Precious Metal Surprise: Silver a Real Comer By David L. Ganz,
April 10, 2008
Hi-o Silver! After years of being thought of as a backwater
of precious metals, and even threatened with demotion to an
industrial metal, silver is back in the spotlight. The effect
on common date silver coins couldn't be more welcome to collectors
and investors, and is helping the market as a whole.
Up more than 29 percent over last year's $13.38 average,
silver has increased almost four times its 2003 average of
$4.87 a troy ounce and three times its 1998 price average
of $5.54 an ounce.
Here's how the difference plays out on a common circulated
Morgan dollar that contains .7734 troy ounces of metal. At
$5.54 an ounce, a silver dollar has about $4.42 worth of bullion.
A quarter has .18084 troy ounces worth of precious metal,
worth just about a dollar. At the current $17.38 average,
the silver dollar's metal reserve is $13.44 and the quarter
is about $3.15.
As gold crossed $1,000 and platinum $2,175, silver went over
the important psychological barrier of $20 an ounce before
retreating to profit takers. That approaches the 1979 average
of $21.79, which is otherwise understood only in the context
of the Hunt Brothers run on the silver market.
Some 22 years ago, in 1986, gold was at $368 an ounce, platinum
was at $466, and silver was quoted at $5.36 average for the
year. A fair question to ask is how did things turn out? The
surprising result: gold rose 158 per cent, platinum 335 percent
and silver weighed in with an impressive 224 per cent - not
bad for an historic also-ran. At its interday high on March
6, 2008, of $20.80, the return is over 288 percent.
Gold's historic breakthrough at $1,000 an ounce is noteworthy;
silver's meteoric rise has barely made the news.
Platinum's excuse for popularity, the Chinese market, is
inapplicable to silver. Gold's gains as an historic asset
of last resort also doesn't apply, since silver is an everyman's
metal that is relatively precious, but not scarce.
Instead, it appears to be old-fashioned economics that is
driving the price of the metal: modest supply, fixed reserves,
and increased industrial and photographic use in the U.S.
and jewelry use in India and the Far East.
A couple of years ago, two of America's wealthiest men became
players in the silver market, and it is apparent with hindsight
that the way that investors (and collectors) look at the greyish
colored precious metal may never be the same.
1998, Warren Buffett, whose net worth Forbes has estimated
in the billions of dollars, took a 130 million ounce position,
according to documents filed with the Securities and Exchange
He was joined by William Gates III - that's Bill Gates of
Microsoft - who on Sept. 28, 1999, bought a 10.3 percent position
in Pan American Silver Corporation.
Buffett's position amounted to about a fifth of the world's
available supply and constituted an investment of about $900
million. The tiny silver mining company based in Vancouver,
British Columbia, cost Gates an estimated $15-million for
his 10 percent stakehold. This is a fraction of the fortune
of Gates, whose net worth also has been estimated in billions
Both are evidently out of the silver market, but what appears
wrong is only their sense of timing. From an average price
of $5.54 in 1998, the average price declined in 1999 to $5.21.
Like 1979 (average price $21.79) when the Hunt Brothers tried
to corner the market, the succeeding year (1980, $16.39 average)
the price went down.
The price in 2001 averaged $4.37, but the upward trend then
began as it steadily increased to $4.59 (2002), $4.87 (2003),
$6.67 (2004), and $7.31 (2005) a net change over the five-year
period of 65 percent (or about 13 percent annually on average).
Then it jumped to$11.54 (2006), $13.38 (2007 average) and
$17.38 in the first three months of 2008 - a 136 percent change
from 2005 (or about 34 percent annually).
In 2006, the latest available from The Silver Institute,
626 million troy ounces were mined from the following 20 countries:
of the reasons that silver has had such intense activity over
the last several years - after a hiatus in the early 1980s
- is that industrial demand has outstripped supply in virtually
every year since 1990. In 2005, the Silver Institute reported
that demand for silver had grown by more than 5 percent and
that over 1.5 billion ounces were utilized but not replaced.
Mine production had hovered at between 300 to 400 million
ounces per year - but now is on the rise. One reason is the
little known fact that except for the company that Gates bought
into, nearly all silver production is done ancillary to other
mining, that is as a byproduct of mining some other metal
that incidentally yields silver.
With this as a supply factor, demand has exceeded 500 million
ounces every year since 1990, and in several years in the
mid-1990s went over 600 million troy ounces to fuel the industrial
economy. Silver Institute stats show it even higher in the
past few years: 848.7(2002), 873.4 (2003), 875.2 (2004), 925.6
(2005), and 911 (2006). Silver is used in making jewelry,
silverware, as a brazing alloy for mirrors, in electronics,
photography and as batteries. Coinage and medals account for
about five percent (40 million ounces annually).
Photography remains a key element of silver's overall demand.
According to the CPM Group, a widely respected industry analyst,
there "are no economical substitutes for silver-halide
technology," and the higher quality and faster-speed
films that consumers seek require more silver.
Digital photography may eventually compete strongly with
this, but in the early 1990s, more than 90 million ounces
of silver went to the photography sector each year.
Issues concerning photography and industrial use for silver
have existed for many years - and are likely to continue.
But silver's price in the future is deeply tied to its past,
when it was a major political issue that was addressed by
both the Democratic and Republican political parties, and
played a dominant role in presidential politics.
At its beginning, silver and gold as coinage metals were
rooted to the federal Constitution, which required that coinage
be composed of both of those metals. Alexander Hamilton suggested
that a ratio of 15:1 be utilized for valuation purposes. The
debate was a considerable one, and the Annals of Congress
recite it movingly. (Today, the ratio is about 58:1).
may have been correct in his economic analysis, but by the
time that the legislation was enacted, the ratio of world
price had slipped to about 15.5:1, and as a result, silver
was too inexpensive. Coins that were produced promptly left
circulation. Until the early 1830s, the imbalance was not
corrected, accounting for modest availability of gold coinage
from that era.
Neil Carothers, whose book Fractional Money remains a classic
nearly 80 years after it was published, calls the original
coinage system (1792-1828) "a discreditable failure."
The Spanish pillar dollar remained the principal unit of value
(that remained true until the late 1850s), and as Carothers
succinctly put it, "Spanish coin could not be driven
out until the mint provided domestic coins in abundance."
Numerous bills were introduced to abolish the Mint outright.
The mint's presence in Philadelphia was extended every two
years, long after the Capital moved to Washington. Out of
caution, Congress refused to eliminate the Mint - but neither
did it outlaw foreign coinage.
Significantly, the ability to deposit gold and silver into
the Mint and receive coinage in return remained - a problem
that would come back to haunt the mint decades later. The
bullion was deposited, the mint refined it for modest charge,
and turned it into coin.
The Coinage Act of 1837 attempted to re-balanced the appropriate
ratio, and priced gold at $20.67 an ounce (or equivalent)
and made silver worth $1.29 an ounce. Gold remained at the
fixed number for nearly a century (it would be re-valued in
1933 by FDR). Silver was less lucky.
By the late 1860s, a mint had already been authorized in
Carson City, Nev., its first coinage coming in 1870. The original
intent may have been to exploit the Comstock Lode, discovered
in 1859, and to produce gold coins from metal mined in the
region, but by the early 1860's, Carothers claims, that Mint
(and indeed, the others) were functioning for the benefit
of bullion dealers, because their coinage simply disappeared
as soon as it was coined.
For the two years prior to the Civil War (1859-1860), silver
was priced at $1.21 an ounce, and the Mint freely accepted
silver at that rate which it turned into coin. A decade later,
one of the bullion dealers testified before Congress than
in 1863, he had $2 million in U.S. coin sales abroad and made
a profit of over $100,000.
The Coinage Act of 1873 eliminated the ability to freely
deposit silver into the Mint and receive coin in return. (It
also removed the half of 1 percent seigniorage charge to convert
gold bullion into coin of the realm). As a practical matter,
it demonetized silver and created a de facto gold standard.
Also resulting was a political crisis of significant proportion,
mainly because silver now began to slip in value as the Comstock
Lode and other western silver mines began to fully exploit
their significant contents. The price of silver moved toward
Through the years, there have been spikes. The Silver Purchase
Acts of 1890 (Sherman Act), the post-World War I silver melts
and sales to India, the 1980 Hunt Brothers "run"
to attempt to corner the market - and even the 1998 Buffett
move and the Gates purchase of 1999 are part of the legend
of silver's pricing.
If Buffett's entry raised the market significantly, so did
Gates's relatively minor purchase. Both in each case the market
reacted because of belief that both men have strong financial
positions and are, or could be, significant players in any
long term for silver's economic future.
Looking at silver's long term price prospects, it is still
along way from the $48 an ounce that it obtained as a metal
when the Hunt Brothers attempted to squeeze the market in
1980. Gold, now around $1,000 an ounce, was then in the $800
an ounce range, and silver coins of every description were
One of the intervening sources has been the U.S. Mint's own
silver eagle program, a one ounce round nominal legal tender
coin designed to hit the investor market. Over 150 million
have been sold since 1986; since 2000, sales have averaged
nine million uncirculated coins each year.
The demand was so substantial that it drained out the last
of America's once great silver reserves - the legislative
source for the silver eagle program. By early 2002, it was
apparent that demand would end the supply by mid-year. In
a concentrated study of brinkmanship, the Senate and House
acted quickly to assure that there would be a continued supply
of the world's most popular silver bullion coin, the American
Eagle, by agreeing to allow the Treasury Secretary to go into
the commodity market to obtain metal to strike the coins.
On June 28, the House of Representatives initialed its approval
stamp on S. 2594, the Support of American Eagle Silver Bullion
Program Act, in a unanimous consent vote, just a day after
the House voted 417 to 1 in favor of H.R. 4846, entitled the
"Silver Eagle Coin Continuation Act of 2002."
Both measures addressed the same problem: after selling millions
of ounces of one-ounce coins that have generated more than
$264 million in profits over the previous seven years - and
lots more since its initiation in 1986 - the nation's silver
stockpile, its source for precious metal, was all but depleted.
Where silver goes from here is anyone's end game, but the
trend line is clear: it's out of the backwater, and "Hi-o