Not Enough Silver
By David Morgan

April 24, 2008

In my article “Silver is too bulky,” we examined a hypothetical look at the average baby boomer placing ten percent of their net worth into the precious metals, split 50/50 gold and silver. At the time, silver was trading over $15 per troy ounce. Since publishing that article silver has traded over $21 and is now trading between $17 and $18.

Many in the mainstream understand portfolio diversification, true diversification as outlined in the Ibbotson Study, which states that precious metals are the only asset class that truly moves opposite to stocks and bonds. Now let us look a little deeper into what a ten percent allocation to precious metals would mean. First, we examine just how many boomers exist in the United States. The statistics vary, and for our purposes we will use 75 million baby boomers in the U.S.A.

Is there enough silver if just ten percent of the baby boomer population were to allocate five percent of their net worth into silver, could it be accomplished? This might seem like a totally absurd question, yet the answer may begin to sink into the collective unconscious of today’s investor. When the Secretary of the Treasury uses the words “financial crisis” more than five times in a recent speech, the attraction to precious metals becomes more urgent.

In the “Silver Is Too Bulky” article, we found the medium net worth of the boomers was about $180,000. So ten percent of this would be $18,000, but remember, for the purposes of this discussion we are going to divide our ten percent allocation to both silver and gold on a fifty-fifty basis. This means $9,000 into gold, and $9,000 into silver!

If ten percent of the boomers allocated $9,000 to buy silver, we would have 7.5 million (ten percent of the boomer population) times $9,000. Pretty simple arithmetic; the product is $67.5 billion. But wait just a moment! Something must be erroneous—the amount of investment grade silver (bullion and coins)* is about one billion ounces.

At our $18 per ounce, that is obviously $18 billion to purchase the entire silver supply, including all .999 fine bullion and silver coins! Perhaps now you can appreciate why the most enlightened financial planners talk in gold terms only; either they know the silver market is pitifully small (unlikely), making it extremely attractive, or they feel safer with gold because gold has become mainstream.

Consider that boomers are defined as being born between 1946 and 1964. During that entire timeframe each and every boomer had a form of money that is far different from today. The United States of America was using dollars backed by silver.

Take a look at the Silver Certificate below.

Notice that this is a certificate and not a “note.” Many of you have recently asked about taking possession of your having your stock certificates mailed to you as a precaution to the possibility of further financial problems.

This certificate represents that there was a dollar* on deposit in the Treasury of the United States of America. Additionally this dollar was payable to the bearer of this certificate on demand. In 1964 the M1 money supply was 153 billion. This would represent a silver supply of 153 billion Dollars (371 4/16 grain (24.1 g)) pure silver. In familiar terms 371.25/480 = 0.7734 troy ounces. And in 1964, the United States held 1.2 billion ounces of silver, not counting the 139.5 million ounces held as a strategic stockpile. Source: The Silver Institute and Silver Bonanza, page 89.

What kind of silver wealth would that represent? Approximately sixteen ounces of silver for every boomer born. That’s correct—each boomer had 16 ounces of silver. However, that was then, and here we are today: the official silver holdings of the United States Treasury is gone, even the strategic stockpile is gone.

Along the road from silver-backed currency to today’s electronic miracle money, a funny thing happened. Nearly one hundred percent of these very same boomers believe with all their might that not only is silver not money, most don’t even know that at one time (during their birth and prior) the only lawful money was silver.

Silver Coins

Silver Coins can be broken down into several subsets, and for the purposes of this article some, not all, of the major broad categories will be examined.

One of the main subsets is bullion coins. These mainly comprise silver coins struck by government mints around the world and include Silver Liberties (U.S.), Silver Maples (Canada), Silver Pandas (China), and some other lesser-known bullion coins. Most of these coins are tightly held and many are dispersed so far and wide that bringing them back to the market is a fantasy. As an example, some percentage of these coins are held as single pieces, where a single coin was given as a gift of some type. In those instances it is very unlikely that these single unitholders are waiting for the day to cash in on their silver investments. The total amount of Silver “Eagles” minted since inception (1986) to present is approximately 160 million ounces. If we are generous and round up to 200 million we can account for Silver Maples, Pandas, and Australian Silver mintages.

Another subset is loosely defined as “coins.” These are known in the trade as medallions although they have all the characteristics of coins but are minted privately and often carry the name “silver rounds.” Many of these “rounds” are nothing more than a convenient way to invest in silver and sell for very close to the spot price of silver. However, there are also many that carry very large premiums as they are low mintage and used in many instances to signify a certain group, club, event, historic moment, or what have you; these are normally keepsakes and in most instances will not be coming back to the marketplace.

The junk silver market is another arena of silver coins. These are coins that were minted by various governments around the world that trade for their silver content. The amount of “junk” silver is small at this point because much of this silver has been melted down and refined into silver bullion for industrial purposes. However, there is an active market for this type of silver and it is usually the lowest premium form of silver available for investment. Almost all of this silver is marked as “investment” and willing to come back to the market at some price.

The last subset we will discuss is the numismatic market, which is the rare coin market. This is the collector market and is certainly part of the overall picture. These coins will not come back to the market for their silver content. They will continue to trade among silver coin collectors and investors, but this subset does not represent any significant amount of silver rushing back into the marketplace. In fact, the opposite is true: this silver (admittedly small) is not coming back to the market to fill industrial demand. 

David Morgan

*Dollar =three hundred and seventy-one grains and four sixteenths parts of a grain of pure silver.  See coinage act of 1792