By: Theodore Butler

— Posted 24 October, 2006 | | Source: SilverSeek.com

I’d like to continue on a theme I wrote about last week, namely, attempting to uncover the true relative value of silver compared to gold. You see, I am convinced that the most widely used yardstick, dividing the price of gold by the price of silver, may be inadequate and even misleading. I don’t believe that enough information is provided by price alone. It’s kind of like trying to determine the weather by temperature alone – 72 degrees Fahrenheit sounds pleasant, but not if you’re in the grip of a hurricane.

Therefore, one should apply as many data points as possible to determine the truest condition of anything. That was why I started to analyze the relative value of silver compared to gold by the market capitalization method, using both price and the actual amount of each metal in existence, instead of just price alone. It’s more objective and scientific that way. For instance, just because one company’s stock price may be higher than another’s doesn’t mean the company itself is worth more – you have to compare total shares outstanding as well.

After I wrote the first article, I realized that I could have provided many more data points to aid both the reader and myself to understand the real gold/silver ratio. While I found it certainly amazing that the gold metal market capitalization was 200 times larger than silver’s, I provided no reference scale to allow anyone to measure just how amazing that difference was. Fortunately, the data needed to construct such a reference scale is relatively easy to obtain.

What I set out to do was to determine how the differences in the current market caps for both gold and silver compared historically. Was the current market cap difference large or small when compared over the last 100 years? After all, the widely used price-only ratio was stuck somewhat in the middle, at 50 or so, of the 100-year trading range of roughly 15 to 100. Would the market cap ratio parallel the pattern of the price only ratio?

The short answer is that the results astounded me, as I think they will astound you. I must confess — it takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me.

Before I present the data in the following tables, let me explain my methodology and reference my sources. I’ve relied principally on data from the World Gold Council, the US Geological Survey and the Silver Institute. Since the data over the past 30 years is unquestionably more accurate than data from 100 years ago, I have worked backwards, from current world above ground amounts for gold and silver, to get to historical amounts.

Admittedly, gold above ground amounts are easier to pinpoint than silver amounts. That’s partly because gold is still held and recorded by world governments, but also because gold is so valuable that virtually none of it is ever destroyed by non-recoverable industrial consumption. Therefore, every ounce of gold that is mined annually is added to above ground total amounts.

Silver, of course, is different from gold in that it is industrially consumed. In fact, for more than 60 years, more silver has been consumed than has been mined annually, even allowing for recycling. Existing inventories were drawn down to balance the structural production deficit. Therefore, we know there is a lot less silver in existence than 30 or 60 years ago. The highest estimate for existing silver bullion equivalent (bullion plus junk coin) is one billion ounces, with most estimates falling in the mid hundred million-ounce range. I will use the billion-ounce amount to be conservative.

I think there are billions of ounces of silver in non-bullion equivalent form (silverware, artifacts, jewelry, etc.), but no one knows at what price, if any, that silver could enter the market. Certainly, there has been remarkably little of such silver released to the market to date, in spite of previous predictions of a flood of such silver starting at $7 or higher. If such silver does come to market in the future at much higher prices, and that silver is not absorbed by other investment or industrial buying, that circumstance will have to be factored into the silver supply/demand equation. The great thing is that such an event cannot go unnoticed and we will all stay alert to its possible coming. At the very least, it is not a factor now. To conclude that silver is not a good investment at current prices, strictly because more supply may come to market at higher prices is patently absurd.

www.gold.org/value/markets/supply_demand/mine_production.html This is higher than the 4 billion ounce figure I stated last week, so I am revising my current market cap comparison to gold being 250 times larger than silver. I’ve rounded all the numbers to provide for easier comparisons.