The Fundamental Reason The Silver Price Will Explode Much Higher Than Gold

Investors need to understand an important fundamental reason why the silver price will explode much higher than gold.  While many analysts state several reasons why silver will outperform going forward, I believe one vital fundamental factor is overlooked.

This critical factor is based upon a certain supply versus demand component of the gold and silver markets.  Actually, I came across this data while working on the research for a completely different article.  However, the more I compared the figures, the more surprised I was by the results.

One of the important aspects of my work here at the SRSrocco Report is to take data, figures and information and to look at them in a different way than most analysts.  By doing this, I can spot interesting trends and factors unnoticed by the majority of analysts.

However, before I get into the critical reason why silver will outperform gold in a big way going forward, let’s dissect some of the underlying factors

THE HUGE DISCONNECT:  Silver vs Gold Jewelry Recycled Supply vs Demand

While most investors realize that gold and silver scrap supply are used to help supplement the market, very few understand the huge disconnect between these two precious metals when it comes to recycled jewelry scrap.

First, let’s take a look at silver jewelry scrap supply.  According to the Metals Focus: Silver Scrap Report, the world recycled approximately 551 metric tons (mt) of silver jewelry in 2015.  This may seem like a substantial amount until we compare it to total world silver jewelry demand of 7,045 mt:

Global-Silver-Recycled-Jewelry-Supply-vs-Demand-2015

Thus, recycled silver jewelry supply of 551 mt accounted for only 8% of global silver jewelry demand in 2015.  Why so little?  Because, very few people will take the time to go down to a pawn shop or precious metal dealer and sell a couple of pieces of silver jewelry for a few bucks.  It’s just not worth the effort.

This is the very reason why very little silver jewelry is recycled.  However, gold jewelry is a much different animal all together.  Matter-a-fact, the majority of global gold scrap supply comes from recycled gold jewelry.  It was difficult to obtain the data on global gold jewelry scrap supply, but I was able to provide an approximate figure based on the data in the Metals Focus: 2015 Silver Scrap Report:

The recycling of silver from old jewelry makes up the second smallest category of silver scrap supply. Its limited scale is also marked in comparison to gold; silver jewelry fabrication may be more than double gold by weight, but its jewelry scrap is less than half gold’s. These modest numbers for silver are largely due to the small amounts typically sold back by consumers as the low value per item means there is little incentive to sell.

Second, according to data from the World Gold Council’s Full Year Demand Trends, and based upon my calculations, global gold jewelry scrap supply was approximately 1,000 mt versus 2,415 mt of total gold jewelry demand in 2015:

Global-Gold-Recycled-Jewelry-Supply-vs-Demand-2015

Thus, global gold jewelry scrap supply comprised 41% of total gold jewelry demand in 2015.  This is an astonishing figure as gold jewelry scrap supply versus gold jewelry demand is five times greater in percentage terms (41% gold vs 8% silver) than its silver counterpart.

Again, this is due to the fact that gold jewelry owners are well rewarded for their time to sell a few gold rings for say $500-$1,000 versus $5-$15 for several pieces of silver jewelry (based on metal content only).

NOTE:  The data in the Metal Focus:  Silver Scrap Report states that silver jewelry scrap was less than half of gold jewelry.  Unfortunately, this is where I had to make an adjustment and estimation.  The World Gold Council states that total gold scrap supply in 2015 was 1,093 mt.  Half of that would be 545 mt.  This is less than the 551 mt reported by Metal Focus for silver jewelry scrap supply.  Not all of global gold scrap supply comes from jewelry.  Some may come from recycled industrial scrap and old gold coins and bars.

This is why I provided the estimate of 1,000 mt for global gold jewelry scrap supply in 2015.  Furthermore, each official reporting source may publish different statistics for the same data which makes it difficult to provide exact figures.  So, it is important to look at the overall trend and not to waste time focusing on exact measurements or data.

Now that we have an idea just how out of balance silver jewelry scrap supply is compared to gold jewelry scrap, let’s look at pathetic figures in the next component.

The Majority Of Industrial Silver Demand Is Not Recycled

One of the things I hear a lot thrown around the precious metals community is the figure that 50% of silver demand is lost forever.  This is due the huge consumption of silver by industry.  However, the real figure is much larger.  I’ll get to that in a moment, but let’s first look at how little of industrial silver is recycled on an annual basis:

Global-Silver-Recycled-Industrial-Demand-vs-Supply-2015

Well, if we go by the figures in the 2016 World Silver Survey and Metals Focus: Silver Scrap Report, global industrial silver scrap was approximately 3,266 mt in 2015 compared to the massive 18,311 mt of world industrial silver demand.  Which means, global industrial scrap supply only accounted for 18% of world silver industrial demand in 2015.

I have decided to convert some of these figures in troy ounces for new folks in the gold and silver industry:

Silver Jewelry Scrap vs Demand 2015:  (metric ton = mt) (million oz = Moz)

Silver Jewelry Scrap of 551 mt = 17.1 Moz

Silver Jewelry Demand of 7,045 mt = 226 Moz

Gold Jewelry Scrap of 1,000 mt = 32 Moz

Gold Jewelry Demand of 2,415 mt = 78 Moz

Silver Industrial Scrap of 3,266 mt = 105 Moz

Silver Industrial Demand of 18,311 mt = 598 Moz

Several of my readers have contacted me asking me to present the figures in only one standard to make it easier for individuals (especially new investors) to understand.  Unfortunately, private and government sources report their data in either metric tons or troy ounces.  Even though it would be convenient to only publish my data in one standard, TROY OUNCES for example, readers would be lost when they come across tables or reports that are published in metric tons.  So, I try to convert figures as much as possible.  And if I don’t, remember this conversion:

[1 metric ton = 32,150 troy ounces]

Okay… if you are beginning to understand how little silver is recycled in the jewelry or industrial markets, wait until you see the TOTAL PICTURE.

A Hell Of A Lot More Silver Is Lost Forever Than Originally Thought

If we compare global silver scrap supply versus total demand compared to the gold market, the figures are like NIGHT & DAY.  In 2015, the world recycled 4,665 mt of silver, while total demand was a staggering 36,423 mt.  Thus, only 13% of total world silver demand was recycled last year.  This is one hell of a lot less than the 50% figure repeated by the precious metals community.

Total-Global-Silver-Recycled-Supply-vs-Total-Demand-2015

While it’s true that physical silver investment demand is a significant portion of total demand, much of that will never be recycled.  This is true for Official Silver coin sales which reached 134 Moz in 2015 (4,168 mt).  Regardless, some of Silver Bar & Coin demand will be recycled, but it’s the smallest segment of the silver scrap market.

According to the Metals Focus: Silver Scrap Report, only 6 Moz (186 mt) of silver coins were recycled in 2015.  And, the majority of that amount came from unsold European commemorative silver coins minted years ago.

So, how does the gold scrap market compare to silver recycled supply?  In 2015, global gold scrap supply was 1,093 mt versus total world demand of 4,253 mt:

Total-Global-Gold-Recycled-Supply-vs-Total-Demand-2015

Here we can see that global gold scrap represents 26% of total gold demand.  This is double the percentage of silver.  Only 13% of total silver demand was recycled last year.  However, these percentages don’t really paint the true picture.

Global Gold-Silver Demand Minus Scrap Supply 2015

Gold Demand – Gold Scrap = 3,160 mt

Silver Demand – Silver Scrap = 31,718 mt

If we compare total demand minus scrap supply, there is ten times more silver demand that is not recycled compared to gold (silver = 31,718 mt vs, gold = 3,160 mt).   Which means, there is a hell of a lot less silver available to the market than gold…. in percentage terms

Furthermore, the majority of gold bullion, jewelry and coins still remain in the world compared to silver.  If we assume that most of silver jewelry and industrial demand is not recycled, then this is truly lost forever unless the silver price surpasses $200-$300.

When the world wakes up the fact that they are invested in PAPER ASSETS that have no future, the mad rush into physical precious metals will push the value of silver up much higher than gold.  As these charts show, a great deal more gold is recycled compared to its total demand than silver.

Which means, a lot more than 50% of silver demand is lost forever.  Actually, if we go by the data, only 13% of total world silver demand came from recycled silver supply in 2015 while 26% came from gold.  Thus, 87% of total world silver demand did not come from recycled silver supply.

Yes, it’s true that in 2011, silver scrap supply increased due to the high annual average price of $35.  Even though total scrap supply increased to 6,430 mt (206 Moz) in 2011, it still only represented 20% of total silver demand that year.  I am using the 206 Moz figure from Metals Focus: Silver Scrap Report rather than the 260 Moz figure reported by the World Silver Surveys because the Metals Focus group went back and did a much more detailed job researching scrap and found out that the market had overstated scrap supply for several years.  I will be writing about this shortly.

Regardless, even at a much higher price of $35, only 20% of the total silver demand in 2011 came from silver scrap supply.  Which means the world lost 80%, more than the 50% figure repeated by the precious metals community.

Furthermore, if we just add up all the silver jewelry produced for the past decade it equals 60,500 mt or 1.95 billion oz.  Let’s say a conservative average of 10% of this silver jewelry was recycled (remember only 8% was recycled in 2015).  That means only 6,050 mt of silver jewelry was recycled since 2006.  Thus, nearly 54,500 mt or 1.75 billion ounces was lost to the market.  Only at much higher silver prices will some this silver jewelry come back on the market as scrap supply.

Precious metals investors need to understand that the majority of manufactured silver will never come back on the market until we see insanely high prices.  However, at that point… it won’t matter.  There still won’t be enough silver to meet demand as mainstream investors stampede out of worthless paper assets and into physical precious metals.

IMPORTANT NOTEThe Precious Metals Webinar scheduled for July 20th on Wednesday next week is being moved a few weeks later due to a change in schedules.  I will be posting that date shortly.

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24 Comments on "The Fundamental Reason The Silver Price Will Explode Much Higher Than Gold"

  1. Steve, how does the present low demand for commodity metals eg. copper, lead, zinc, where silver is a by-product of mining them, come into the question of supply?
    Especially considering that many of these commodity metal mines, have been placed on maintenance or closed entirely. Also bearing in mind, these mines that fit that category, will require time and capital to bring back on line, if ever. Adding to the already very tight supply of physical silver.
    Your article is a really an eye opener, or should I say eye “popper” of revelation, as to the amount of physical silver that is lost due to it’s industrial use. To say nothing of the growing amount that vanishes into hoards.

  2. I read all the arguments, I look at all the charts, I consider all the analysis. yep, it all looks good, so clever, you’re absolutely right.

    except for two things.

    1) as long as the fiat is still working and the comex fractional reserve print-it-as-we-need-it paper is still being sold, that’s what the price will be.

    2) when the fiat fails and the comex goes black, no-one anywhere is going to be paying any attention to silver or gold.

    • It won’t be bad in all places at the same time.

      IF ANYTHING has value as a medium of exchange G & S will be there.

      No, people aren’t interested in anything other than safety or eating if they feel in imminent danger or hunger.

      • “It won’t be bad in all places at the same time.”

        historically this is true – but only for one reason, because the currency consisted of gold or silver or a basket of independent and independently supported currencies (e.g. zimbabwe using u.s. dollars). that reason no longer exists. at the present time all currencies are fiat and are propped up by each other and by failing industries and by nations in demographic decline and by ponzi debt. they are all interlinked to failure – and the entire world economic system is linked to and dependent on and defined in terms of those fiat currencies. and worst of all is that they all are electronically liquid, meaning a problem on one side of the world is accounted and responded to by an algorithm on the other side of the world within a few minutes. it’s all tied together economically and financially and electronically (by intent, by design). at this point it is almost guaranteed that everything everywhere will go “bad” at the same time (by intent, by design).

        “IF ANYTHING has value as a medium of exchange G & S will be there.”

        sure, absolutely, no doubt. “IF”.

    • Most people won’t be paying attention to gold and silver during the crisis. We will look like Venezuela for a period of time where food, water and bullets will be the thing to have. The aftermath and reconstruction phase (if there is one) is where gold and silver will come into play, if not in arrogant America, then in the rest of the world.

      • “The aftermath and reconstruction phase (if there is one)”

        I don’t think there can be one. 95% of people around the world have no useful skill that can support them in a grid-down environment – they can’t grow a potato to save their lives, they have no idea how to raise chickens, they’re fat, they live in unsustainable areas, and worst of all is they all have guns. guns plus no food equals bad times. in their desperate thrashing they will seek out and capture and crush by sheer numbers anyone who is able to support themselves.

        “gold and silver will come into play”

        disagree. money is a medium of exchange used in an economic system, and only works if people have it. g&s ownership is confined to a tiny handful of people, where it will do no good, and it will not be spent and deployed fast enough to keep any kind of surviving economy going.

        • For you, as you see the future unfolding, it may not make much sense to own G or S.

        • gman –

          I have followed your comments here for some time with interest.
          I certainly would not want to be you, with your outlook so deeply soaked in pessimism.

          I think an optorectolmy operation would vastly improve your life outlook.

          That’s a surgical procedure, to sever an optic nerve that connects to your rectum. Thus instantly improving your crappy outlook on life. Good luck. You will need it.

        • Gman, i partly agree. When the Seneca cliff comes into our lives, there’s a possibility the grid goes down. Or one or more important hubs stop working, see ‘Trade off’ link above.

          Then, all bets are off. In the case however that governments can maintain a sort of emergency situation, a black market will occur. In that case, all currencies will be dead in the water, that’s where pm’s come in.

          Diversify.

  3. Hey Steve, I’ve double-checked that the mining supply of silver is 10x that of gold. So approximately 1/10 the amount of rock to blast, haul, crush, and process. I was wandering why, at approx. $1500/oz break-even for gold miners the break-even for silver miners isn’t $150/oz.

    • Because 75% of all silver mined is mined as a “by-product” of base metals such as copper, lead, and zinc. For these miners the silver “profit” is just “an extra” – until they will mine the base metals to get at the silver, that is…

    • Eric,

      It’s 9 to 1 by the way.

      Silver is also a byproduct of gold mining.

      • So when rising fuel costs and week demand destroy base metal mining, silver will benefit greatly. Hmmm. This metal seems to have everything going for it. Thanks for the response.

  4. Steve , Your “When the world wakes up the fact that they are invested in PAPER ASSETS that have no future, the mad rush into physical precious metals will push the value of silver up much higher than gold.” I can’t help and look back to when the Hunt boys were in a mad dash to corral physical silver , in 1979-80 , and almost pulled it off !! When the central bankers saw the whip saw reaction that Volker and Greenspan pulled on them by bringing the Hunt boys to their knees , it was one of the greatest plays that the bankers ever had dropped in their laps ! All the while America slept. Well , the alarm clock’s going to on very shortly!

  5. There will always be a currency in the USA. The $100 today will be worth $10 in 10 years. Or said another way, if I buy $100 of food today I’ll need $1000 10 years from now. For silver $20 an ounce
    today does not DEVALUATE. Simple demand will put the price up 10 fold or $200 an ounce in 10 years. Thinking of a currency failure means no USA, riots, all distribution lines cease to exist. What occurs is a devaluation. Look at England, They had Brexit and their currency dropped 10%. Their currency will exist but its value will drop. Silver is the best hedge of value in that it will track the devaluation. So, I’ll need more dollars and my silver will provide that. What am I missing?

    • Joe , What you might be overlooking is the fact that groups like the CME and Comex have silver set at a certain number based solely on paper in play. Your $ 100 , $ 1000 , even $ 20 silver is all based off of their rules.

      Move forward to circumstances proving that physical silver is in fact scarce. How you might ask – say Intel places an order for 10,000 ounces of Ag only to find that they can get a 1/4 of that.

      If the Hunt Bros. were able to corner the physical market some 40 years ago and experts are calling 9 to 1 ratios silver to gold coming out of the ground present day , what more do you need for proof ?

      Overall this set’s itself up for a different list of playing rules (and value understood) in the not so distant future for the REAL silver and not relating to how the dollar looks or acts on a particular day.
      It all comes down to the fact that physical silver will not be pushed around by king dollar any more.

  6. I’m no expert, but it seems to me that the “recycled” figures refer to physical gold or silver, while the “demand” figures would be inflated by contracts which are continually rolled over, i.e. dealers playing the market. Apples and oranges?

  7. Ever Vigilant | July 15, 2016 at 6:28 am | Reply

    the thing i have been watching is the Silver/Gold ratio which was approx. 84/1 6 months ago (someone will correct me if i am wrong) to 65.8/1 as of 2 minutes ago, that’s almost 20 points!!!! Wahoo.

  8. Thats’ correct and is falling. It was once 16-1. It MIGHT overshoot in the next few years to 9/1 .

  9. Les metaux precieux ont traverses les ages depuis au moins six milles ans de lorsque les hommes prehistoriques luttaient pour manger et vivre jusqu’a nos jours cela n’a pas change ,pire de nos jours bien que plus rare ,les metaux precieux sont indispensables pour la technologie et les appareils domestiques mondiaux surtout pour l’argent dont les applications diverses ne cessent d’etre decouvertes : stations epurations , systeme de purification des eaux potables ,domaine medical ect….. A mon humble avis ,meme la pire des crises ne pourra enlever ce qui a toujours valut pendant des milliers d’annees la rarete et le cote precieux de l’or et de l’argent .
    Merci pour vos analyses et votre excellente reflexion ,steeve
    (Desole pour le francais )

    ENGLISH TRANSLATION:

    How:
    The precious metals have ties ages for six thousand years to when prehistoric men were struggling to eat and live to this day it has not changed, worse nowadays although rare, the precious metals are essential to technology and global household appliances especially for the money the various applications continue to be discoveries: stations cleansing, purification system for drinking water, medical field ect ….. IMHO, even the worst crises will not remove what has always won over thousands of years of scarcity and valuable dimension of gold and silver.
    Thank you for your analysis and your excellent reflection, steve.
    (Sorry for the french)

  10. Angry Turks drag tank commander out of turret and beat him ….

    http://www.mirror.co.uk/news/world-news/breaking-gunfire-reported-ankara-military-8431911

  11. “If we compare total demand minus scrap supply, there is ten times more silver demand that is not recycled compared to gold (silver = 31,718 mt vs, gold = 3,160 mt). Which means, there is a hell of a lot less silver available to the market than gold…. in percentage terms”

    Maybe I’m dense, but I’ve read that several times, and the train of logic escapes me. ?

  12. I get a daily newsletter from Dr. Steve Sjuggerud. In his letter posted 26 July 2016 he says the following about silver prices to fall.

    ================

    The price of silver is going crazy…

    The metal jumped 35% in the first half of 2016. It soared 17% in June alone.

    The trend is certainly up in this precious metal. But things could be getting out of hand right now, according to history.

    That means we could see losses – not gains – through the end of the year. And a fall of 10% is possible, starting now.

    Let me explain…

    After years of declines, investors are in love with precious metals once again.

    Silver is no exception. Based on the Commitment of Traders (COT) Report – a weekly report that shows the real-money bets of futures traders – bullish bets on silver are at their highest level in history.

    Not even in 2011, when silver prices nearly hit $50 an ounce, were futures traders more bullish than they are today.

    This is not a good sign. It shows that the “buy silver” trade is getting crowded today.

    Typically, when sentiment reaches an extreme like this, the opposite happens over the next three months or so.

    That’s exactly what has played out in the past in silver as well…

    You see, optimism on silver is high thanks to the precious metal’s recent gains – specifically the massive 17% gain in June.

    Now, a gain that big in just one month is rare in silver. It has only happened six other times over the last decade. And it has only happened 22 other times going all the way back to 1970.

    Importantly, these large monthly gains tend to signal that silver is getting ahead of itself… Based on history, instead of continuing higher, the metal tends to fall.

    Silver tends to fall over the six-month period following these big monthly gains. The metal’s typical six-month return is 2.4%… But these extremes have led to losses of roughly 10%.

    Based on the historical precedent, we could see a double-digit fall in silver prices by the end of the year.

    This is a sentiment extreme. This type of extreme typically affects performance over the next one to six months.

    Looking at the bigger picture, I believe precious metals could head much higher in the coming years.

    I do like silver and other precious metals… But I believe you’ll get a better chance to buy silver in the coming months, once today’s optimism extreme wears off.

    ===== END =======

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