Every market has its peculiarities. Investors who are unaware of them, or even aware but choose to ignore them, inevitably risk being caught off guard by these market specificities. What applies to markets in general, naturally also applies to commodity markets, and particularly to silver, as it exhibits several unique characteristics not found in other commodities.
Some of these special properties are geological in nature. Many commodity investors know that silver is approximately 17 times more abundant than gold in the upper layers of the Earth’s crust. Nevertheless, currently – depending on the daily price – nearly 80 ounces of silver must be exchanged to purchase one ounce of gold. From a purely geological perspective, such a high gold-silver ratio does not make much sense, as it suggests an abundance of silver that does not exist in this form on Earth.
Looking back at the more than 4,000-year history of gold and silver, one quickly discovers that the price ratio between the two precious metals fluctuated for a long time between 15 and 17, and the high gold-silver ratios we currently observe are a very recent phenomenon. It only emerged in the second half of the 20th century and has shaped the situation ever since. Whether today’s high gold-silver ratios will persist in the long term is therefore a more than legitimate question.
Today’s silver mining is no longer what it used to be
Although geologically there are still 17 ounces of silver for every ounce of gold, the actual extraction by the mining industry is quite different. For every ounce of gold extracted today, only about seven or eight ounces of silver are simultaneously mined. Or, to put it another way: The mining industry currently extracts only about half the amount of silver that would be geologically possible in principle.
If one delves deeper into this observation and asks why mining companies are only able to exploit slightly more than half of the available potential, one encounters another geological peculiarity of silver.
Compared to the Earth’s entire diameter, the uppermost layers of the Earth’s crust are relatively thin. Nevertheless, we are talking about a layer that extends over several kilometers, and within this layer, the individual elements are far from evenly distributed. Silver, for example, tends to be found more frequently in the upper layers of the Earth’s surface and less frequently in deeper layers.
The easily accessible silver has already been extracted
The aforementioned geological gold-silver ratio of 17 is therefore far from stable. It rather characterizes the situation in the uppermost layers of the Earth’s crust and decreases the deeper one goes. For earlier generations, this was a great advantage; for us, it is a disadvantage, as we have to dig deeper to access similarly large quantities of silver.
Technically, this is certainly easier for us than it was in earlier times. Nevertheless, the disadvantage remains that, compared to previous generations, we must expend significantly more effort to extract similar amounts of silver. If one also considers that the low-hanging fruit has already been harvested almost everywhere in mining, it quickly becomes clear what avalanche of costs is already heading our way.
Today’s silver price does not yet reflect these geological peculiarities. Rather, it still reflects a situation that prevailed for a long time during the 19th and especially the 20th centuries. However, those times are over, and there is currently little to suggest they will return.
Any investor who believes that the silver price has risen too high in recent months and must therefore soon fall back is reckoning without Mother Nature. Many things in this world and in our lives can be influenced by clever psychological directives. Geology cannot. It follows its own laws, and every commodity investor is well advised to know and follow these laws.
If they do not, unpleasant surprises are only a matter of time.
