BIG MONEY IN SILVER COINS AHEAD?
SILVER MAY BE ABOUT TO STEP OUT OF GOLD’S SHADOW
Silver May Be About to Step Out of Gold’s Shadow
An observer of the precious-metal markets once commented that silver has its bright, white luster so that it can find its way in the shadow of gold—alluding, of course, to the fact that gold is a tough act for any metal to follow. While silver lacks the nobility of gold, it nevertheless has always had a well-defined place in the hierarchy of monetary and coinage metals. Initially, silver filled the critical niche between gold coins, once affordable only to governments and the wealthy, and copper and bronze coins, which had limited acceptance. Today, silver still fills that gap in places like coin shows, where relative affordability makes silver coins enormously popular. Coin collectors, traders, and dealers working on budgets can set up far more substantial and more impressive displays of silver coins than gold coins. And with security always an issue, silver coins carry far less financial risk than gold. It now seems that silver may be about to step out of gold’s daunting shadow. The COVID-19 pandemic has severely disrupted the supply of newly mined silver—and that has huge implications for future prices. In late March 2020, in response to the worsening pandemic, the government of Mexico halted all nonessential commercial activities, including mining. As the world’s leading source of silver, Mexico produced 200 million troy ounces in 2019—nearly one-quarter of the world’s production. Within the following week, other major silver-producing nations— including Bolivia, Peru, Poland, and Chile—closed their mines. These combined shutdowns have slashed global silver production by 66 percent. In 2020, the world had been projected to produce 850 million troy ounces of silver or roughly 71 million troy ounces per month. The pandemic shutdowns have since reduced production to only 24 million troy ounces per month. By late May, the cumulative production shortfall had topped 90 million troy ounces. This shortage already amounts to an unexpected 11 percent decrease in the projected 2020 output. And if mine start-ups are slow, the economy remains depressed, or a second wave of COVID-19 closes mines again, the 2020 production shortfall could be much more significant—and silver prices will skyrocket.
FLUCTUATIONS IN SILVER MINING
Silver mining is no stranger to wild production swings; its history is marked by huge discoveries, fabulous booms, and dismal busts. And during each major silver-mining boom, mints have turned out a flood of now-legendary silver coins. Silver was first mined in what is now Turkey around 4000 BCE. Although the metal initially had no utilitarian use, it was valued for its rarity, substantial weight, and visual appeal. A popular medium of exchange in early
Mediterranean commerce, silver was traded in crude pieces with their value directly proportional to their weight. The first great silver discovery came at Laurium, near Athens, Greece, where full-scale production began in 550 BCE. By 500 BCE, the Greeks were minting silver drachma coins that would become the model for future world coinage. For the next three centuries, Laurium would contribute more than a million troy ounces of silver per year to fund the ascendancy of classical Greece. Silver was equally important to the Romans, who obtained most of their supply from rich silver-lead deposits in what is now Spain. Roman silver denarius coins served as the standard payment in Mediterranean commerce for more than 400 years. By the early 1500s CE, the center of silver production had shifted to the Erzgebirge (Ore Mountains) on the present-day border of Germany and the Czech Republic. Over the next century, the Erzgebirge mines produced 130 million troy ounces of silver. To utilize its growing silver stockpile, the Erzgebirge mining town of St. Joachimsthal turned out Joachimsthaler coins. Weighing nearly one troy ounce, these were the first
large modern silver coins ever minted. Joachimsthaler, shortened to the German taler and the Dutch daler, is the etymological base of the English word “dollar.” Before the 16th century, the world had produced about seven billion troy ounces of silver. But Spain’s New World explorers were about to discover the metal in previously unimaginable quantities. In 1545 in the Viceroyalty of Peru (now Bolivia), they discovered a mountain filled with extraordinarily rich silver veins. The mines at the new city of Potosí were soon turning out eight million troy ounces of silver annually. At the same time, Spanish prospectors found silver in the Viceroyalty of Mexico, where mines at San Luis Potosí, Taxco, Zacatecas, Batopilas, Guanajuato, and Mapimí began yielding another fortune in silver. Most of Spain’s enormous colonial silver production was minted into eight-real coins, the familiar “pieces of eight.” These coins, weighing nearly one troy ounce, circulated worldwide. In 1730, Spain refined these crude eight-real pieces into round silver coins called “pillar dollars.” By the time Spain’s colonial empire collapsed in the early 1800s, its mines had produced eight billion troy ounces of silver—more than had been mined worldwide in the previous 5,500 years.
PROLIFIC SILVER PRODUCTION IN THE WEST
The western United States was the site of the next great silver strikes. Throughout the 1860s, Nevada’s Comstock Lode turned out six million troy ounces of silver per year. In the 1880s, the mines at Leadville, Colorado, shipped 11 million troy ounces of silver annually, as did northern Idaho’s aptly named “Silver Valley.” These exceedingly rich underground ores often graded hundreds and sometimes thousands of troy ounces of silver per tonne (metric ton). In 1892, the Smuggler Mine in Aspen, Colorado, yielded the largest silver “nugget” ever documented. Weighing 2,350 pounds and consisting of 93 percent metallic silver, it had to be cut into pieces to be hoisted up the narrow shaft. The West’s prodigious silver production far exceeded the limited domestic demand for jewelry, silverware, and coinage, then the metal’s only uses. In 1878, to support the silver price and the West’s economy, Congress ordered the U.S. Department of the Treasury to purchase one million troy ounces of silver per month, for use in minting vast quantities of Morgan silver dollars. By the late 1880s, annual U.S. silver production had topped 50 million troy ounces. Even though the nation was literally awash in silver, Congress passed the Sherman Silver Purchase Act of 1890, which required the Treasury to purchase four million troy ounces of silver each month—and mint, even more, Morgan dollars. In 1893, Congress yielded to political pressure from the eastern states and repealed the Sherman Silver Purchase Act. Without the huge Treasury purchases, the price of silver plummeted from a subsidized $1.29 to only 60 cents per troy ounce. Silver mines closed by the hundreds, putting an end to the glory days of silver mining. By the 1960s, soaring industrial demand had driven the price of silver above the governmentestablished $1.29 per troy ounce. The Treasury halted its purchases, withdrew the metal from circulating coinage, and turned it loose as a free-market commodity. By that time, the nature of silver mining had changed radically. Silver occurs in multimetal deposits, always in association with such other metals as gold, lead, zinc, and copper. Traditionally, silver came from primary mines in which it was the main economic product, with other metals being by-products of lesser value. But by 1900, most primary silver mines had exhausted their rich ores. Meanwhile, industrialization was sharply increasing demand for the base metals copper, zinc, and lead. Many base-metal ores contain small, but recoverable quantities of silver. As growing numbers of base-metal mines turned out more significant amounts of by-product silver, primary silver mines began losing their importance. Today, primary silver mines account for only 30 percent of global silver production. Of the remainder, 35 percent comes
from lead-zinc mining, 22 percent from copper mining, and 13 percent from gold mining. With 70 percent of all newly mined silver coming from base-metal and gold mining, the silver price is no longer the driving factor behind the mine production of silver. Because gold and base-metal mines recover by-product silver at little additional cost, they sell it profitably regardless of the price of silver. Additionally, the erratic booms and busts that once characterized silver production is a thing of the past. This change came about when the mine supply of silver started coming from a broad base. As a result, silver production today is much steadier and more predictable than ever before. Most gold ores contain between 10 and 20 percent silver, and both metals are recovered through the same cyanidation-extraction process. The “gold” that is poured at gold mines, called doré, is actually a gold-silver mix, the proportions of which reflect the metal values in the ore. Today, the world’s gold mines recover about 12 million troy ounces of by-product silver per year. In just the last 20 years, this has amounted to more than 200 million troy ounces.
SILVER MINING’S RESPONSE TO PANDEMIC
The impact of the COVID-19 pandemic on gold mining and silver mining differs radically. Sixty-six percent of silver production is shut down, but only nine percent of gold production. More than 90 percent of all newly mined gold comes from primary gold mines. These are mostly huge, mechanized open pits where drillers, haulage-truck drivers, crusher operators, and leach-pad technicians work alone or with minimal human contact. The gold-recovery circuits in the mills of these mines are highly automated. Because gold mining is not a high-risk environment for the spread of the COVID-19 virus, few mines have shut down. But all lead-zinc mines and almost all primary silver mines are underground operations where miners work in close contact and breathe ventilated air in constricted areas. Because these conditions are favorable for the spread of the virus, most underground mines have closed. And the pandemic has also shut down much of the construction and manufacturing sectors, the resulting weakened demand for base metals also reduces the output of by-product silver. The pandemic’s adverse effects are linked to another aspect of silver production—the purported arrival of “peak silver.” Peak silver refers to the year when annual worldwide silver production has been maximized and will never again achieve the same level. It is the point where silver supply begins to fall rapidly short of demand. Like the theory of “peak gold,” the idea of peak silver proposes that the production of nonrenewable resources follows a bell-shaped curve by climbing, peaking, and then sinking into terminal decline. During the 16th century, the average annual world silver production was 6.9 million troy ounces. By the 19th century, it had risen to 51 million troy ounces. From 1900 to 1999, it jumped again to 274 million troy ounces. In just the first 20 years of this century, average annual
silver production has soared to 750 million troy ounces. The magnitude of this astounding increase is apparent in one telling statistic: More than one-quarter of all the silver ever mined in history has come to surface in just the last 20 years. Graphically, this production trend fits nicely into the front half of a bell curve. The steep “front” of this curve represents the recent rapid acceleration in production. During the past few years, however, this rate has leveled and has reached what appears to be the peak of an incomplete curve. If the peak-silver theory is correct, silver production is about to begin—or has already begun—its downward trend onto the backside of the curve. In 2000, global silver output was 643 million troy ounces. Driven by booming gold and base-metal mining, it increased steadily to an all-time high of 861 million troy ounces in 2015. But since then, production has slowly decreased to 850 million troy ounces in 2019, leaving many metal-market analysts to conclude that 2015 was indeed the year of peak silver. If they are correct, the COVID-19 pandemic will only accelerate the predicted decline in production. Silver production for 2020 has already taken a big hit, the full extent of which remains unknown. Some analysts suggest that silver mining may never fully recover from the pandemic shutdown. Declining ore grades also support the idea of peak silver. The days when silver ores graded 50 or more troy ounces per tonne are long gone. Since 2000, the average ore grade of the world’s ten largest primary silver mines has declined from 15 troy ounces per tonne to only nine troy ounces. Some primary silver mines are already working ores that grade only five troy ounces per tonne. And many base-metal ores contain a mere one troy ounce of by-product silver per tonne. Primary silver mines, beset with high undergroundmining costs and declining ore grades, face a bleak future. Of the world’s top 20 silver producers, only six are primary silver mines. Their ore reserves, defined as ore that can currently be mined profitably, are estimated at 18 billion troy ounces. While that’s a significant number, these reserves will last only 20 years at the current mining rate, and exploration geologists do not expect any major new silver discoveries. The end of primary silver mining will come in the not-so-distant future and eliminate nearly one-third of the current silver supply. Looking at the overall prospects of silver mining, GoldSilver senior analyst Jeff Clark writes, “There is no doubt at this point that the silver supply is going to tighten.” And Clark offered this comment shortly before the onset of the COVID-19 pandemic. Although silver is about 20 times more abundant than gold in the Earth’s crust, it is still a rare metal. The United States Geological Survey estimates 60 billion troy ounces of silver have been mined throughout history. To visualize the estimated amount, all of it would occupy a cube about 170 feet on a side, and that’s not much for 6,000 years of mining. About 88 percent of all the gold ever mined —an estimated 6.3 billion troy ounces—still exists. But that’s not the case with silver, which, unlike gold, is primarily an industrial metal. According to The Silver Institute, 90 percent of all mined silver has been lost, mainly through dissipative and non-recoverable industrial uses. The current above-ground stocks of silver are estimated at 5.6 billion troy ounces; 48 percent of these stocks exist in industrial forms, 46 percent are jewelry and decorative items, and 6 percent are coins and bullion. Author, attorney, precious-metal investor, COINage contributing writer, and former American Numismatic Association president David L. Ganz is confident that declining future silver production will favorably impact silver prices. But as for the idea that we have passed the time of peak silver and that mine production will never again reach the 2015 level, he is a bit more cautious. “From my experience with precious metals,” Ganz says, “I learned never say ‘never.’” Silver has always managed to find its way in the shadow of gold throughout history, and it may soon be gleaming brighter than ever. The possibility of already having achieved peak silver coupled with the current negative impacts of the COVID-19 virus on mine production could indeed trigger a major shortfall in mine supply that sends silver prices skyrocketing.