CTAB Comments Regarding Silver Price, Demand

By: Bill Cara Thursday, April 16, 2009 12:06 PM


Here are some facts as derived from the USGS website and Kitco.

In 2008 the average gold price($871.96/oz) was 58.2 times the average silver price ($14.99/oz). At the same time silver production from mining (672 Moz) was 9 time that of gold mine production (74.9 Moz) and silver reserves (8.68 Billion oz) were 5.7 times more than gold reserves (1.51 Billion oz).

Looking at this another way, silver reserves are equivalent to 12.9 years of mine life at current production rates whereas gold reserves are equivalent to 20.2 years of mine life at current production rate. By this measure, silver can be considered more scarce than gold.

So if you were to consider gold and silver to be equal in terms of their utility as a precious metal or store of value and equal in terms of their industrial utility, then you would consider silver to be undervalued based on their relative scarcity and metal value.

So then I thought, how do these ratios compare to other metals such as copper and zinc.

The current gold price ($900/oz) is 7,200 times higher than the current copper price ($0.125/oz or $2.00/1b). Copper production in 2008 (15.7 mt) was 6,700 times greater than gold production and copper reserves (550 Mt) were 11,700 times greater than gold reserves. Copper reserves were equivalent to 35 years of mine life compared to 20.2 for gold.

The current gold price ($900/oz) is 24,000 times higher than the current zinc price ($0.0375/oz or $0.60/lb). Zinc production in 2008 (11.3 mt) was 4,850 times greater than gold production and zinc reserves were 3,830 times greater than gold reserves. Zinc reserves were equivalent to 15.9 years of mine life compared to 20.2 for gold.

A direct comparison of copper and Zinc indicates that the copper price is approximately 3 times that of zinc. This would suggest that zinc would be more scarce, but the data indicates that copper production (15.7 Mt) was 1.4 times greater than zinc production (11.3 Mt) and copper reserves (550 Mt) were 3.05 times greater than zinc reserves (180 Mt).

So it can be seen that from the supply point of view, zinc is more scarce than copper but the price of copper is three times that of zinc. This tells me that scarcity of supply is not the overriding factor in metal prices and that demand has a large role to play and in this case is the overriding factor. Obviously the demand for zinc is much lower than copper and if the demand for zinc was ever to approach that of copper, you would expect the zinc price to soar to well above that of copper due to it’s relative scarcity of supply.

So going back to the relationship, the imbalance between the ratio of supply and the ratio of their prices is most likely due to the current demand for each metal. If the demand of silver was ever to become equivalent to that of gold, we could expect the price ratio to decrease from 72:1 currently to about 9:1 based on production or about 6:1 based on reserves. This would be achieved either through a massive decrease in gold price or a massive increase in silver price, or a bit of both, depending on the change in demand.

*There is an indirect correlation between the metals themselves and so with the other commodities like Oil. It is interesting to see the relationship of the metals and understanding this relationship can help one make good investment decisions.

IS THERE A SIGNIFICANCE TO THE GOLD/OIL RATIO?

Is there a hidden connection behind the Gold to Oil ratio? Some would say yes. We have often called Gold the King of Money, while Crude Oil (sometimes called Black Gold) is clearly the King of Commodities. Many hold the view that both Gold and Oil are a direct reflection of US dollar value ; as the value of the dollar falls, so gold and oil rise. From 1999 to 2009 gold has risen from $255 to as high as $1,000 while oil has risen from $12 to its peak of $147.

In 1999 when the commodity bull market began, the ratio between the gold and oil price was 21:1 (where it would take 21 barrels of oil to buy 1 oz of gold). Does this ratio offer us an indication of something deeper, or is it simply some arbitrary variation between the King of Money and the King of Commodities?

The last several years the ratio has been reasonably stable, ranging between 8:1 to 10:1. For example, in early 2006 the bull market in commodities was now seven years old; Gold was trading at $560, Oil at $62 and the ratio 9:1.Two years later in early 2008 Gold was $835, Oil $100 and the ratio 8.5:1. At this point it could be argued that the two had risen together, each equaling reflecting a loss of value in the dollar.

However the end of 2008 shows a very different picture. Now Gold was trading at $844 but Oil was at $39.50 and the ratio all the way up to 21:1. What had changed for oil? Global demand hadn't fallen significantly, nor had the fact changed that we are only discovering 1 barrel for every 8 we consume.

Did the ratio change signify a simple slowdown in world trade? Or could it be indicating a greater importance being placed on money, a representation of 'value' than on commodities, a representation of 'things'?

Where is the ratio now? Today the ratio was 17.7:1 and trending back to its average.

*Now do you understand why there is an Oil price watcher at the bottom of this blog and also a Precious Metals price watcher? These commodities are all 'in this together' and if you have spotted the similarities and trends then blessed are ye...