March 5, 2009 – Gold & Silver

All precious metals are limited in their supply by the amount that can be extracted in any given year. Demand tends to be quite high, especially given the unique characteristics of these metals. However, the price of silver in comparison to gold has risen unusually high in the last several decades. Classically, silver has been priced at a ratio of between 12 and 16:1 against gold. However, that standard has been moot since the 20th century, and the ratio has remained between 40 and 80 since the early 1990s. Much of this difference in the ratio of gold and silver spot prices is due to the amount produced each year and how it’s used.

Silver, for instance, is used in many industries. While the use for photographic film has tapered off considerably since the widespread adoption of digital cameras, there are sill plenty of industries that use the metal, high capacity rechargeable batteries using silver-zinc being one of the most rapidly increasing uses. Jewelery-making uses many millions of ounces of silver each year, as does the production of silver bullion coins for investment purposes.

Because of its unparalleled conductivity as compared with other metals, when kept away from ozone and hydrogen sulfide it is used in several different types of high-end electronics. Both silver contacts and solder can be found in equipment, and silver speaker wires use a significant amount of sterling silver (at least 92.5%). Dentistry uses quite a bit of silver and mercury amalgam fillings, but both gold and silver spot prices affect this industry, too. Other uses include nuclear reactor control rods, chemical reaction catalysts, colored glass and covering the back of high-quality mirrors. Some people take it internally, and silver is a successful treatment for bacteria, impregnated in bandages and clothing.

The United States produces a significant amount of silver, though only 30% of the amount used per year through the ’aughts was domestic – the rest was imported. In fact, the world as a whole has been using more silver than has been mined since 1990. After a dip in production in the early 1990s, the world production of silver has continued to rise unabated, but the demand has soared even faster.

In addition to the US, Mexico, Peru, Chile and Bolivia are all major exporters of silver, with Peru producing nearly 3,200 tonnes in 2005. China and Australia are also major players, as are Poland and Russia. Since most of the silver in the world has come from the Americas since the 19th century (when large-scale mining really increased production capacity), it is no wonder that the price of silver has come down so far in terms of relative value considering how relatively little of the metal is found in the Old World as compared with gold, which is relatively plentiful in Africa, Russia and Central Asia.

However, production ratios between gold and silver have remained very close to the classical 12:1 ratio. In 2005, production of silver was greater than 20,000 tonnes while about 2,500 tonnes of gold were pulled out of the ground. Silver mines continue to increase their capacity worldwide, and have been doing so since the conspicuous drop in production in the early 1990s. Other than that those few years, the silver output has steadily climbed since the late 1940s with little regard to gold and silver spot prices.

While much of the most speculative investment in recent years has come in the form of open-pit mines and low grade ore extraction, the actual output when compared to all the expenses are very often close to even, so when fuel prices go up, production in such mines goes down, while underground, high-density mines are not as closely affected.

Arthur McGuire

March 5, 2009

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