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Thursday, January 13, 2011

500 dollar an ounce silver? Sure! That is a conservative number!

What happens when, during the next year, "inflation" starts to become a normal part of our vocabulary?

It is already finding its way into the articles of rhe mainstream press. What happens when it becomes the topic of bull sessions at the office, and instead of swapping hot stock tips, people start swapping stories on how to beat the declining value of the dollar? One very common sense result will be that silver will become an INVESTMENT item to normal schlubs like me and you. Not to investment bankers, and hedge funds (they are already playing), but little people, with mortgages and college tuition and car payments and 401 K plans. When THAT public faces the fact that our earning power is on a toboggan ride downhill, then the investing public will wake up and start buying silver to protect from inflation. This will occur in stages, of course. So, long before 10-20% of people buy silver, at least 1% of the American public will buy silver. So, let's look at what would happen to the silver price when one per cent of the American investing public enters the silver market.

The amount of money in US Banks is about $18 trillion. 1% of that is $180 billion. Let's make an assumption that this 18 T is owned equally by the public (nowhere close, actually, but skewing the numbers here won't mess up the illustration, you get relatively the same numbers if you say that every household in America drops in 2,000 dollars). So, 180 billion dollars of money goes shopping for silver.

So, how much silver is here to buy? Very little, in fact. Silver is an industrial metal. 600 million ounces is consumed annually, and about 700 million ounces is mined. In fact it's mostly all been consumed, so most of what is available to buy each year is the annual new mine supply which is 700 million ounces..... ASSUMING ALL THAT GOES TO INVESTMENT AND NONE TO INDUSTRY.

So, we have $180 billion (or $180,000 million) chasing 700 million ounces of silver. Divide that by 700 ounces of silver and we have a price of $257 per ounce, ONLY ON INVESTMENT DEMAND FROM 1% of the US populace.

But that price would mean that there is no newly mined silver left over for any industrial use, and that nobody else outside of the USA could buy any of the world's newly mined silver. Clearly that can't happen; those two groups would continue to buy silver, competing to buy, and driving up the price even more. That is AT LEAST a double, or over $500 an ounce.

Oh, by the way, the 1980 high for silver was $50/oz. That was when M3, money in the banks, was about $1.8 trillion. Today, the monetary base has increased about ten times higher. Thus, the true inflation adjusted peak for silver would be $500/oz.

There is still room to buy. Don not listen to that crap about gold OR silver being in a "bubble." We are nowhere near that place yet. We have a great deal of economic pain to endure before we get there.


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