The Tiny $0.001 Trillion Silver Market Part 1
(Millions, Trillions and Billions, Oh My!)
September 25, 2009
The Silver Market is small. Very small. I don't think people quite understand how small it is, nor understand fully the implications, meaning how much higher silver prices must go as the market grows to accommodate future silver buyers.
Confusing matters is that the terms million, billion, and trillion mean different things, in different nations, and other nations also have different notations for how to write numbers exceeding 1000. Furthermore, most Americans are also unfamiliar with the terms, since most people don't use these terms in daily life. Who needs a billion french fries? But you do need to understand the numbers, in order to interpret political events, such as the amounts being spent by Congress.
Here are the American conventions, which I use in my writings. A thousand is written as 1000 and is notated with commas as 1,000. In America, we use a comma after every three zeros, starting from the far right, so every comma signifies another multiple of 1000.
A million is a thousand thousand. 1000 x 1000 = 1,000,000, also written as a million.
A billion is a thousand million. 1,000 x 1,000,000 = 1,000,000,000 also written as a billion.
A trillion is a thousand billion. 1,000 x 1,000,000,000 = 1,000,000,000,000 also written as a trillion.
A quadrillion is a thousand trillion 1,000 x 1,000,000,000,000 = 1,000,000,000,000,000 also written as a quadrillion.
Knowing that, we can now interpret the following key figures:
The annual Federal Budget these days is about $3 trillion, which can also be written as $3000 billion, or $3,000,000 million, or $3,000,000,000,000.
World annual silver production is about 600 million ounces. World annual silver investment is about 50-100 million ounces. All of mine production, and more, including recycling, is consumed by industry, leaving very little left over for any investment.
At $16/oz., x 75 million oz. = $1,200 million, or $1.2 billion, or $0.0012 Trillion.
Again, let's compare:
US annual government spending: $3 trillion
World annual silver investment demand: $0.0012 Trillion
Can you say, "The US government is spending way more than exists in the entire world?" I can. It sounds funny to say it, but I understand what I mean when I say it.
But that's only silver, some will protest. But adding gold to the mix does not help. Watch.
World annual gold mine production is 2500 tonnes, which is (x 32,151 oz/tonne) is 80.3 million ounces. At $1000/oz., that's $80 billion dollars, or $0.08 Trillion.
See, not even all the gold in the entire world's annual production would help the US budget. Gold would have to increase by a factor of 3000 / 80, which is 37.5 times, in order for the entire world's gold production to equal the US government's annual budget. See, gold will go way above $37,500/oz. by the time this bull market in gold is finished, because there are other people in the world who want gold in addition to the US government.
China wants gold. China has said they want $80 billion worth of gold. China has $2130 billion to spend on gold, or $2.13 trillion of foreign exchange reserves.
If China tries to buy a mere $80 billion of gold within one year, the gold price will likely head to $1500 to $2000/oz. this year. But China does not want to push up the price of gold to make it double in price. If they do, the value of the remainder of their $2130 billion will be cut in half.
Too bad for China, they have no choice. The value of their paper money will be cut by 95% or more anyway, even if they do nothing, as other nations, besides the US and China, also want gold. So it will come down to the reality, for everyone, that some gold is better than no gold! And silver, of course, is always better than gold, because silver will increase in value much faster!
How will $2,130 billion of China's foreign exchange reserves fit into the annual silver market of $1 billion? Think about it. Think carefully. Think hard. Think!
Here's what I think. If China's people started buying $1 billion of silver per year, the silver price would head to $25/oz.
If China's people started buying $10 billion of silver per year, the silver price would head to $75/oz.
If China's people started buying $100 billion of silver per year, the silver price would head to about $750 per oz.
Can you say "Not enough silver!"? I can. There is a world silver shortage, and there will be a world silver shortage for the next few decades to come, probably until silver exceeds thousands of dollars per ounce in price!
There is no possible way that the silver price can be contained for very long, unless they discover a way to divert investment demand away from the limited physical silver, and convince people to hold things like ETFs, or futures contracts, or 'bullion accounts' instead. Oh yes, they have. But not for long, as the truth is getting out.
The Bank of International Settlements reports there are $111 billion in "Other Precious Metals (IE, Silver) over the counter derivatives, as of Dec. 2008. (We await June 2009 stats.)