The Case for Silver Investment

I. Introduction
As of September 2010, it appears that physical silver is today potentially the most explosive precious metal play in history. A combination of factors – chronic scarcity, inelastic demand, and expanding consumption has created potentially one of the most profitable opportunities ever seen. The following analysis presents the base rationale for purchasing silver. Furthermore, significant evidence exists to point towards downward manipulation of the silver market by large bullion banks, further compressing the market. It is this author’s opinion that a parabolic top in silver could easily surpass the 20x rhodium price increase from $500 to $10,000 over a five year period as the market realizes the supply shortage. Silver’s supply and demand are analyzed below to provide a background for the reader.

II. A Scarcity of Silver
Total world silver production from the prehistory to the end of 2001 was estimated by the USGS to be 1.26 million metric tons, or 40.5 billion troy oz. The Silver Institute reports that 5.1 billion oz have been mined from 2001-2009. In total, 45.6 billion oz have been mined in history, with roughly 1/9 of that total in the last decade. The Silver Institute and GFMS conclude that approximately 800 million oz existed in total above ground official stocks (governments, COMEX, other dealers, and ETFs combined) as of the end of 2008. Assuming that jewelry and other private stocks are unaccounted for, let us assume that an additional arbitrary 200 million scrap oz can be recovered. Furthermore, there is no justification for ETFs to be included in silver stocks – in theory, the ETFs are supposed to hold investor’s silver and to include investor silver in inventories would be to double-count them. Recall that the Hunt Brothers’ silver squeeze in the 80’s pushed many to liquidate scrap silver, implying that individuals today probably either 1) did not sell at $50/ounce in 1980, and probably would not sell now, or 2) sold their silver in the 1980’s and have only silver acquired since then. In summary, a base could rationally assume potentially 1 billion ounces exist in the market today. (more)