2015 Silver Series Part 4: Making The Case For Silver
In the previous parts of The Silver Series, we’ve shown that silver has a rich and multi-faceted history with applications in money, health, and technology. We’ve covered the metal’s supply and geological origins, as well as the growing demand stemming from industry, investment, and other areas.
However, the real question for investors boils down to this: is it worth it to hold silver bullion or equities in a portfolio?
Silver and Gold
The two major precious metals are alike in many ways. They’ve both been used as money for thousands of years, and both are considered a store of wealth today. However, to understand the nuances of silver as an asset, it is important to keep in mind a couple of key differences that it holds from the yellow metal.
The most obvious difference is that silver is used much more widespread in industry than gold. Approximately 50% of all demand stems from technological applications like photovoltaics, automobiles, batteries, and other such uses. This gives silver a potentially wider range of demand triggers.
The other major difference is that in comparison to the gold market, silver trades thinly and with much higher volatility. In 2014, there was $20.4 billion of demand for physical silver and $159.7 billion demand for physical gold. Even more interesting, these physical markets are less than 1% the size of the total markets when factoring paper trades like derivatives, futures contracts, and options.
Silver typically hits higher highs and lower lows than gold. To the savvy investor, this creates great opportunity.
Why Own Silver?
The reasons an investor should consider exposure to silver can be summed up with three key points.
Silver has little or no correlation with most asset classes such as bonds, stocks, or real estate. This is because silver prices move based on supply and demand, but also because of other factors such as the global economic environment, futures market speculators, currency markets, the level of inflation or deflation, and central bank policy decisions. Even though silver itself is more volatile than many other asset classes, it does help reduce the overall risk of a portfolio by having less correlation to other asset classes. Over the last eight years, silver’s correlation to treasuries and bonds have been basically zero (-0.07 and 0.08 respectively). It has slightly higher correlation with US equities (0.23) and real estate (0.13).
2. Safe Haven
When the times get tough, silver is your friend. Even in the most challenging environments it holds its value or bucks the negative global trends.
How did silver do in the four years surrounding the Financial Crisis? Over a period where US equities, emerging markets, and REITs were down, silver more than doubled in value from 2007-2011.
3. Fundamentals and Value
The fundamental numbers around silver make it quite clear that silver could provide extreme value as an investment. Here are some key numbers:
- In the earth’s crust, there is 1 gram of silver for every 12.5 tonnes of rock.
- For centuries since ancient times, the gold-to-silver ratio was 15 to 1. That means 1 oz of gold could buy 15 oz of silver.
- In the earth’s crust, there is 19x more silver than gold by mass.
- The “modern” gold-to-silver ratio is closer to 50 to 1.
- Yet, in mid-2015 the ratio is 75 to 1, which means silver could be very undervalued relative to gold.
- The silver price, in terms of USD, is also at its lowest point in five years.
- Silver miners are even cheaper, trading at their lowest valuation in years.
Silver, the metal itself, continues to have the same impressive properties, supply and demand fundamentals, and a rich history as money. What has changed is what people are willing to pay for it at a given time.
Right now it seems that silver is being sold for half price.
That’s the end of our Silver Series. Thanks for reading!
Prove Your Metal: Top 10 Strongest Metals on Earth
There are 91 elements that are defined as metals but not all are the same. Here is a breakdown of the top 10 strongest metals and their applications.
Prove Your Metal: Top 10 Strongest Metals on Earth
The use of metals and the advancement of human civilization have gone hand in hand — and throughout the ages, each metal has proved its worth based on its properties and applications.
Today’s visualization from Viking Steel Structures outlines the 10 strongest metals on Earth and their applications.
What are Metals?
Metals are solid materials that are typically hard, shiny, malleable, and ductile, with good electrical and thermal conductivity. But not all metal is equal, which makes their uses as varied as their individual properties and benefits.
The periodic table below presents a simple view of the relationship between metals, nonmetals, and metalloids, which you can easily identify by color.
While 91 of the 118 elements of the periodic table are considered to be metals, only a few of them stand out as the strongest.
What Makes a Metal Strong?
The strength of a metal depends on four properties:
- Tensile Strength: How well a metal resists being pulled apart
- Compressive Strength: How well a material resists being squashed together
- Yield Strength: How well a rod or beam of a particular metal resists bending and permanent damage
- Impact Strength: The ability to resist shattering upon impact with another object or surface
Here are the top 10 metals based on these properties.
The Top 10 Strongest Metals
|Rank||Type of Metal||Example Use||Atomic Weight||Melting Point|
|#1||Tungsten||Making bullets and missiles||183.84 u||3422°C / 6192 °F|
|#2||Steel||Construction of railroads, roads, other infrastructure and appliances||n/a||1371°C / 2500°F|
|#3||Chromium||Manufacturing stainless steel||51.96 u||1907°C / 3465°F,|
|#4||Titanium||In the aerospace Industry, as a lightweight material with strength||47.87 u||1668°C / 3032°F|
|#5||Iron||Used to make bridges, electricity, pylons, bicycle chains, cutting tools and rifle barrels||55.85 u||1536°C / 2800°F|
|#6||Vanadium||80% of vanadium is alloyed with iron to make steel shock and corrosion resistance||50.942 u||1910°C / 3470°F|
|#7||Lutetium||Used as catalysts in petroleum production.||174.96 u||1663 °C / 3025°F|
|#8||Zirconium||Used in nuclear power stations.||91.22 u||1850°C / 3.362°F|
|#9||Osmium||Added to platinum or indium to make them harder.||190.2 u||3000°C / 5,400°F|
|#10||Tantalum||Used as an alloy due to its high melting point and anti-corrosion.||180.94 u||3,017°C / 5462°F|
Out of the Forge and into Tech: Metals for the Future
While these metals help to forge the modern world, there is a new class of metals that are set to create a new future.
Rare Earth elements (REEs) are a group of metals do not rely on their strength, but instead their importance in applications in new technologies, including those used for green energy.
|Neodymium||Magnets containing neodymium are used in green technologies such as the manufacture of wind turbines and hybrid cars.|
|Lanthanum||Used in catalytic converters in cars, enabling them to run at high temperatures|
|Cerium||This element is used in camera and telescope lenses.|
|Praseodymium||Used to create strong metals for use in aircraft engines.|
|Gadolinium||Used in X-ray and MRI scanning systems, and also in television screens.|
|Yttrium, terbium, europium||Making televisions and computer screens and other devices that have visual displays.|
If the world is going to move towards a more sustainable and efficient future, metals—both tough and smart—are going to be critical. Each one will serve a particular purpose to build the infrastructure and technology for the next generation.
Our ability to deploy technology with the right materials will test the world’s mettle to meet the challenges of tomorrow—so choose wisely.
Visualizing the Life Cycle of a Mineral Discovery
Building a mine takes time that poses risks at every stage. This graphic maps a mineral deposit from discovery to mining, showing where value is created.
Visualizing the Life Cycle of a Mineral Discovery
Mining legend Pierre Lassonde knows a little bit about mineral exploration, discovery, and development. Drawing from decades of his experience, he created the chart above that has become a staple in the mining industry—the Lassonde Curve.
Today’s chart of the Lassonde Curve outlines the life of mining companies from exploration to production, and highlights the work and market value associated with each stage. This helps speculative investors understand the mining process, and time their investments properly.
Making Cents of Miners: The Stages of a Mineral Discovery
In the life cycle of a mineral deposit, there are seven stages that each offer specific risks and rewards. As a company proves there is a mineable deposit in the ground, more value is created for shareholders along the way.
This stage carries the most risk which accounts for its low value. In the beginning, there is little knowledge of what actually lies beneath the Earth’s surface.
At this stage, geologists are putting to the test a theory about where metal deposits are. They will survey the land using geochemical and sampling techniques to improve the confidence of this theory. Once this is complete, they can move onto more extensive exploration.
There is still plenty of risk, but this is where speculation hype begins. As the drill bit meets the ground, mineral exploration geologists develop their knowledge of what lies beneath the Earth’s crust to assess mineral potential.
Mineral exploration involves retrieving a cross-section (drill core) of the crust, and then analyzing it for mineral content. A drill core containing sufficient amounts of metals can encourage further exploration, which may lead to the discovery of a mineable deposit.
Discovery is the reward stage for early speculators. Exploration has revealed that there is a significant amount of material to be mined, and it warrants further study to prove that mining would be feasible. Most speculators exit here, as the next stage creates a new set of risks, such as profitability, construction, and financing.
This is an important milestone for a mineral discovery. Studies conducted during this stage may demonstrate the deposit’s potential to become a profitable mine.
Institutional and strategic investors can then use these studies to evaluate whether they want to advance this project. Speculators often invest during this time, known as the “Orphan Period”, while uncertainty about the project lingers.
Development is a rare moment, and most mineral deposits never make it to this stage. At this point, the company puts together a production plan for the mine.
First, they must secure funding and build an operational team. If a company can secure funding for development, investors can see the potential of revenue from mining. However, risks still persist in the form of construction, budget, and timelines.
Investors who have held their investment until this point can pat themselves on the back—this is a rare moment for a mineral discovery. The company is now processing ore and generating revenue.
Investment analysts will re-rate this deposit, to help it attract more attention from institutional investors and the general public. Meanwhile, existing investors can choose to exit here or wait for potential increases in revenues and dividends.
Nothing lasts forever, especially scarce mineral resources. Unless, there are more deposits nearby, most mines are eventually depleted. With it, so does the value of the company. Investors should be looking for an exit as operations wind down.
Case Study: The Oyu Tolgoi Copper-Gold Discovery, Mongolia
So now that you know the theoretical value cycle of a mineral discovery, how does it pan out in reality? The Oyu Tolgoi copper deposit is one recent discovery that has gone through this value cycle. It exemplifies some of these events and their effects on the share price of a company.
- Concept: 15+ Years
Prospectors conducted early exploration work in the 1980s near where Oyu Tolgoi would be discovered. It was not until 1996 that Australian miner BHP conducted further exploration.
But after 21 drill holes, the company lost interest and optioned the property to mining entrepreneur Robert Friedland and his company Ivanhoe Mines. At this point in 1999, shares in Ivanhoe were a gamble.
- Pre-Discovery/Discovery: ~3 years
Ivanhoe Mines and BHP entered into an earn-in agreement, in which Ivanhoe gained ownership by completing work to explore Oyu Tolgoi. A year later, the first drill results came out of drill hole 150 with a headline result of 508 meters of 1.1 g/t Au and 0.8%. To get a sense of how large this is, imagine the height a 45-story building, of which a third of story is copper. This was just one intersection of an area that could stretch for miles.
Wild speculation began at this stage, as steadily improving drill results proved a massive copper-gold deposit in Mongolia and drove up the share price of Ivanhoe.
- Feasibility/Orphan Period: ~2 years
In 2004, the drilling results contributed to the development of the first scoping study. This study offered a preliminary understanding of the project’s economics.
Using this study, the company needed to secure enough money to build a mine to extract the valuable ore. It was not until two years later, when Ivanhoe Mines entered into an agreement with major mining company Rio Tinto, that a production decision was finalized.
- Development: 7 years
By 2006, the Oyu Tolgoi mineral deposit was in the development phase with the first shaft headframe, hoisting frame, and associated infrastructure completed. It took another two years for the shaft to reach a depth of 1,385 feet.
Further development work delineated a resource of 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. This first stage of development for Oyu Tolgoi made Mongolia the world’s fastest growing economy from 2009 to 2011.
- Startup/Production: Ongoing
On January 31, 2013, the company announced it had produced the first copper-gold concentrate from Oyu Tolgoi. Six months later, the company stated that it was processing up to 70,000 tonnes of ore daily.
- Depletion: Into the Future
The Oyu Tolgoi deposit will last generations, so we have yet to see how this will affect the value of the mine from an investment perspective.
It’s also worth noting there are still other risks ahead. These risks can include labor disruptions, mining method problems, or commodity price movement. Investors will have to consider these additional conditions as they pan out.
The More You Know
Mining is one of the riskiest investments with many risks to consider at every stage.
While most mineral discoveries do not match it perfectly, the Lassonde Curve guides an investor through what to expect at each stage, and empowers them to time their investments right.
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