Silver Supply: The Great Illusion

Diminishing silver supply is THE best reason for owning silver. There simply isn't much left for the retail investor, and it’s getting harder to find.

This shortage will undoubtedly be felt by industrial users soon. Despite the state of the economy, silver prices will begin to reflect demand. For the investor, time is running out.

The Silver Supply Deficit

Silver is misunderstood, as is any rare, strategic natural resource. For many years, the world has used more silver than it has produced, yet most people assume that silver is abundant.

This was certainly the case before the industrial revolution. Since then, we've had a dramatic shift in perception, just as the mainstream investor begins to catch on, and yet before the inevitable price explosion.

Over the last two generations, major government stockpiles of silver have been sold off for use by industry. Currently, though, the amount of silver mined each year is far less than the amount used. Industrial users will soon begin to feel the pinch of longer delivery times. When this happens, silver prices will skyrocket.

Soaring prices will mean the end of cheap silver. This is why it is so critical to act now.

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Here is a good source for silver supply data.

Silver vs. Gold

Remember that silver is rare compared to gold. Even long-time silver investors often overlook this fact. Even though gold is a highly desired item, it is NOT an industrial commodity. Whereas gold is desired, silver is needed. This makes it even more critical to take action quickly.

Consider that the world’s investors get their main clue from price. Because gold has traded at more than 50 times the price of silver, investors assume that gold is more rare than silver. Yet there is 200 times more gold available than silver in dollar value.

Only 35% of silver supply comes from pure silver mines. The rest is the by-product of gold, copper, zinc, and lead mining. In the wake of digital imaging, the recycling of photographic scrap for silver has flattened out. Return of silver jewelry dropped by 20% in 2007, and is expected to remain at similar levels for some time.

(We tend to avoid direct investment in silver mining stocks)

Given the large market cap in gold compared to silver, even if all the owners of silver decided simultaneously sell their silver and buy gold, this would only amount to 0.5% of the gold market cap.

In contrast, if only one half of one percent of gold owners decided to switch into silver, that would represent 100% of the silver market cap. This would have an enormous impact on the price of silver. Just imagine that price ratio reversed.

The Economy

When it comes to silver supply, the economy simply doesn’t matter. In a strong economic scenario, surging industrial demand and depleted inventories would propel silver, creating larger annual deficits and forcing prices significantly higher. In a weak economic scenario, many base metal producers would slow production, and as a consequence, the world silver supply would decrease.

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Mining is already expensive, but 65% of the world's silver comes as a byproduct of other metal production. As a result, silver production cannot be increased without much disruption to other mining activities. That would mean substantial overproduction of copper, lead, and zinc.

What Happens Next?

Silver deficits now run between 50-100 million ounces per year. The only way to bring the supply and demand for silver into balance is higher prices. This is where the dynamics of the silver market become very exciting for investors.

Think of it—the world has been depleting its silver inventory for more than 60 consecutive years, diminishing the only source of what is available for investment. And only now have we begun to collectively see that silver is a good investment.

Even as premiums rise and available retail supply dwindles, there is still time. Remember, the very best form of silver you can own is physical and in your personal possession

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