The Enigmatic Silver Miners

In my most recent commentary, I wrote about the gold miners, specifically how the “junior miners” had greatly out-performed the large producers, and represented superior investments in virtually every respect. I also pointed out how the silver miners were so different from the gold miners that they required their own, separate analysis.

While silver (like gold) has roughly quintupled from its trough of a decade ago to its (interim) peak during this long “bull market”, the silver miners have not been able to replicate the performance of the gold miners – especially with respect to their performance over the last couple of years. Part of this decoupling in performance is due to the fickle nature of markets: silver miners are simply being valued much more poorly for assets of similar value.

However, there are also many fundamental factors which have prevented the silver miners from delivering better returns to shareholders. Most of these factors directly or indirectly relate to the fact that silver is grossly undervalued – and even grossly undervalued versus gold. Regular readers and sophisticated silver investors are very familiar with the current and long-term history of the gold/silver price ratio, but I will repeat a few points for the benefit of newer readers.

Silver is roughly 17 times as plentiful as gold, as an element in the Earth's crust. Thus, it is no surprise that over the course of nearly 5,000 years, the gold/silver ratio has averaged approximately 15:1. What is surprising is how this ratio has been so thoroughly perverted by the manipulations of the anti-gold cabal – to sit at one of its most lop-sided extremes in history: currently greater than 60:1.

Under any circumstances, this ratio is obviously unsustainable. However, with the “industrial” usages of silver literally causing the vast majority of the world's silver stockpiles to be “consumed”, there is less silver in the world today (relative to gold) than at any time in more than 4,000 years. Thus, at a time when the gold/silver ratio should be at its lowest level in history, it hovers at the opposite extreme – arguably the greatest disconnection between price and fundamentals in the history of markets.

The fact that silver is so obviously and so grossly undervalued has subtle implications for the world's silver miners too – beyond the obvious fact that these miners aren't even being paid close to a fair price for the precious commodity they produce. One of these “subtle implications” is that there aren't many silver miners. Despite the fact that silver is so vitally necessary in countless industrial applications and is the second-best “money” our species has ever devised and exists in greater supply than gold; there simply aren't many “silver” miners in the world.

“Experts” will tell you that “most silver is produced as a byproduct of other mining”. Sadly, no effort has been made to analyze this peculiarity of the silver market. In fact, the reason that there are not many “silver miners” in the world is simply and directly tied to the fact that silver is the most-undervalued commodity in the history of markets.

While some mineral deposits in the world are relatively “pure” (irrespective of which metal we refer to), it is more common for these ore deposits to contain a mixture of various metals. When the ore is eventually mined and processed, the miner is classified based upon the revenues of the various ores contained. In the case of silver, the most-common metallic “partners” for silver in ore deposits are lead and zinc. Thus, if a lead/zinc/silver deposit produced revenues of 40% for lead 30% for zinc and 30% for silver, the miner would either be referred to as a “lead miner” or a “lead/zinc miner”.