17/11/2012
When
a reader (and fellow silver-mining investor) recently expressed his
frustrations on our Forum regarding the absurd valuations which most of
these miners currently exhibit, I decided it was once again time to try
to shed some light (and sanity?) on this subject.
When I began investing in these silver miners many years ago; one of
the first anomalies to which I was introduced was that the vast majority
of silver produced in the world (more than 75% at that time) was
produced as a “byproduct” of other mining. While I immediately
recognized that this was an extremely important factoid, at that time I
lacked the level of understanding necessary to glean its true
significance.
Since that time, the ramifications of these incredible parameters in
silver mining are now apparent to me. Sadly, however, this important
analytical point does not seem to be as apparent to others. While I’ve
covered this subject matter once already in a prior commentary, the lack of general awareness in this area clearly merits repetition of this analysis.
The basic parameters for the mining of metals on our planet are
simple and clear. With nearly every commercially-produced metal on the
planet, the vast majority of that metal is produced via “primary” mining
– mines which “primarily” produce that particular metal. The reason for
this should be obvious.
At the large scale at which the modern, global economy operates; the
need develops to secure large supplies of these metals. For purposes of
both efficiency and a secure supply-chain; it is natural/preferable to
seek to develop “copper mines” to meet copper demand, “zinc mines” to
meet zinc demand, etc.
We would thus expect all of these commercially/industrially consumed
metals to have production models where the vast majority of supply came
from primary mining, with the metal which was produced as a “byproduct”
(through the primary mining of other metals) being merely incremental to supply.
Indeed, with any/every metal for which there is this
commercial/industrial demand, there are only two market paradigms where
we would not expect the majority of (new) supply to come from primary mining, but rather as a byproduct of other mining:
a) Metals with a low level of demand, and/or only limited or specialized uses;
b) Metals which are found in either such small quantities or trace amounts that “primary” mining is not commercially feasible.
It is abundantly obvious that silver doesn’t come close to meeting
either of those two conditions. With respect to its level of demand and
its multitude of commercial/industrial applications; silver is literally
in a class by itself.
With its aesthetic appeal (it’s the brightest of all metals) and
malleability, it is (along with gold) the world’s best and oldest form
of real “money”.
On that basis alone there is significant investor demand for silver.
Meanwhile, with new patents for silver-based industrial applications
outnumbering those of any other metal; industrial demand for silver is
large, strong, andgrowing.
The demand parameters are unequivocal: the majority of silver mined
in the world should come from primary silver mining. This leaves the
issue of supply. Is silver so rare in quantity and/or purity that
primary silver mining is not feasible? Absolutely not.
Again the evidence is totally unequivocal, and can be demonstrated
either from an historical perspective or via current, empirical data.
Historically, the world used to be full of silver mines. From the 16th century until the latter half of the 20th century; the vast majority of the world’s silver was always supplied through primary silver mining.
What happened toward the end of the 20th century? Nothing much…other than the price of silver being driven down to a 600-year low (in real dollars)—and held there. At this point the realities of silver mining become just simple arithmetic.
If the price of copper was driven down (and held down) at a 600-year
low, there would soon be few if any primary copper mines in the world;
and the vast majority of copper would have to come as a byproduct of
other mining. If the price of nickel was driven down to a 600-year low,
the world’s nickel mines would quickly be driven out of business. And so
on.
Is there so little silver around that it cannot be located and mined
at large-scale, commercial levels? Absolutely not. While silver is
admittedly a “precious” metal, it is roughly 17 times more abundant in
the Earth’s crust than gold; and throughout history the majority of the
world’s gold has always been produced via primary gold mining.
Indeed, the parallels (and differences) between silver-mining and
gold-mining are highly instructive. Despite being much less abundant
than the lesser “base” metals; throughout history gold and silver have
always been produced via primary mining. Even in the 1980’s and 1990’s
when (by remarkable coincidence) the price of gold had also been driven
down toward historic lows, most of the world’s gold still came from
primary mining.
Where the gold-mining industry and the silver-mining industry
differed was that the level of price-suppression with gold was never as
savage/extreme as occurred in the silver market, and so the primary gold-mining industry survived.
The historical evidence, recent empirical evidence, and simple
arithmetic/economics of global mining are crystal-clear. All
commercial/industrial metals should be supplied mostly through primary
mining (subject to the limited exceptions previously noted). This
directly implies an even more important principle: by
definition, the “fair-market price” for any metal is one which is high
enough to support primary mining as the dominant component of supply.
There can be no argument here. The only reason why gold can be
“primarily” mined and sold by the ounce whereas copper is mined/sold by
the pound is price. This, in turn, leads to another unequivocal
conclusion: the only reason why the majority of (new) silver supplied to
the market today does not come from primary silver mining is that the
price of silver continues to be suppressed far below its fair-market
value.
The same mining geologists scouring the world for gold, and generally
encountering it in concentrations of between one and five grams per ton of
ore, are locating silver (in large deposits) at concentrations of
between 100 and 200 grams per ton – and sometimes more. If silver was
fairly priced in the marketplace today, the majority of silver
production would be coming via primary silver mining instead of as a
byproduct of other mining.
This is a conclusive “smoking gun” pointing toward the manipulation
of the price of silver in the silver market. The fact that the laughably
myopic CFTC can see “no evidence” of silver-manipulation despite
claiming to have focused all its regulatory/analytical prowess on this
market for roughly the past five years only undermines the legitimacy of
that institution still further.
Despite the rise in the price of silver from under $4/oz (its
600-year low) to over $30/oz, a large portion of the world’s
small-but-growing number of primary silver miners are struggling just toturn a net profit. Yet despite the economic realities of supply and demand, all we get out of the mainstream media is repeated, idiotic rhetoric about some mythical “silver bubble”.
The absurd/incredible paradigm of modern silver mining is mirrored by
parallel imbalances and absurdities in the world of silver. Part II of
this series will look at the Investment Paradox which has resulted from
the serial suppression of silver prices; while Part III will focus on
the Market Paradox – and yet again shine the spotlight on glaring
evidence of silver manipulation.
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