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Getting to Know Your Silver

By  +Follow October 8, 2013 2:10PM
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Like gold, silver is a precious metal that has been coveted by mankind for some 4,000 years. Like gold, it’s long been used in making jewelry and as a currency. And, like gold, it’s a dense, malleable metal.

But the similarities stop there. Investing in silver has some things in common with investing in gold, but the market for the two metals have a lot more about them that’s fundamentally different. If investing in gold is like living in the Wild West, investing in silver is like…a more volatile version of the Wild West. The Very Wild West, if you will. There are many more factors that can cause the price to fluctuate, and low market liquidity means that investors themselves can swing the price per ounce just by buying or selling in large quantities.

Silver Mining

Like any other metal, silver is mined. The global silver production as of 2011 was about 23,800 tonnes with the world’s production leaders being Mexico (4,500 tonnes), Peru (4,000 tonnes), and China (4,000 tonnes). The remaining countries all produce less than 2,000 tonnes and the United States is good for 1,160 tonnes. Silver is rare in its native form, more often combined with elements like sulfur, arsenic, and chlorine. It’s also commonly found in ores. Subsuquently, silver usually has to be extracted through amalgamation or electrolysis.

What Supply and Demand Mean to Silver Prices

Silver has much stronger market forces acting on it than gold. With the price of gold exceeding silver by a factor of close to 60 (more on this later), silver’s industrial uses are imminently more affordable than any potential use for gold. It’s a simple concept to grasp: one would never make a fork out of gold, it just costs too much. And, as such, much of the world’s silver supply ends up going into industrial uses. Only 11 percent of the world’s gold production is used for industrial purposes, while some 50 percent of silver is used for non-investment purposes. Silver is used in dental fillings, a variety of medical applications (silver is an antibiotic), photography, jewelry, silver ware, microchips, and photovoltaic cells.

While tracking the price of gold, one need only focus on investors and traders, for the most part. But in silver, commodity investors influence the price, along with a variety of other market forces acting through different industries. For instance, the rise of digital cameras has cut the legs out from under one of silver’s biggest industrial uses: photography. In 1998, 30.98 percent of the silver consumed in the world went to photography in the form of silver nitrates and silver halides. By 2001, that number had shrank to 23.47 percent, and by 2010 it was down to 6.8 percent, including a 38 percent decline in just three years. However, for all the silver not being used in film anymore, new uses were springing up in the form of the rapid expansion of the solar industry.

Silver as an Investment Vehicle

With all of the different applications for silver, it’s easy to forget that it’s also traded in the form of bullion and futures contracts just like gold. However, for an investor to do so would be at their peril. While silver’s not at all like gold because of its myriad practical uses, it’s also not at all like iron or tin because of its status as a precious metal. Despite the wild volatility, many investors buy and sell silver. In fact, Warren Buffett purchased 130 million troy ounces of silver in 1997 for $585 million (and announced to investors that he was completely divested as of May 6, 2006).

One number that’s important to any discussion of silver investing is the gold/silver ratio. It measures how many ounces of silver would be needed to purchase an ounce of gold, and has varied from as low as 12 during the days of the Roman Empire to 100 in the early 1990s. Despite some wild fluctuations, the average gold/silver ratio over the last 35 years has been about 55. Some serious silver bugs watch this ratio carefully, looking to make trades that accumulate more metal holdings rather than dollar-value profits, but most rational investors want no part of that action.

The Hunt Brothers and Silver Thursday

Any discussion of silver investing would have to include the story of Silver Thursday and the attempt to corner the silver market by the Hunt brothers,if for no other reason than as a warning of what the silver market can hold. One major factor one must consider when investing in silver is low market liquidity. Physical demand for silver is only about $15.2 billion a year, and the silver market ultimately comes to almost 20 times less money than the gold market. As such, big trades by large investors have the capacity to move the market for the precious metal. And the attempt by the Hunt brother to corner the market is one such example.

Beginning in 1973, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., Nelson Bunker Hunt and William Herbert Hunt, began an attempt to corner the market on silver. Believing that inflation would increase silver’s value as a safe haven while simultaneously wiping out the value of any paper investments, they began buying up all the silver they could, often buying on margin. With the death of their father in 1974, the Hunts had immense resources at their disposal because of a massive inheritance. What’s more, they could leverage the family fortune many times over and get better deals on credit and loans than other speculators because of the reputation of the Hunt family name.

The Corner of Brotherly Love

The combination of the massive increase in demand connecting to the Hunts’ purchase of over $1 billion worth of silver and the rush by other investors to jump onto the bandwagon meant that the price of silver started to skyrocket. The price of silver jumped from $6 per troy ounce to $48.70 in 1979, a new record high and a modest 712 percent gain in a single year. It was a major short squeeze, and the Hunt brothers were estimated to hold one third of the world’s silver supply not held by governments. People everywhere were pawning their silver coins and jewelry to take advantage of the market, and the value of the Hunts position increased to $4.5 billion. The situation became so dire that jeweler Tiffany’s ($TIF) took out a full-page ad in the New York Times criticizing the Hunt brothers.

However, the Hunts weren’t far from running into serious trouble. On January 7, 1980, the New York Mercantile Exchange adopted new rules regarding purchasing commodities on margin, limiting the ability of investors to use leverage. It also prevented investors from taking any more long positions on silver futures. The rule, known as “Silver Rule 7,” was most likely a specific response to the practices of the Hunt brothers, and it had the desired effect. With only short options being written, the price of silver started to slip and the Hunts were faced with more and more margin calls on their holdings. The Hunts managed to persist for some time, relying on their family’s sparkling credit to continue taking out loans so they could meet the millions of dollars in margin calls.

Silver Thursday

It culminated on March 27, 1980, now known as Silver Thursday. Angry with the Hunts ability to persist in manipulating the markets, the Federal Reserve strongly encouraged banks to stop giving loans for speculative activity. So, when March 27th rolled around and the price of silver continued to decline, the Hunts were finally issued a margin call of $100 million that they couldn’t meet. The markets immediately went into a panic, and the price of silver plunged to $11 a troy ounce, 77 percent off its high at $48.70.

In the end, the Hunts managed to survive the crisis by getting a consortium of banks to give them a $1.1 billion line of credit against the family’s assets. However, those assets continued to lose value over the course of the 1980s and the Hunts declared bankruptcy in 1988.

No Silver Lining

Investing in silver is not for the weak of heart, and while we’ll most likely never see an episode quite like the one created by the Hunt brothers ever again, that doesn’t mean that prices can’t fluctuate a great deal from day to day. Classic supply-and-demand forces combining with the price pressures created by investors and speculators make for a unique and unpredictable commodity play.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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Results for tif
Sterne Agee
21 Aug 14 08:26:11
Tiffany & Co. Price Target Raised to $108.00 at Sterne Agee $TIF @RatingsNetwork @SterneAgee http://t.co/94dKkPgHrc
US Banking News
21 Aug 14 07:53:41
Tiffany & Co. $TIF Announces Quarterly Dividend of $0.38 http://t.co/hk7jXbqvm5
Biz News Pioneer
21 Aug 14 06:50:45
$TIF: Tiffany (TIF) Is Water-Logged And Getting Wetter Today http://t.co/fZw0wXsiLy http://t.co/7lU1ErCRmr
$Stocknewsalerts
21 Aug 14 06:39:11
$TIF Tiffany Declares Regular Quarterly Dividend From our Stock News Alerts App
Dreamers'Trade
21 Aug 14 06:33:58
$FFIV $UA $YELP $TWTR $TIF Five stock chart with analysis. http://t.co/ehUWd2LFyn
Clair Voight
21 Aug 14 06:31:23
$TIF TIFFANY & CO. RELEASES RE-DESIGNED 2013... http://t.co/y67WMZnOhK
4-traders.com
21 Aug 14 06:05:22
Tiffany : Declares Regular Quarterly Dividend http://t.co/njVBAeuMVR $TIF
NASDAQ
21 Aug 14 06:02:39
$TIF - Tiffany Declares Regular Quarterly Dividend http://t.co/70M2PsazuH
BV Services
21 Aug 14 06:01:37
$TIF Tiffany Declares Regular Quarterly Dividend.. http://t.co/3yjV7zGpEY
Companies in News
21 Aug 14 05:50:36
$TIF: TIFFANY & CO. RELEASES RE-DESIGNED 2013... http://t.co/iw3mpx47g0 http://t.co/oHU1ciNLx7
The Fly
21 Aug 14 05:45:32
$TIF Tiffany new T Collection positive, says Sterne Agee: Full Story http://t.co/klB98pQhgc
Ticker Report
21 Aug 14 05:43:47
Tiffany & Co. Price Target Increased to $108.00 by Analysts at Sterne Agee $TIF http://t.co/51J8IreyVe
US Banking News
21 Aug 14 04:44:00
Tiffany & Co. Price Target Raised to $108.00 at Sterne Agee $TIF http://t.co/lXe5TGMcwa
Analyst Ratings
21 Aug 14 04:19:07
Tiffany & Co.'s PT raised by Sterne Agee to $108.00. buy rating. http://t.co/UjVdiFSfDx $TIF #TIF
US Consumer News
21 Aug 14 04:18:59
Tiffany & Co.'s PT raised by Sterne Agee to $108.00. buy rating. http://t.co/jK5bYPhdIy $TIF #TIF
Business Updates
20 Aug 14 19:50:37
$TIF: Tiffany group director's bias lawsuit gets settled http://t.co/CqN0ziQevc http://t.co/eUUaDzGtZ9
Stockaholics
20 Aug 14 19:45:08
$GLBH closed up 150% today! Major Update: http://t.co/nHv4FnEmKE $ZLC $TIF $USB
Jack Trader
20 Aug 14 15:01:03
$TIF TIFFANY & CO. RELEASES RE-DESIGNED 2013... http://t.co/cJUI0DsaKt
ADimeADozen
20 Aug 14 12:26:50
$TIF Entered Sept 105 Puts @ 6.90, three past green days have been on low and descending volume, seems a bit overextended, PT: 91-92
Stockaholics
20 Aug 14 12:06:04
SKYF ran up as much as 300% Today! News Update: http://t.co/5A4Sg5sQA5 $ZLC $TIF $USB
James P Worthy
20 Aug 14 08:31:15
$TIF TIFFANY & CO. RELEASES RE-DESIGNED 2013... http://t.co/I0990RFnqP
Financial News
19 Aug 14 09:50:24
$TIF: Is Pattern A Next Step for Tiffany? http://t.co/q69ZLgYDbj http://t.co/hJDfjluuDk
Media Sentiment
19 Aug 14 09:05:46
$TIF received a new alert. Find out why at http://t.co/WHJp8eTsSr #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 198
Market Int Center
19 Aug 14 09:03:00
Tiffany $TIF Showing Bearish Technicals With Support At $96.54 ( http://t.co/FtakLs6Lu0 )
Jeffrey Blake
19 Aug 14 09:01:21
$TIF Tiffany & Co. CEO Michael Kowalski to Retire; Successor Named http://t.co/7tieSV0NmI
Alfred Ip
19 Aug 14 06:22:53
$KING Short Trade Idea http://t.co/nPqyHqNGfT $ZNGA $QQQ $TIF $TWTR
Alfred Ip
18 Aug 14 15:37:50
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Market News
18 Aug 14 14:50:34
$TIF: [video] Concern for Michael Kors http://t.co/P3pKIQXBYG http://t.co/QYBK1wXsl0
Wall Street News
18 Aug 14 13:50:33
$TIF: Tiffany & Co. Receives Average Rating of "Buy" from Brokerages (NYSE:TIF) http://t.co/dHxGQnqkI9 http://t.co/YvMvuw4gGT
4-traders.com
18 Aug 14 13:15:07
Tiffany : Achieves New Milestone in Conflict-free Diamond Sourcing http://t.co/N4SgRc28oJ $TIF
ADimeADozen
18 Aug 14 12:59:36
$TIF Considerable entry point to go short would be a couple of minutes before the close pertaining that price closes below 20 Day SMA
_JustBlaze
17 Aug 14 14:12:37
RT @_90sHardHead: Birthday Weekend $tif http://t.co/1SLHxM7j5s
Armand Ruiz
17 Aug 14 10:26:08
RT: @BrendaPayne56-Awesome #Stock #Research $TAP $IBM $TIF $OPK #overvalued http://t.co/o6YQ3ItSv8
cash hound
16 Aug 14 19:30:56
RT @_90sHardHead: Birthday Weekend $tif http://t.co/1SLHxM7j5s
BO$$ MAN
16 Aug 14 18:32:18
RT @_90sHardHead: Birthday Weekend $tif http://t.co/1SLHxM7j5s
TracyLynn™
16 Aug 14 18:19:43
Birthday Weekend $tif http://t.co/1SLHxM7j5s
ⓢ
16 Aug 14 16:30:25
Tiffany & Co. CEO Michael Kowalski to Retire; Successor Named http://t.co/75MaJp37xL $TIF
Financial Headlines
16 Aug 14 14:50:19
$TIF: Spenders Sprang For Sporting Goods, Jewelry For Q2 http://t.co/aL2ScWsAC2 http://t.co/4XnJrJCL6H
Martin Johnson
16 Aug 14 13:31:58
Top Performing #Stocks today $ANF $GXP $TIF $FB #financial http://t.co/nVZRbOcRVy
Carson Dahlberg, CMT
16 Aug 14 11:44:19
SP500 stocks in uptrend w/ 5/1 RiskReward $ETN $FCX $JWN $SLB $TIF http://t.co/OSoE5uXN4j
Market Int Center
15 Aug 14 12:54:45
Potential Tiffany $TIF Trade Targets 6.45% Return ( http://t.co/QUN5injyWp )
Clair Voight
15 Aug 14 11:00:51
$TIF Tiffany & Co. Receives Average Rating of "Buy" from Brokerages (NYSE:TIF) http://t.co/xTbJZ46EFo
Jack Trader
15 Aug 14 11:00:50
$TIF Tiffany & Co. CEO Michael Kowalski to Retire; Successor Named http://t.co/xTWOrTu718
Financial Headlines
15 Aug 14 07:50:33
$TIF: [$$] Tiffany Taps Cumenal As CEO http://t.co/d1ktfUd8En http://t.co/QSRHOV5xCw
Market Headlines
15 Aug 14 06:50:48
$TIF: Spenders Sprang For Sporting Goods, Jewelry For Q2 http://t.co/j4QKI6FADA http://t.co/VZGe4Urni8
US Banking News
15 Aug 14 06:10:41
Analysts Give Average Rating of Buy to Tiffany & Co. $TIF http://t.co/gUxpBwTU7o
The Fly
14 Aug 14 14:20:31
$BK $MDLZ $PEP $TIF $ALLE $IR $GNC Trian Fund gives quarterly update on stakes: Full Story http://t.co/4Awv46hpV6
John Siracusa
14 Aug 14 06:21:12
RT @Brady_FBN: #Macys earnings miss and disappointing July #retail sales data weigh on the stocks today $XRT $M $KSS $TIF $JWN $FOSL http:/…
InterCooler
14 Aug 14 04:21:04
Tiffany & Co. Rating Reiterated by Credit Suisse $TIF http://t.co/JQTSSfIQuX
Точка Входа.Трейдинг
14 Aug 14 03:00:42
In Play / / $TIF $CREE $YELP $ITMN / / #трейдинг #nyse #nasdaq
				
				
By  +Follow October 8, 2013 2:10PM
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