Silver Mining vs. Gold Mining: The Dynamics Explained by Jeff Nielson, Sprott Money
Understanding the dynamics and the differences between the silver mining industry and the gold mining industry is simple. It’s all in the numbers. What is somewhat more challenging is to decipher what these numbers really mean.
A reader recently made a valid observation in endeavouring to “explain” the current, extremely skewed , gold/silver price ratio . Historically (for more than 4,000 years), this ratio hovered at around a 15:1 level. Over the last 100+ years; this price ratio has exploded, at times exceeding a ratio of 80:1.
It was noted by the reader that on a cost per ounce basis today, it is more expensive for the mining companies presently in operation to mine their gold deposits, versus the relative cost-per-ounce for companies presently in operation to mine their silver. Thus, according to this reasoning, gold/silver prices should be skewed to such an absurd degree.
It seems like a reasonable argument. Indeed, at first glance the logic seems almost irrefutable. It is only when we step back, and view precious metals mining from a broader, long term perspective that we see that what this observation actually proves is something quite opposite to its surface appearance.
First, some context. Gold and silver are deemed to be “precious” metals because in relative terms they are much, more scarce than industrial “base metals”, such as lead, zinc, iron, and even copper. However, gold, in particular, is found in most regions of the world, in varying concentrations. Silver, for reasons known only to the geologists, is more abundant in the New World: North and South America. On average, silver exists at a 17:1 ratio versus gold in the Earth’s crust.
Humanity has mined these metals for well over 4,000 years. Until approximately a century ago; the world has always gotten most of its silver from silver mines. Similarly, we get most of our iron from iron mines. We get most of our copper from copper mines. And we get most of our gold from gold mines.
This is elementary logic. We require metals for industrial purposes, or (in the case of gold and silver) also for use as money and jewelry. The most efficient means to acquire these metals is to search for where they are found in greatest abundance, and then mine those deposits.
Then, suddenly, a little over 100 years ago, the dynamics of precious metals mining began to change, for the first time in more than four millennia. While the world continued to get the vast majority of its gold from gold mining, we began to get a smaller and smaller percentage of our silver from silver mines .
Instead, we began getting a greater and greater percentage of our silver as a “byproduct” of other mining. Many of the world’s richest ore deposits are polymetallic, meaning the ore being mined contains several metals, in significant percentages. Thus the world began to get more and more of its silver from, in particular, copper mines and lead/zinc mines.
Eventually, we started to get a majority of our silver via this byproduct production. For the past, several decades, we have gotten at least 75% of our annual supply of silver as byproducts, and often more than 80%. How and why did this happen? It’s all in the numbers.
Silver Mining vs. Gold Mining
Look at the chart above, and what do we see, starting a little over 100 years ago? We see the price of silver, in real dollars, start to go lower and lower and lower. The reason for the steadily falling price of silver 100 years ago is the same as the reason for the steadily falling price in recent years: price manipulation. Those readers wanting/needing more education in this area would be well-served by reviewing Charles Savoie’s chronology, titled “The Silver Stealers” .
Putting aside the reason for the relentless decline in the price of silver, the effect of this relentless price-destruction was obvious. It became more and more “expensive” to mine silver (because of the perpetually declining price). Thus, one by one, the world’s silver mines began to close.
When prices hit their despicable bottom in this Century of Manipulation, the banking oligarchs had driven the price of silver to a 600-year low, in real dollars. The result of this systemic crime was that well over 90% of the world’s silver mines were driven out of business, and the mines were mothballed, or simply abandoned.
As the world’s silver mines were driven out of business by the perennial price-manipulation of the banking crime syndicate , a greater and greater percentage of the world’s silver came as a byproduct of other mining, by default. This is the only reason why we do not continue to get most of our silver from silver mines, just as humanity has done for more than 4,000 years.
Obviously, this is a dynamic which could/can be reversed. If the price of silver began to steadily rise, and even approached its fair-market value, we would see this trend completely reverse . More and more silver mines would go into production. A steadily rising percentage of our silver would come from silver mines, and soon the vast majority. Equilibrium (and sanity) would be restored to precious metals mining
The price of silver is no longer below $4/oz, as it was at the original 600-year low. Today, after a slight recovery, the price of silver teeter-totters around the $20/oz level. Many readers may look at this elevated nominal price for silver and ask why we have not seen this dynamic already start to reverse.
There are two facets in response to such thinking. First of all, if silver was priced at an historic norm (versus the cost of labour), a fair-market price for silver today would be somewhere around $1,000/oz. Some readers may choose other metrics for estimating their own “fair-market value”, but by any rational calculation, we would still be dealing with some three-digit number as a price for silver.
Relative to those numbers, the current $20 (USD) price is pathetically low, which is why most of the world’s silver mines remain closed, and many large deposits of silver (at lower grades) remain un-mined. The dearth of silver mining is further evidentiary proof that silver is grossly under-priced – and proof that this under-pricing can only be the result of price manipulation.
As noted in a previous commentary, it has now been established that the silver market has had a supply deficit for roughly 30 consecutive years , if not longer. This is unprecedented, throughout history, anywhere else in the world’s spectrum of commodities.
What is supposed to happen, when any commodity experiences a supply deficit? Elementary supply/demand analysis provides us with the answer. The price rises. This rise in price discourages demand, while it stimulates supply (because it becomes more profitable to produce). The price continues to rise until the deficit is eliminated, and equilibrium is restored. The economics term for this principle is price discovery.
This is what happens in all legitimate markets. The fact that this has not happened, the fact that we have not had real “price discovery” in the silver market for three decades, is absolutely conclusive proof of systemic price-manipulation. There could never be any legitimate explanation for the complete absence of price discovery in any market, for three decades .
There is only one reason why it has been possible to sustain this price-manipulation, at such an extreme level, for three decades and more. It is because as “precious metals”, both gold and silver tend to be conserved. Thus, over a period of more than 4,000 years, humanity accumulated tremendous stockpiles of gold and silver. How the oligarchs acquired control of much of these stockpiles, and how much (silver) remains is the subject matter of another discussion.
The bottom-line is that it is only through bleeding these massive stockpiles onto the market, year after year, decade after decade, that silver price-manipulation could be sustained, at a cost of decimating the global silver mining industry. The other reason why a $20/oz (USD) price for silver is not remotely sufficient to restore the world’s silver mining industry can be seen by looking at the (familiar) chart below – of the Bernanke Helicopter-Drop.
The point here should be obvious. After the most-extreme episode of monetary dilution of any major nation in our modern history; in real dollars, today’s $20/oz US nominal price for silver is lower than the sub-$4/oz (nominal) price which we had twenty years ago. In real dollars; the price of silver remains mired at a 600-year low – yet we have some people referring to recent, modest price action as “a rally” .
The perversion here should be obvious to most readers, even without the benefit of the preceding analysis. Ask the bankers (or their media sycophants) why we get most of our silver as a byproduct of other mining, and you’ll get some variation of the response that there are not enough high-quality deposits of silver to support more silver mines.
This is absurd. If there is “not enough” silver to support more silver mines, why do we continue to get the vast majority of the world’s gold from gold mines – even though the price of gold is also manipulated lower (to a lesser extent)?
As previously noted, silver is 17 times as abundant as gold. If it was gold where most of the world’s supply came as a byproduct, this might be rational – because of gold’s considerably greater scarcity. There can be no rational/legitimate explanation as to why we get most of our gold from “gold mines”, while the same is not true with silver.
Price silver at $1,000/oz (USD), or price it even at $200/oz, and keep it there (in real dollars), and we would see a return to sanity and legitimacy in precious metals mining. Once again the world would get the vast majority of its silver from “silver mines”.
The near-extinction of silver mining around the world is absolutely conclusive evidentiary proof of the extreme, sustained, downward manipulation of the price of silver. Equally, if (when) the world once again is getting most of its silver from silver mines, this will be evidentiary proof that silver is at or approaching its fair-market value. Until we see this occur, we will continue to have irrefutable proof of the criminal price-manipulation taking place in this sector.