Why is silver so cheap?  On an inflation-adjusted basis, the price of silver is comparable to the price of dirt right now.  It is a bizarre historical anomaly for a metal that has been treasured since the dawn of civilization.

The precious white metal’s current price is a far cry from how valuable it used to be.

For example, during the 1st century AD in the Roman Empire, one day’s skilled labor was equal to one silver denarius coin.  This was equivalent to about 3.9 grams (0.1254 troy ounces) of pure silver.

In late 14th century medieval England, a master carpenter earned one groat (4-pence) per day.  These coins weighed 4.66 grams of sterling silver, or 4.31 grams (0.1386 troy ounces) of fine silver.

A skilled construction worker in late 16th century Mughal India commanded a salary of 5.25 silver rupees a (lunar) month.  A Mughal rupee was a large coin containing 11.3 grams of nearly pure silver.  Assuming a 6 day work-week, this would translate into a daily wage of around 2.47 grams (0.0795 troy ounces) per diem.

Even as recently as the 1850s, a carpenter living in the United States would have only received a daily wage of somewhere around $1.50.  Because a silver dollar contained 24.06 grams of pure silver, this wage would have equaled 36.08 grams (1.1601 troy ounces) of fine silver per day.

Today we can conservatively expect a skilled worker to earn a minimum salary of $25 per hour, or $200 per day.  With silver currently bouncing around $16 a troy ounce, today’s skilled laborer earns a wage of 388 grams – 12.5 troy ounces – of silver every day!

This naturally leads to a very basic question.  Why is silver so cheap right now?

Another way to measure the historical price of silver is via the gold-silver ratio.  This calculates the price of one troy ounce of gold in terms of ounces of silver.

From the dawn of human history until the mid 19th century, this ratio never rose above 20 to 1.  It fluctuated from a low of 2.5 to 1 at the dawn of the Egyptian Empire in 3100 BC to a high of 16 to 1 throughout much of the 19th century.  It was 12.5 to 1 during the time of Roman Emperors.  In early 19th century Japan under the Tokugawa Shogunate, the ratio was 5 to 1.

Today the gold-silver ratio stands at 82 to 1.

So once again I’ll ask the question.  Why is silver so cheap?

If you look at how much silver is mined every year, the lunar-themed metal seems even rarer.  The global mine supply of silver has averaged 803.2 million troy ounces per annum over the past decade (2008 through 2017), while gold has averaged 89.4 million troy ounces over the same period.  This gives a gold-silver production ratio of about 9 to 1.

This doesn’t make any sense.  Why is silver so cheap?

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From a historical perspective, the price of silver only really collapsed about 150 years ago, starting around 1870.  And then the white precious metal’s situation went from bad to worse in the 20th century.  This culminated in silver’s price washout in the 1990s to early 2000s, when you could buy as much of the stuff as you wanted for a mind-blowingly low $5 an ounce!  This was most likely a unique historical event.

Even though you can no longer buy silver for $5 an ounce, it is still tremendously undervalued today.  In order to understand why silver is as cheap as dirt, we have to look back at a few key events in world history.

The first of these was demonetization – the discontinuance of silver as an official form of money.

Until the 1860s, many nations around the world were on silver standards or bimetallic gold-silver standards.  This manifested itself through the free coinage of silver, meaning that you could take unlimited quantities of silver bullion to your national mint and have it turned into legal tender silver coins (for a fee, of course).  So your silver bullion was, quite literally, money!

But the coup de grâce for the global silver standard came, rather unexpectedly, from the aftermath of the Franco-Prussian War.  Once the Prussian Army had crushed the French at the battle of Sedan in 1870, the victorious Germans demanded an indemnity of 5 billion gold francs from the defeated nation.  The French had no choice but to pay the exorbitant bribe, even though it amounted to a staggering 1,451 metric tonnes of gold.  As a point of reference, this is more gold than is currently held in the entire Swiss national gold reserves.

Prussia opportunistically used this golden windfall to switch its currency from the silver-backed German Thaler to the gold-backed German Mark.  However, because the major economic powers of Great Britain and France were already on gold standards, this Prussian monetary reform had an unintended side effect.

It fatally undermined the acceptability of all remaining silver-backed currencies in international trade, causing a domino effect.  As the price of silver fell throughout the 1870s, more countries (including the U.S.) were forced to switch to gold-backed currencies as silver-backed currencies collapsed in foreign exchange value.

At the same time, halfway around the world in the United States major silver mining discoveries were taking place.  The first of these was the famous Comstock Lode, located in Virginia City, Nevada.  This deposit produced massive quantities of silver from 1860 until the mid 1880s.

As the Comstock Lode’s production began to taper in the late 1870s, Leadville, Colorado replaced it as the United State’s premier silver boom town.  Mining there continued uninterrupted until the early 1890s.

Silver was also discovered in the Coeur d’Alene region of Idaho in the mid 1880s.  This area eventually became one of the most prolific silver deposits in the world, yielding more than a billion troy ounces of the precious metal to date. Silver is still mined in the Coeur d’Alene region today, over 130 years after its first commercial production.

These sizable silver discoveries ensured that prodigious supplies of the precious white metal flooded the global market for decade after decade, helping to drive its price down.

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Another little-recognized factor that crippled silver prices was the commercial deployment of electrolytic refining in the late 19th and early 20th century.  Until that time, metal refining was a very imperfect process.  Copper, zinc, lead and other base metal ores often contained trace amounts of silver that couldn’t be profitably extracted using older, less efficient refining methods.

But at the dawn of the 20th century, electrolytic refining suddenly turned the metal mining industry on its head.  This new refining process used electricity to decompose a mixed-metal anode bar in an electrolyte solution and then reconstitute a pure, single-metal bar at the cathode.  This is an extremely efficient refining method that allowed for the recovery of effectively all trace metal impurities.

And while the percentage of silver contained in most base-metal ores is very small, the quantities involved become massive in aggregate.  The widespread adoption of electrolytic refining allowed the small quantities of silver that had previously been “locked-up” in base metals to be freed.

This was especially important because metals are generally recycled over time.  So as all the lead, copper, tin and zinc accumulated since Roman times was gradually recycled  over the course of many decades via electrolytic refining, a considerable amount of additional silver was recovered.  This extra supply largely hit the market in the early to mid 20th century.

In addition, the secondary production of silver extracted via electrolytic refining is price insensitive.  If you are a copper miner, you care primarily about the price of copper.  Any silver you get from the refining process is considered a by-product metal that you will sell into the spot market regardless of how low the price of silver might be at the time.

The next major event in the silver price timeline took place during the 1960s.  Although the white metal had been largely demonetized in the late 19th century, most countries still used silver for token coinage.  But when silver prices started to rise in the 1960s due to widespread inflation, all countries on earth quickly removed any remaining silver from their circulating coinage.  This process was largely complete by the early 1970s, resulting in silver being completely demonetized for the first time in human history.

The final insult came when national governments began to slowly dispose of their leftover silver stockpiles.  For example, the last of the U.S. Government’s strategic silver stockpile was sold off to the U.S. Treasury for the minting of U.S. Silver Eagle bullion coins in 2002.

Other nations enthusiastically followed suit.  Foreign governments and central banks were significant net sellers of silver from the 1980s until around 2010.  However, there have been almost no government sales of silver bullion stockpiles since that time.

At this point, I think it is fairly safe to assume that governments have no substantial silver reserves left.  This is in stark contrast to gold, which is still widely held as an important reserve asset by nearly all central banks around the globe.

So now we know why the price of silver has been so undervalued for the last 150 years.  But will it stay cheap forever?  Well, let’s examine the evidence.

Silver has already been completely demonetized.  So it is effectively impossible for its monetary demand to drop any lower.  Furthermore, there are no longer any meaningful government stockpiles of the metal (unlike with gold), so that potential supply overhang is gone.  No government can credibly pledge to sell physical silver in large enough quantities to suppress its price for long.

More or less all base metal ores are subject to electrolytic refining these days.  This means that there is more silver produced as a by-product of base metal mining than from primary silver mines.  But in spite of this fact, the gold-silver mining ratio is still only 9 to 1.  So the extra silver supply certainly doesn’t seem to adversely impact its rarity very much.

In addition, mining companies have been having an increasingly difficult time finding large, rich ore deposits, regardless of whether they are looking for base metals or precious metals.  Humanity has effectively high-graded the planet for several centuries now, always mining the richest ore bodies from the easiest to access locations.

All that is left are low-grade, geologically-complex ore bodies located in remote, politically unstable regions.  The idea that we will magically stumble across another Comstock Lode or Coeur d’Alene bonanza chock full of high-grade silver ore borders on the ludicrous.

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My analysis is pretty straightforward.  Silver is insanely undervalued at any price below $20 an ounce.  The current gold-silver ratio of 82 to 1 is egregiously high and represents little downside risk for silver investors.

The upside is that silver might one day revert to its traditional value.  If one day’s skilled wage was to once again become equal to a single troy ounce of silver, it would imply a silver price of at least $200 per ounce.  Anything even close to this result would enrich silver stackers beyond their wildest dreams.

However, I feel it is important to note that I don’t think the price of silver will skyrocket while the global securities market bubble is still in play.  As a bedrock tangible asset, silver is the antithesis of the paper asset casino that currently dominates the marketplace.

In other words, silver will only rise dramatically in price if it is either partially or completely remonetized.  And remonetization will only be possible once our grotesque paper asset bubble has definitively (and messily) popped.

So I’ve got good news and bad news for you.  The good news is that I think you have a little more time to get in on this stunningly undervalued monetary metal.  The bad news is that one day when we least expect it, this marvelous bargain will be gone.

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