By: Eric Sprott
As long-time students of precious metals investing, there are certain
things we understand. One is that, historically, the availability ratio
of silver to gold has had a direct influence on the price of the
metals. The current availability ratio of physical silver to gold for
investment purposes is approximately 3:1. So, why is it that investors
are allocating their dollars to silver at a much higher ratio? What is
it that these “smart” investors understand? Let’s have a look at the
numbers and see if it’s time for investors to do as a wise man once said
and “follow the money.”
Average annual gold mine production is approximately 80 million
ounces, which together with an estimated average 50 million ounces of
annual recycled gold, totals around 130 million ounces available per
year. In comparison, annual mined silver production has averaged around
750 million ounces, while recycled silver is estimated at 250 million
ounces per year, which adds up to approximately 1 billion ounces. Using
this data, there is roughly 8 times more silver available to buy than
there is gold. However, not all gold and silver is available for
investment purposes, due to their use in industrial applications. It is
estimated that for investment purposes (jewelry, bars and coins), the
annual availability of gold is roughly 120 million ounces, and of silver
it is 350 million ounces. Therefore, the ratio of physical silver
availability to gold availability is 350/120, or ~3:1.1
We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Without understanding their dynamic relationship and their implications is difficult to predict how things might unfold. The economic future depends on the interplay of both these forces. From the point of view of their final effects, inflation and deflation are, respectively, the devaluation and revaluation of the currency unit. The quantity theory of money developed in 1912 by the American economist Irving Fisher asserts that an increase in the money supply, all other things been equal, results in a proportional increase in the price level [1]. If the circulation of money signifies the aggregate amount of its transfers against goods, its increase must result in a price increase of all the goods. The theory must be viewed through the lens of the law of supply and demand: if money is abundant and goods are scarce, their prices increase and currency depreciates. Inflation rises when the monetary aggregate expands faster than goods. Conversely, if money is scarce, prices fall and the opposite, deflation, occurs. In this case the monetary aggregate shrinks faster than goods and as prices decrease money appreciates.