Wednesday, June 3, 2009

Why Silver Will Be a Better Investment than Gold

The investment potential of silver is hugeWhile gold is and always has been money, and its status as the ultimate preserver of wealth is untouchable, in the coming years silver promises to be a significantly more lucrative investment than gold. There are a few reasons for this.

According to (fairly) recent surveys, there are around 400 million ounces of silver bullion in the world versus 2 billion ounces of gold bullion. That means there the supply of gold bullion is 5 times greater than the supply of silver bullion. If we include coinage that can be melted down into bullion, then the supply of gold is three times greater than the supply of silver, with 1 billion ounces of silver and 3 billion ounces of gold. So silver the amount of silver available for use is much smaller than the amount of gold available.

The global supply of gold increases by about 2% per year, largely because gold is normally recycled and reused. But silver has many industrial uses, and silver is largely not reusable, so every year there is a supply deficit. Even in years of low demand, the supply of newly mined silver falls short of demand by about 70 million ounces. In years of high demand, it may fall short by as much as 200 million ounces. These deficits need to be taken out of the existing silver supplies above ground, which are therefore being depleted. Demand for silver has been outstripping supplies for 15 years straight, and there is no sign of this reversing.

In addition to those simple realities of supply and demand, the case of silver is complicated by some of the financial funny business that goes on in this world (which we've seen plenty of over the past year and a half). One of those funny things is the existence of unbacked silver certificates. Silver certificates are like IOUs that indicate that you have paid for an ounce of silver, and these certificates are supposed to be redeemable for physical silver. There are one billion of these certificates out there. But remember -- there are only 400 million ounces of silver bullion in the world. So what happens when the price of silver increases and people want to convert their certificates? A big shortage will occur, and that will send the price of silver soaring even higher.

Another bit of funny business is that there is a massive short position in silver that greatly exceeds the supply of physical silver. When you short an investment, it means that you borrow it and sell it now while the price is high, and you buy it back later when the price is lower. The problem is that when everybody goes to buy back the silver they have shorted, there won't be enough! There are approximately 508 million ounces of silver shorted on NYMEX, but there is only 132 million ounces of supply. Remember that worldwide, there is only 400 million ounces of silver bullion in existence, less than the amount that is shorted on NYMEX. When these people all go to cover their short positions then the rediculous degree of the silver shortage will become apparent.

For all of these reasons and others, silver is destined to be an amazing investment opportunity over the years to come. While gold will protect you from currency devaluation, silver will help you multiply your wealth, if you are significantly invested in it.

1 comment:

IMM said...

I hope you've all been stacking silver! I've continued buying silver regularly, about 20 ounces a month. It really does stack up, and before you know it you'll have a valuable investment.