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Silver’s Smoking Guns, Part I: Mining Paradox

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When a reader (and fellow silver-mining investor) recently expressed his frustrations on our Forum regarding the absurd valuations which most of these miners currently exhibit, I decided it was once again time to try to shed some light (and sanity?) on this subject.

When I began investing in these silver miners many years ago; one of the first anomalies to which I was introduced was that the vast majority of silver produced in the world (more than 75% at that time) was produced as a “byproduct” of other mining. While I immediately recognized that this was an extremely important factoid, at that time I lacked the level of understanding necessary to glean its true significance.

Since that time, the ramifications of these incredible parameters in silver mining are now apparent to me. Sadly, however, this important analytical point does not seem to be as apparent to others. While I’ve covered this subject matter once already in a prior commentary, the lack of general awareness in this area clearly merits repetition of this analysis.

The basic parameters for the mining of metals on our planet are simple and clear. With nearly every commercially-produced metal on the planet, the vast majority of that metal is produced via “primary” mining – mines which “primarily” produce that particular metal. The reason for this should be obvious.

At the large scale at which the modern, global economy operates; the need develops to secure large supplies of these metals. For purposes of both efficiency and a secure supply-chain; it is natural/preferable to seek to develop “copper mines” to meet copper demand, “zinc mines” to meet zinc demand, etc.

We would thus expect all of these commercially/industrially consumed metals to have production models where the vast majority of supply came from primary mining, with the metal which was produced as a “byproduct” (through the primary mining of other metals) being merely incremental to supply.

Indeed, with any/every metal for which there is this commercial/industrial demand, there are only two market paradigms where we would not expect the majority of (new) supply to come from primary mining, but rather as a byproduct of other mining:

a) Metals with a low level of demand, and/or only limited or specialized uses;

b) Metals which are found in either such small quantities or trace amounts that “primary” mining is not commercially feasible.

It is abundantly obvious that silver doesn’t come close to meeting either of those two conditions. With respect to its level of demand and its multitude of commercial/industrial applications; silver is literally in a class by itself.

With its aesthetic appeal (it’s the brightest of all metals) and malleability, it is (along with gold) the world’s best and oldest form of real “money”. On that basis alone there is significant investor demand for silver. Meanwhile, with new patents for silver-based industrial applications outnumbering those of any other metal; industrial demand for silver is large, strong, and growing.

The demand parameters are unequivocal: the majority of silver mined in the world should come from primary silver mining. This leaves the issue of supply. Is silver so rare in quantity and/or purity that primary silver mining is not feasible? Absolutely not.

 

Again the evidence is totally unequivocal, and can be demonstrated either from an historical perspective or via current, empirical data. Historically, the world used to be full of silver mines. From the 16th century until the latter half of the 20th century; the vast majority of the world’s silver was always supplied through primary silver mining.

What happened toward the end of the 20th century? Nothing much…other than the price of silver being driven down to a 600-year low (in real dollars)—and held there. At this point the realities of silver mining become just simple arithmetic.

If the price of copper was driven down (and held down) at a 600-year low, there would soon be few if any primary copper mines in the world; and the vast majority of copper would have to come as a byproduct of other mining. If the price of nickel was driven down to a 600-year low, the world’s nickel mines would quickly be driven out of business. And so on.

Is there so little silver around that it cannot be located and mined at large-scale, commercial levels? Absolutely not. While silver is admittedly a “precious” metal, it is roughly 17 times more abundant in the Earth’s crust than gold; and throughout history the majority of the world’s gold has always been produced via primary gold mining.

Indeed, the parallels (and differences) between silver-mining and gold-mining are highly instructive. Despite being much less abundant than the lesser “base” metals; throughout history gold and silver have always been produced via primary mining. Even in the 1980’s and 1990’s when (by remarkable coincidence) the price of gold had also been driven down toward historic lows, most of the world’s gold still came from primary mining.

Where the gold-mining industry and the silver-mining industry differed was that the level of price-suppression with gold was never as savage/extreme as occurred in the silver market, and so the primary gold-mining industry survived.

The historical evidence, recent empirical evidence, and simple arithmetic/economics of global mining are crystal-clear. All commercial/industrial metals should be supplied mostly through primary mining (subject to the limited exceptions previously noted). This directly implies an even more important principle: by definition, the “fair-market price” for any metal is one which is high enough to support primary mining as the dominant component of supply.

There can be no argument here. The only reason why gold can be “primarily” mined and sold by the ounce whereas copper is mined/sold by the pound is price. This, in turn, leads to another unequivocal conclusion: the only reason why the majority of (new) silver supplied to the market today does not come from primary silver mining is that the price of silver continues to be suppressed far below its fair-market value.

The same mining geologists scouring the world for gold, and generally encountering it in concentrations of between one and five grams per ton of ore, are locating silver (in large deposits) at concentrations of between 100 and 200 grams per ton – and sometimes more. If silver was fairly priced in the marketplace today, the majority of silver production would be coming via primary silver mining instead of as a byproduct of other mining.

This is a conclusive “smoking gun” pointing toward the manipulation of the price of silver in the silver market. The fact that the laughably myopic CFTC can see “no evidence” of silver-manipulation despite claiming to have focused all its regulatory/analytical prowess on this market for roughly the past five years only undermines the legitimacy of that institution still further.

Despite the rise in the price of silver from under $4/oz (its 600-year low) to over $30/oz, a large portion of the world’s small-but-growing number of primary silver miners are struggling just to turn a net profit. Yet despite the economic realities of supply and demand, all we get out of the mainstream media is repeated, idiotic rhetoric about some mythical “silver bubble”.

The absurd/incredible paradigm of modern silver mining is mirrored by parallel imbalances and absurdities in the world of silver. Part II of this series will look at the Investment Paradox which has resulted from the serial suppression of silver prices; while Part III will focus on the Market Paradox – and yet again shine the spotlight on glaring evidence of silver manipulation.

 

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Jeff Nielson
...
written by Jeff Nielson, November 17, 2012
If silver does indeed cost $30 an ounce to bring to market (I'm assuming you've read these calculations and agree with them) then it's going to take a while for the slowly increasing number of primary silver mines (Arian, of course, being one of them) to turn a profit or, for that matter, to survive in their current form.

Of course, the manipulation can collapse, as it appeared ready to do a while ago, in which case these businesses will be increasingly successful. Turd Ferguson is convinced that movements behind closed doors are tending towards something he calls 'hot and explosive' (to the upside, obviously) in the precious metals, but we'll have to wait and see.



TheRationalist, on the one hand you need to focus a little more carefully on what I did write here. When I wrote that many silver miners "are struggling just to turn a net profit" with silver in the low $30's; I was thinking specifically of Hecla and Couer e'Alene -- which both just reported miserable results.

So for the better-run/more-efficient silver miners; many have cash costs around or below $10/oz. And even taking into account total operating costs, they could likely be profitable with silver between $15-$20/oz.

On the other hand, your statement about the silver market being "slow" to grow production to meet demand is (if anything) an understatement. All of the mines producing silver as a byproduct (still a significant majority of production) do NOT respond to higher silver prices at all -- because they're not primary producers of silver.

It's only PRIMARY producers (of any commodity) which are responsive to price increases. This means that the silver market will be SLOWER in responding to higher prices with greater supply than ANY other metal. smilies/wink.gif
TheRationalist
...
written by TheRationalist, November 16, 2012

Very interesting, Jeff. I've been looking out for this and wait with interest for the subsequent installments.

If silver does indeed cost $30 an ounce to bring to market (I'm assuming you've read these calculations and agree with them) then it's going to take a while for the slowly increasing number of primary silver mines (Arian, of course, being one of them) to turn a profit or, for that matter, to survive in their current form.

Of course, the manipulation can collapse, as it appeared ready to do a while ago, in which case these businesses will be increasingly successful. Turd Ferguson is convinced that movements behind closed doors are tending towards something he calls 'hot and explosive' (to the upside, obviously) in the precious metals, but we'll have to wait and see.


Jeff Nielson
...
written by Jeff Nielson, November 16, 2012
The "laughably myopic" CFTC is hardly the term I would use. How about "the criminally captured and incompetent tools of the banking cartel" CFTC?


Lol Apberusdisvet!

As you know, I'm no stranger to strong rhetoric. However, as I've gotten older-and-wiser(?); I've found some value in thinking more expediently.

IF I write about these White-Collar Psychopaths in at least SLIGHTLY euphemistic terms, not only do my commentaries get PUBLISHED in more places, but they also 'reach' more newer readers -- whose minds are at least slightly open.

Regular readers KNOW what I mean when I use such euphemistic language -- and the newer readers will soon figure it out !!

smilies/grin.gif
apberusdisvet
...
written by apberusdisvet, November 16, 2012
The "laughably myopic" CFTC is hardly the term I would use. How about "the criminally captured and incompetent tools of the banking cartel" CFTC?

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