Silver: There's Never Enough!
(There's Always Enough)
Silver Stock Report
by Jason Hommel, January 15, 2008
Mr. Dines of the Dines letter which I recommend
and subscribe to, has provided me a good occasion to write today's
letter. Mr. Dines writes of Thomas Malthus: "This British economist
was ostensibly the first to link human growth to the limits of our
planet." And since many of my readers have called me a Malthusian
because I discuss "the shortage of silver," I thought I'd discuss the
topic of scarcity.
But Malthus was wrong. Farming methods improved with technology, and probably also due to the economic incentives that would come with scarce food, which would drive up prices, and also profits. Essentially, the profit motive kept and keeps men from starving. You could have learned this economic lesson from Joseph's experience in Egypt, in Genesis, as men will pay a very high price for food during famines, if they have to.
Today, the world has more than enough food, and famines are most often the result of dictators who try to isolate their economies from the world, and who reject free market economic solutions to problems.
Malthus was wrong because he did not trust that the market would find solutions to the problem of scarcity.
Malthus was not the first to predict famines, Jesus predicted famines in Matthew Chapter 24, about 1800 years before Malthus. Jesus predicted famines, probably because Jesus could rightly predict that people would not understand or trust in God's ways enough to be able to practice free market economics.
Men have always feared scarcity, ever since we were thrust out of the Garden of Eden. And Jesus, it seems, tried to teach men about abundance through the miracles of creating wine from water, and multiplying loaves of bread and fish.
Some might say that Lot, Abraham's cousin, was one of the first men to fear that the carrying capacity of the earth might not be enough for their excess.
Abraham's problem of "not enough land" was easy to solve--he would part with Lot, and let Lot choose first. That solves it, because that way, Lot could not argue that Abraham had the best land. Abraham chose the solution that I would call, "first come, first served" and was happy to take the leftovers, because Abraham knew that there was more than enough.
But that was not the first Bible story illustrating both the problem and solution to "scarcity".
Noah in Genesis chapters 7 and 8, built the ark and saved his family of 8 from the global flood. Space on the ark was limited only to those who shared Noah's values.
And that was not the first incident of scarcity either.
Prior to that, giants roamed the earth, the Nephilim, who used violence to take from other men.
But perhaps there was an even earlier incident?
Cain killed Abel after God showed favor upon Abel, and got jealous, or coveteous. Did Cain think that there was not enough of God's love for both of them?
And even earlier, there was clearly abundance in the Garden of Eden, but the restriction of one tree was enough to cause problems for Adam and Eve who had the wrong perspective on the forbidden fruit.
I think the running theme here is that a fear of scarcity is false, and that there is always enough, and more than enough, as long as people have the right values, the right perspective, the right understanding, the right approach.
For example, for decades, men have said that there is not enough gold or silver for the economy. I think they mean to say that they, themselves, don't have enough gold or silver, and they try to impart that notion of a false fear of scarcity and apply it to everyone else.
There is more than enough silver to run the entire world's economy, we would not even need any gold! We would just need to value silver highly enough, and that would solve the problem of "a number of limited ounces".
For example, the world economy runs on perhaps $50 trillion worth of paper money.
And there is, perhaps, 5 billion ounces of silver in the entire world that is recoverable in all form, including all jewelry and flatware.
Well, simple math shows that if silver were valued at $10,000 per ounce, then all the silver in the world would be valued at that same $50 trillion, and we could use gold for paving stones like they do in heaven.
I'm exaggerating, of course, because the world will never use gold as paving stones, nor value silver at $10,000 in terms of today's money (but maybe it will after a lot of inflation), but I wrote that to try to make the point; valuing silver highly enough can create a "heaven on earth" of plenty in the face of scarcity.
Scarcity is not the problem.
Bad values are the problem.
People have the wrong values, you see. In the global economy today, people don't value silver highly enough, and they trust fraudulent paper too much.
Or maybe people don't have enough in their own life because people value drunkenness over productivity. Or they value sleeping in over going to work on time. Or they value entertainment over learning. Or they value "keeping a job" over free trade. Or they value "gun restriction" over "gun rights". Or they value "a monopoly" over competition.
The problem is that people do not trust the solutions to the problem of scarcity. The solution is free market economics, which is based on the Biblical values of property rights.
Free market economics teaches us that government fixed prices don't work. Prices need to be free to change, as the market demands, and that higher prices solve problems of scarcity.
Higher prices best solve problems of scarcity, you see, because those who can afford to pay more are generally providing more, and earning more, and thus, a free market economy itself is best able to direct to whom anything scarce should go, which will be the most productive members of society, who are serving society's other needs the best.
I'm particularly disgusted to see mining companies sign long term offtake agreements at fixed, or below market prices with select buyers, because that is exactly the opposite of allowing the free market to allocate resources to whomever will become the highest bidder.
The allocation of scarce resources is not a problem as long as people have Biblical values, and value the rights of other people to freely enter the marketplace.
Now, I'm on record as advertising "The scarcity of silver". What I mean to say is that at today's prices, silver is scarce if big money wants to protect itself from inflation. At today's values, there is certainly not nearly enough silver to both protect big money from inflation and run the world's economy. But at higher values, silver can definitely do the job.
What I mean to say is that there is not enough silver at $17/oz. in the event that a billionaire wanted to buy $1 billion of silver at $17/oz. The reason is that $1 billion / $17 = 58 million ounces, and 58 million ounces is about the same as the entire world's investment demand for silver in 2006. A doubling of the world's investment demand would surely drive up the price, and thus, our hypothetical wanna-be silver-owner billionaire would be confronted with a scarcity of silver at $17/oz.
Let me explain in more precise detail about how the silver market works.
The coin shops who are "market makers" in the industry regularly buy silver from customers at about $.50 to $1/oz. under the spot price, and they sell that same silver to larger dealers or refiners at about 1-2% under spot, or they sell that same silver to customers at about $.50 to $1/oz. over spot. (Just like all businesses that buy at wholesale and sell at retail, to pay for expenses.)
The flow of silver is about 200 million oz. of recycled silver each year (much of this is old silver being sold to the coin shops that ends up at the refinery), and only about 50 million oz. is purchased by investors. So coin shops typically buy more silver from the public than they sell.
Since America is still mostly a free market, especially in silver, and you don't need a "coin shop licence", anyone can place an ad in a newspaper, or phone book, and advertise "We buy silver! We pay top dollar." Then, you can answer the phone calls, and buy what comes your way. But unless you knew what you were doing, you might not recover your ad costs, and you'd have to take time to answer the phones, and the silver that you get is limited to what other people will sell you, at their timing, not yours. My friend tried this, and decided it was not worth the hassle, nor risk, and he barely paid for the ad.
See, you are limited if you try to buy "at the bid". But if you try to buy at the asking price, then coin dealers can be motivated to "fill your order" and they will "have enough" silver to "fill your order," because the higher price motivates everyone to ship to you, rather than to the refineries.
Interestingly enough, sometimes you can get a tiny discount from your local coin shop, if you are able to buy $100,000 worth of silver at a time, even if the dealer will have to ship from other dealers, because that's a big enough order for them to try to put a good deal together, especially if they are in need of selling that much to a refiner at exactly that time.
However, if you try to buy from $300,000 to $1 million worth of silver, you will be less likely to get a discount because the amount of silver available starts to dry up, because you can clean out up to 10-20 coin shops with orders that size, and your order starts to "move the market" by displacing too much silver that would otherwise go to the refinery. And since the refinery doesn't get the silver that they otherwise normally would get, they have to start paying more, too, to help alleviate their own newfound problem of scarcity.
Now, if you are Tiffany's Jeweler's, there will always be enough silver. The reason is that they sell silver for ten to hundreds of times the cost of the physical silver itself, because they polish it up to a high sheen, and put a "designer" name on it, and sell it to people who don't have any values who are more interested in impressing other people with fancy jewelry.
Since people like us who do have values are scarce ourselves, this world will always be a very interesting place in which to live, because the opportunity to help others see more clearly will always be available, especially as our own understanding improves.
Therefore, I apologize for ever saying that silver is scarce. Let
me clarify: There's more than enough silver for everyone as long as
everyone is willing to value silver as highly as I value my silver.
And I think that silver is rare, and likely to become scarce in the event
of increasing investor demand, which I take as a given!
So, where can you get silver? Coin shops.
Increasingly, you can find 100 oz. silver bars selling at ebay.com for under the spot price of silver. However, silver on ebay is available typically only one bar at a time, which is a rather low flow. And now that I've mentioned it, ebay silver bars might start selling at close to spot, or over the spot price for a few days. Therefore, try to remember to check ebay in the coming weeks and months when a lot of other buyers are not rushing in at once. You'll be more likely to find a deal. Or, be willing to pay what it costs, and you can have silver in more abundance!
Related to this point, all the way up, from $5/oz., people have been asking me, "Do you think I can get silver $1/oz. cheaper if I wait a bit?".
Generally speaking, in a bull market, the longer you wait, the more you pay.
Yes, I think there is a fairly good chance that silver could hit $15/oz. again, and "test" the break-out price, so that the former ceiling becomes the floor.
However, the length of time that silver might be "at $15/oz." in the future might be measured in mere minutes, and not long enough to actually buy it at that price.
For example, if you sat on a briefcase full of cash, and sat in the lobby of your local coin dealer, and had your laptop with you connected to a wireless connection, and ignored all conversations in the coin shop, and checked the price every 15 minutes for the next several weeks without showering or eating, you could still miss it, because the price might not dip for a long enough time to convince the local coin dealer to even sell to you at that price, or, he could be too busy with another customer during that short time frame.
In other words, if you think you can do better by waiting in a bull market, you may be kidding yourself, and you have not thought it through well enough.
Besides, when the short term downside is $1/oz., and the upside is $15/oz., why in the world would anyone wait?
Thus, once again, if your values are right, you are more likely to get more than enough silver, and probably more than enough profits and money in your life. If your values are wrong, you will more likely have a problem of scarcity.
I offer a "look at my portfolio" for $50/month that comes with a "money back" guarantee that you will be satisfied, because we know our customers are more than satisfied. If you don't like it, we will refund your money, even for a full 3 months if you are not satisfied.
We also offer a wonderful forum with like-minded, very intelligent investors.
Today at the forum, I invited our forum members to take an IQ
test. Eight people who took the test and reported all had scores at
136 or higher, while the average score for the nation was 110.