with the guts to think big, find me and we'll do this thing.
Michael Bryden
July 25, 2016 at 10:41 PM
While my knowledge of economics and mining does not compare to others, including the author, I find the rationale in this article not to be of sufficient depth (or mine) to justify the conclusion of "price manipulation" to suppress silver's "real" price, versus my understanding of "price equilibrium" (between forces of supply & demand). We have seen attempts at "cornering" the silver market and watching prices escalate in the past, followed by a tumbling silver price when the scheme was exposed, including criminal prosecutions. More recently, we have seen governments manipulate the markets post 2008-09 in the name of economic stability and safe-landings, as well as creating extended market mahem in the process. My personal view, is that silver has lost some of its favour as a precious metal, versus gold and other upstarts (e.g., platinum, etc.), and also some if its industry prominence as substitutes emerge (e.g., digital photos, etc.) and technology advances. These demand reductions, likely in "real" terms, relative to past demand are also impacting on the current prices of silver. For sure, governments are influencing (manipulating) the precious metals markets, and I agree with others' conspiracy theory(s) that there is an impending change afoot for monetary policy worldwide that could revert back to a gold standard, and/or a basket of currencies, as evidenced by the repatriations of gold reserves and covert collecting (e.g., China, etc.). These activities tend to support the shift in the gold to silver ratio, while at the same time creating sufficient uncertainty to keep precious metals' prices, especially gold, at historic lows, in real terms. I do agree with the author that current silver prices do not justify mining solely for this metal, unless the grade is sufficient to be economic (profitable) and these mines do get developed.
Slide
September 29, 2016 at 7:59 AM
Great article Jeff. Miners are known to release harmful pollutants into the air and water. Is there a listing of ethical producers? Price suppression shrinks margin so are the miners forgoing ethics to keep from operating at a loss? Are the unethical producers just as criminal as the One Bank? Also, what would be the percentage of ethics driven investors vs profit at any cost investors in the silver and gold sectors?
Roland
March 25, 2017 at 8:30 PM
Couldn't agree more
C
September 3, 2017 at 10:51 AM
So many assumptions here. Silver fell to ultra low prices because, wait for it.. It wasn't worth much, it's closer to a base metal due to most of it coming along with copper mining. Why did silver miners close?, because it wasn't worth it to mine anything more than the stuff just lying around near the top soil layer, also the silver miners did not close shop, the silver miners that were not profitable closed shop! Why else did they close up?, we stopped using it for money. Why did we stop using it for money?, because the price fluctuates, how can you use something for money when it's all hoarded up due to speculation. Also, it became an industrial metal, where it really belonged all along. Trade and commerce would halt if it were used as monetary exchange. Through the years other things have been used for money, anything of barter value can be used as a means for exchange, i.e. the oldest profession. Not long ago we didn't really have much electricity, now we do, and copper is needed. Not long ago mining was more difficult, with technology it's easier to pull out of the ground and grab all the metals in the dirt vs. oh this is just a gold, silver, copper mine only as was the case in yesteryear, those days are over!, it's not just in the numbers , it's in the dirt. Bankers didn't ruin silver, they just stopped it's use as a primary means for commerce, so that's a crime??? Restore the world's silver mining industry?, that's over, that's the past, that's old technology talking. Now, it's so easy to pull out of the ground it has little value outside of speculatory price movements and I find silver jewelry at garage sales all the time, in gram amounts like that I find it in dumpsters as well. We throw it away, once it's bought and paid for it's served it's purpose, their is no law that says it must be recycled. A good example of this is I pay .50-2.00 over spot to buy it, and when I go to sell I don't get that price, I get 2.00 or more less than spot!, so what's it really worth?, only what someone is willing to pay for it, only what they can get to send it back in to be melted, so that's a 4.00 price difference, and silver used to sell for 4.00? hmmm. Now in recent years with physical investor demand, and the creation of ETF's silver is up, and with the higher price, more plentiful than ever before in history. With investors eating up 1/4 to 1/3 of mined supply we will never (ok you never know) have a shortage of silver as our above ground supply is now enough to last a couple of years. Until the price goes back so low that's it's not viable to sift it out during copper mining we will continue to have over supply. I'm not trying to refute Jeff here, I agree with him more so than not, as I have a certain level of net distrust in the fiat system because it's so debt driven and 100% prone to failure. Still, without so much money creation where would we be?, do we even know? My main argumentative point here is when Jeff said silver is a precious metal, I don't agree with that anymore. Example being, where would we be without copper?, imagine a life without copper. I have a speculatory investment in au/ag, but I don't feel silver will have it's day until the green revolution comes (solar) and we see the fallacy or error in our ways of over use of fossil fuels when the sun is what created all those fossil fuels in the first place.
Jack
October 10, 2017 at 5:55 AM
mining is based on the experience and also LUCk which is very important but when it should be researched first then the actual work should start so that failure rate can be minimised. http://bestmetaldetectors.net/
Matt
August 18, 2018 at 11:53 PM
I don’t know if i’m Reading this right because I began skipping parts towards then end when it started to deteriorate into your garden variety ‘blame it on the bankers’ rant... but you seem to be suggesting that we should stop aquring silver via the most cost effective means, which is as a byproduct from mining other minerals, and instead start reopening costly silver mines which have been unable to operate profitably for decades, so that market supply will dwindle, causing the price to rise and thus make mining silver profitable again? For a start, if that’s not “market manipulation” then I don’t know what is, but more importantly, it’s completely and utterly illogical. We live in a capitalist free market world, (mostly) and if there is a cheaper way to do something, then that’s what the market will do, it’s simply absurd to suggest anything otherwise. Unfortunately too many people have been sold this myth that silver is a rare precious metal, but it simply isn’t. 200 + years ago we though differently and this is why it was once placed alongside gold as a form of currency, but there have been countless enormous discoveries of silver since then, hence why the price has disintegrated. Silver is just not scarce, there is more than enough to go around, and infact it’s industrial use annually is actually falling, yes there is technically a small deficit between the amount used every year and the amount mined, but this is presently being filled by huge surpluses, formerly belonging to central banks etc that are being offloaded because they have such little value it doesn’t justify the high cost of storage. Just think about it, if Silver was really at risk of becoming scarce and imensely valuable, why would major central banks be dumping all their reserves? There are many other scare minerals essential for various industrial and manufacturing requirements that we will start to run out of long before anybody worries Silver, eg Cobalt and Rhodium.