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Cheap Shots: Beating up on Poor Old Silver

By Franklin Sanders
Editor, The Moneychanger
Jun 2, 2005

Several of my subscribers have sent me an article by Paul van Eeden that appeared on Kitco on May 13. I don't know Mr. van Eeden,, never heard of him before, but must respectfully disagree with him. Besides, if I didn't answer this article I fear some of y'all might come lynch me.

It's no new thing for people to take cheap shots at poor old silver. Professionals have been doing that for the past 130 years and more. Some criticisms strike home, but many miss the mark utterly. Most of Mr. van Eeden's darts fall into that latter void. I'll just quote his words in italics and then comment.


"Silver bugs believe that, like gold, silver is money. They also believe that the silver price is going to vastly outperform the gold price because of silver's supply shortage. But silver is not money; it's a commodity whose price is far more dependent on industrial demand than on anything else. However, because the silver market is so small, it is entirely possible for silver investors to create their own self-fulfilling prophecy. You need to be nimble, and remember to sell, to take advantage of such an increase in the silver price."

What precisely is "money"? Unhappily, Mr. van Eeden never condescends to define it. He just makes assertions -- "gold is money, silver is not" -- then reasons circularly from there. Unfortunately, proof wants something more than his mere say-so.

Small wonder he avoids defining money, since money today is the world's most undefined subject. As a matter of what the world today practices, what society accepts as money, neither gold nor silver is money. Plastic is, and bank credit. Gold's status as "money" exists officially only because central banks hold it in their reserves.

"Officially" -- by statutory law -- the meter is the unit of measure in the United States. Nobody, however, uses them. Everyone uses inches and feet and yards and miles, and stubbornly clings to these ancient measures in the teeth of all government arguments to the contrary that "meters are good for you."

Both gold and silver remain "money" in the same way that "miles" remain the measure of our hearts and minds. We know what they are. We know what they mean. We trust them. We weigh them in our hands. We know that a six foot three man is a big piece of a man, but what is a 1.905 meter man? Why, he ain't even a full two of anything. It makes sense to us that twelve inches measure good King Henry's foot, or an inch equals three barleycorns laid end to end. But who can fathom 1/1,000,000th of the distance from the equator to the pole? Like today's imaginary money, it's just makes your head hurt trying to visualise it.

Mr. van Eeden points out that most of the demand for silver is industrial, but what does that prove? Much gold is also used in applications other than coins or stored bars. Of gold's yearly production, about 75% goes into jewellery. That's hardly "monetary" demand. And if silver's industrial demand might be curtailed by swooning economic conditions, what about the demand for gold jewellery?

Mr. van Eeden neglects to note that because of gold's vestigial official monetary use, most of the aboveground supply lies in central bank hoards (they claim, anyway). Silver, however, is distributed in humanity's hands around the earth. Thus the authorities find it much harder to manipulate and suppress silver's price, as opposed to gold.

The silver market's "smallness," far from being a drawback, constitutes one of silver's greatest attractions. Because the market is so small, it needs only a relatively small injection of demand, interest, and money to make it fly.

Likewise, the "self-fulfilling prophecy' charge could be laid against most investments, especially the small and illiquid markets for junior mining shares. These shares are far more likely than silver to fall prey to "self-fulfilling prophecies" and hordes of predatory promoters.


"Annual mine production of gold is about 80 million ounces while annual mine production of silver is roughly 600 million ounces, yet gold mining revenues are eight times more than revenues from silver mining at current metal prices."

It's hard to grasp how or why Mr. van Eeden considers this a telling criticism of silver. So mining gold generates greater revenue than mining silver. So, what's the point? In fact, the very smallness of most silver mines compared to gold projects works in silver's favour, since it keeps silver mines and silver supply off the market until prices rise substantially.

"Why is gold expensive and silver less so? Because gold is money and silver is primarily an industrial commodity.

Whoops! By this test platinum and diamonds are also money, and iridium, because they are all more expensive than gold.


"Even though silver has, from time to time, been used as money, its chemical and physical properties make it less desirable than gold as a monetary asset. Among other things, silver oxidises readily, and it is far more abundant than gold."

Here's a strange perspective on things from Mr. van Eeden. No less a monetary expert than Nobel Laureate Milton Friedman admits, "The major monetary metal in history is silver, not gold." The high weight/value ratio of gold (which Mr. van Eeden claims makes it "money") has been precisely why men have preferred prefer silver to gold in daily use. Who buys a loaf of bread with a thousand dollar bill?

As far as its chemical properties are concerned, silver does oxidise more readily than gold. So, what's the point? That doesn't make it 'less desirable as money." It's not like silver catches fire in the presence of oxygen.

And silver is more abundant that Gold. Again, what's the point? There's probably 17 times as much silver as gold in the earth crust, but so what? There always has been.


"Annual fabrication demand for silver is well in excess of eight hundred million ounces a year, of which roughly forty percent is used for industrial applications, just over twenty percent for photography, thirty percent for jewellery, and the rest (less than five percent) for coins and medals.["]

The unique chemical and physical properties of silver that make it virtually irreplaceable in most use don't constitute an argument against, but for, silver. Unlike gold, silver is steadily consumed by industrial use. Other things being equal, over time this consumption will make silver more valuable against gold.

"Because annual fabrication demand exceeds annual mine supply, silver investors believe much higher prices are in store. However, since industrial applications and photography account for roughly two thirds of annual silver consumption, fabrication demand plays a key role in the silver market. The silver price is thus very dependent on changes in annual fabrication demand. As a result, continued economic growth in North America and the rest of the world should help the silver price remain strong and perhaps move up, whereas an economic downturn could be quite detrimental to the silver price."

Mr. van Eeden reasons that because by his unsupported assertion that silver is not money, it needs a strong economy and strong industrial demand to rise. He misses the point. Industrial demand, even under economic stress, changes slowly. Only sudden investment ("monetary") demand makes silver's price move because it hits (1) at the margin, (2) suddenly, and (3) adds new demand. Exactly the same holds true for gold.


"If we look at gold and silver in US dollars, then the relative strength in the dollar since the early Nineties should have had the same effect on both metals if they were priced as money, and their charts should look the same. But they don't.

Silver actually performed much better than gold during the Nineties because demand for silver supported its price during the high-tech boom in the latter part of the decade. When the tech boom went bust, silver suffered, and its price barely budged from 2001 to 2003 while the gold price rallied strongly."

Again, Mr. van Eeden either misses the telling point, or apparently misses the facts.

In the 20th century, silver has always underperformed gold in bear markets, and outperformed in bull markets (the 1930s excepted, due to government manipulations). Why would silver and gold prices react the same to the dollar? Competing monies don't behave exactly the same in their pricing because independent factors peculiar to each affect their pricing differently. In silver's case, it took nearly 20 years to work off the oversupply (1 billion ounces plus) brought onto the market by the bull market that peaked in 1980.

In fact, silver didn't much outperform gold in the 1990s. Silver began the decade at a 75:1 ratio, rose to 100:1 in 1991, and then very gradually descended to 65-70. Only when Warren Buffett suddenly bought 130 million ounces between summer 1997 and January 1998 did the ratio sink below 65 for its very brief visit to 42.5. The rest of the decade the ratio remained trapped between 50 and 60. In absolute terms, silver began the decade with a 1990 average Comex settlement of 4.82 and ended 2000 with an average settlement of 4.96 (2001 World Silver Survey, p. 82). The highest average price of the decade occurred in 1994 at 5.28. The Nineties were not silver's decade. (By average price, gold lost 27% from 1990 through 2000. But that's about the only thing that "just breaking even" could beat.)

As far as the impetus that the high-tech boom gave silver, it may exist in Mr. van Eeden's mind, but not in the statistics. Silver's saucer bottom begins in February 2000 and ends in November 2003 when it finally conquered 5.25. Silver in electronic & electrical uses peaked in 2000 at 5,114 tonnes, it's true, and dropped in 2001 to 4,119 tonnes. (2004 World Silver Survey, p. 79, Table 5a) However, that 32 Moz. drop amounted to only 3.4% of total demand the year before, and not only electronic uses but all uses shrank in that year. (2004 World Silver Survey, p. 7, Table 1). In 2002, the next year, electronic demand had risen nearly to the 1999 level. Since silver from 1998 through 2000 was locked into a 5.60 - 4.80 trading range, it's hard to observe how high tech usage was boosting it. Since no big price rise occurred in those years, and since silver usage in all other categories increased every year from 1995 through 2000, it's hard to find that "support" from high tech.

"Since 2003, gold and silver prices have moved more or less in tandem, and that is a result of the weakening US dollar. However, if we see a change in the economic climate, the correlation between the two metals' prices can easily break down again."

Mr. van Eeden proves too much for his case. If both gold and silver moved up together solely because the dollar weakened, then what will happen to gold if the dollar strengthens? It will fare no better than silver.

However, it is not merely dollar weakness or strength that moves gold, but as Steve Saville has observed lately in The Speculative Investor, confidence in the dollar and other fiat currencies, to which both gold and silver serve as alternatives. When confidence rises, demand run out of gold and silver. When confidence wanes, demand run into silver and gold.

Why? Because people lose trust in fiat money, and they demand a safer alternative money. The investment demand for silver and gold is purely monetary. It is demand for "money," a demand to hold silver and gold as silver and gold, and nothing else.


"[B]ecause the silver market is such a small market in dollar terms, a relatively small amount of investment demand can cause the price to spike dramatically. And because fabrication demand is inelastic, fabrication demand will not decline due to the price increase.

So speculators buying silver in anticipation of a move upwards can easily create a self-fulfilling prophecy, causing the silver price to soar. But when they want to sell their metal to take profits, the same lack of liquidity that drove the price up will drive it right back down again.

This combination of a small illiquid market, inelastic demand and feverishly bullish investors could cause the silver price to outperform the gold price at some point. However, you must be wary of an ensuing collapse and remember to sell. Silver's day in the sun might be very short-lived.

Mr. van Eeden rightly observes that (1) the silver market's smallness and (2) the inelasticity of silver's industrial demand make silver very volatile, reacting violently to sudden investment ("monetary') demand.

However, from that it does not follow that this is merely a "self-fulfilling' prophecy any more than the same would be true of the gold market, which is small compared to bonds or stocks or other currencies. As far as the market becoming illiquid at peaks, this is not as important for silver as it is for junior mining stocks, where both liquidity and demand can vanish at the drop of a newspaper article. Besides, it's not lack of liquidity, but lack of demand that drives markets. That's what a peak is.

However, the warning is well made. Every investor should attentively and watchfully scan the silver market for the ultimate top. Much better to get out before the peak brings liquidity or demand problems.

The chief issue here is, what drives the prices of silver and gold? Aren't both "money" because markets -- human beings -- have preferred and used them as money throughout human history? Not even government-backed central banks with their manipulatory might could rob them of their monetary character over the past 130 years. It clings to them as an hallowed ancestral memory. Certainly, central banks have suppressed the metals' use as currency, as well as their prices -- for a time. Yet because they offer incorruptible alternatives to rotten fiat monies, whenever confidence fades, then monetary demand for silver and gold blooms.

Is gold the only money and silver only a "commodity"? It matters not what Mr. van Eeden thinks, or what I think. History shows that investment demand flows into both metals. Facts also show that silver outperforms gold when that happens, two to four times.

Does historical performance guarantee future performance? Of course not, but it does present the strongest argument in the current market.

Poor silver -- you've been trashed by governments, central bankers, and experts for 130 years. They've one everything possible to dethrone and demonetise you. Yet you still keep chugging along. And as long as men desire stability and safety, I hazard that you will keep chugging.


Copyright ©2005 The Moneychanger

June 2005
-- F. Sanders


Franklin Sanders has edited and published The Moneychanger newsletter and brokered physical gold and silver since 1980.

You can find more of his articles at at

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