-- Posted 31 December, 2010 | | Discuss This Article - Comments:

Reliable market estimates suggest that there around two billion ounces of gold held above ground in bullion, and only one billion ounces of silver.

Over time there has been far more silver mined than gold, say around 45 billion ounces, but it has almost all been consumed by industry. Much more of the five million ounces of gold mined by mankind remains.

Undervaluation

At current prices then the total silver market is worth $30.6 billion and gold $2.8 trillion. Any investor ought to spot the undervaluation there. That is what happens when a commodity trades at a lower price than three decades ago.

It is as though silver has been kept in some kind of communist, controlled economy. And indeed, that essentially is what happened after the 1980 silver price crash. Several banks colluded to keep the silver price locked down and in a world of its own, trading silver to profit their own books.

Earlier this year the bank’s position finally became untenable. Regulators began to publicly acknowledge a legion of complaints from investors and found them impossible to deny any longer. And the banks, fearing action largely liquidated their short positions over the quiet summer months.

Price fundamentals change

Silver prices have jumped from $17 to $30 since then. However, while this kind of price spike is always vulnerable to sudden corrections, there is a change in price fundamentals here.

The real lesson is that the artificial price fixing regime is over. Communism has collapsed and price controls are off. The logic is actually for very much higher market prices, not a retracement as some now expect.

History shows that once price fixing regimes collapse prices quickly inflate, and they then never go back to former levels. The gold rush of the 2000s is going to be nothing to the silver rush of the 2010s.

The silver market is incredibly small to absorb the scale of investment likely to come its way as other asset classes lose their appeal thanks to rising inflation and interest rates. For the gold-to-silver price ratio to get back to its historic average then silver prices must treble; and that will be on top of the rise to come by following the gold price up and up.

Market psychology

And while precious metals have been growing in investor appeal for the past decade, there has been nothing yet like the over confidence of the late phase of an investment bubble. We saw that in dot-com stocks and later in residential housing.

At the moment many investors in gold do so out of fear and with little enthusiasm, and they hardly touch silver. Only when the broad masses get the bug and greed over powers this market will it be time to get out. That hardly seems to be the case right now.

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