Silver gets cheaper relative to gold

As of morning trading on Sept. 29, the gold/silver ratio exceeded 69:1. In my mind, that makes silver much more attractive for appreciation potential than gold (Even though I still like the intermediate to long-term prospects for gold).

The big questions are when and at what levels will silver’s price bottom out. No one knows those answers for sure. However, I suspect we are closer to that point and may even have passed the bottom.

One indicator that the bottom of the silver market may have been reached is the change in futures positions on the COMEX exchange. The number of open positions reached the highest levels in years, and possibly decades, last week. The number of traders looking to make profits off continuing price declines by selling short contract positions may have peaked in the middle of last week. Toward the end of the week, the number of open contracts dropped 3-4 percent.

Such a decline could happen for one of two reasons. It could indicate that some traders holding long positions were giving up and selling off their positions. Alternatively, it could be a sign that short sellers anticipated that they had maximized their potential and were closing out their positions to lock in their gains.

Either way, the sudden significant decline in open positions in the COMEX silver market is a sign that the price may be changing direction. We may see prices stabilize near current levels or even fall a bit more from current levels. In my judgment, it is possible that the price recovery may get under way during October.

If my contention that silver (and gold) prices have been extensively suppressed by the U.S. government, central banks and their trading partners, then there is likely to be a huge reaction. When prices turn upward, look for the rebound to be both fast and large. It will make the 13 percent rise in the spot price of silver during the month of June look like nothing.

I think that the way to ensure that you can acquire silver at today’s prices is to buy it sooner rather than later.

An analyst recently released a report on the costs for various gold mining companies to produce an ounce of gold. His company stated at the time that they will be producing a similar report for silver mining companies.

Unlike gold, such an analysis will have limited impact on the prospects for the future price of silver. An extremely high percentage of gold comes from primary gold mines. In contrast, only about 30 percent of newly mined silver comes from primary silver mines. The other 70 percent comes from mines where silver is a by-product or co-product of mines that produce copper, gold, lead, zinc and other metals. For example, the world’s second largest silver-producing mine is a copper mine in Poland. Activity at the mine depends on the price of copper. The 30 million ounces of silver they produce every year is a by-product of mining to extract copper.

The production of 70 percent of the newly mined silver, therefore, does not depend on the price of silver. Such mines will continue to produce silver no matter whether the price goes up or down. The point to understand from this is that if there is a sudden spike upward in the price of silver, there will not be a major surge in the development of new silver mining output.

When the spot price of silver soared in the late 1970s to peak around $50 in January 1980, silver mining output only increased about 30 percent in the short-term. Then when prices came right back down in the early 1980s, there was no financial incentive for a huge expansion of silver mine output.

By the way, there was one development in the late 1970s that continued to boost silver supplies into the 1980s. As the price of silver rose, companies expanded their capability to recycle and refine silver. After the price fell, the fixed capital costs were already sunk (meaning that the cost of the equipment and facilities had been incurred no matter what future use was made of them). Therefore, refiners aggressively continued recycling silver in the early 1980s as long as the marginal costs of doing so could be covered. Profits of doing so were so thin, however, that Engelhard Corporation, one of the largest silver refiners and fabricators of ingots, sold off their refining and precious metal ingot production operations in 1986.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).