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When Silver Hits the Wall
By Rusty McDougal


The purpose of this essay is to pursue an analysis of the coming silver bull market, specifically to get a feel for how long it is likely to last as well as how mining entities will respond to a sustained increase in the price of silver, say to the $30 to $50 per ounce range.

We have all heard the projections for the coming silver prices, $50, $100, $200, or higher. Some claim that silver will even reach parity with gold. I have owned silver on and off nearly 30 years and have read most everything I can get my hands on regarding
 silver for the last 10 years. The bullish case for silver was well made with Jim Blanchard and Franklin Sanders' "Silver Bonanza" in the mid 1990's, and the case for silver has only grown much stronger since then. This piece is treating the coming silver bull as inevitable, whether this year, next year, or five years from now.

Now, that being said, let us take a look at what is likely to happen once this silver bull is underway. Not as far as price projections for silver, but more so, for the length of time that the bull will play out.


     1.Silver demand is currently at a higher level than silver supply from mining or scrap sources and has been for the last 12 years. Several official silver organizations have put this needed amount (deficit) at over 100 million ounces per year.

     2.This excess demand or "silver deficit" is being met by already existing above ground inventories that are rapidly being expended. "Yesterday's Silver".

     3.This above ground silver supply used to meet the ongoing deficit is largely being uneconomically dumped onto the market, meaning it is either changing hands or being expended for less than the average cost of silver production.

     4.At some point this current above-ground silver supply will be inadequate and silver will then be set free as a function of today's (tomorrow's) supply/demand fundamentals.


A large part of the future silver equation becomes "How much underground silver remains?" Are we running out of silver?

There has been a recent survey put out through the U.S. Geological Survey, "Mineral Commodity Summaries 2001". Let us look at their numbers and try to determine exactly what they do mean and even more importantly, what they do not mean.

You may find the link at:

You will need to follow the links to the silver references as other minerals are also listed.

We will focus primarily on 3 statistics produced by this survey. First, they state that there were 17,900 tonnes of silver produced in year 2000. Second, they state there are 280,000 tonnes of "Recoverable Reserves" as of year 2000. Third, they portray a "Reserve Base" of 420,000 tonnes as of year 2000.

The first number, 17,900 tonnes of silver production is straightforward. There are approximately 32,000 ounces per tonne so this is approximately 573 million ounces of silver KNOWN by the U.S. Geological Survey to have been produced by the U.S. in year 2000. Is this a totally accurate number? Likely not, because countries like China are renown for not providing full and accurate production numbers. Nevertheless, even though this is likely a somewhat low figure, it will suffice for the purposes of this article.

Let's look at the second category, "Recoverable Reserves" and explain exactly what these 280,000 tonnes of underground silver mean. 280,000 tonnes of silver is the equivalent of over 9 billion ounces of silver. These "Recoverable Reserves" are often categorized as "economic reserves", meaning that they have been satisfactorily drill proven and they can be profitably mined near current going prices of silver. It takes extensive drilling with relatively tight spacing to prove up these reserves. Again these are only the reserves that have been detected by the U.S. Geological Survey and it is quite unlikely to be a complete and comprehensive figure.

Now for the third category, "Reserve Base" listed as 420,000 tonnes or approximately 13 plus Billion ounces of silver. These 420,000 tonnes of silver "resource" include the 280,000 tonnes of silver "reserve" (category one). Some might call this category a geological reserve, but it includes all KNOWN silver deposits that have had a minimum standard of proving up via drills. Mining companies are always working to get sufficient drill holes to upgrade a Žresource' to a Žreserve'. Category three includes silver deposits that are proven and economical as well as proven yet not currently economical.

These above categories and silver potential mining numbers are frequently used to demonstrate how little silver remains to be mined. For example, let's say the total world annual consumption is 850 million ounces (a 3 year old number), that would mean
 we have a known, economically mineable silver reserve of approximately 9 billion {as previously listed} ounces or slightly more than 10 years of supply available to be mined at current prices. That is a reasonable comparison, but only if you project silver to stay at current prices! You cannot project $35-$50 silver and still hang on to these same "Reserve" numbers!

At $30 silver, the vast majority of all of the silver resources will become economical to mine, so now you're looking at 13 plus billion ounces of known economic silver. It also must be remembered that there are other sources of silver available other than
 mining; specifically scrap or recycling, as well as currently held monetary or investment silver. All of these factors will increasingly come into play as the price of silver inevitable soars. So far, we have listed silver reserves, resources, scrap, recycling, and investment silver that will be available to impact the future silver market and its supply/demand fundamentals. Mining only has to provide a portion of silver supply as above ground silver from various sources is not going to zero, ever.

Is this the whole picture? NO, emphatically, NO! Please bear with me as I am just now at the heart of this essay. Let us project forward to what these numbers and this survey do NOT tell us, a category 3 if you will. That will give a much more accurate picture of what will happen with $30, $50, etc. POS.

3rd Category÷.. This one includes many UNKNOWNS and that is exactly why it is NOT listed by the U.S. Geological Survey, they cannot list what they do not know, right? However, we must analyze what they do know and extrapolate from there.

Let us start with resources of silver that have yet to receive sufficient drill testing to be put into either previous category. These are frequently large systems, yet no capital for initial or expanded drilling is available. Does anyone seriously think all worldwide silver is a known entity? Does anyone think that a higher POS might get a few trenches dug and drills turned? What will happen with $50 POS? Primary deposits will be explored for and discovered, as will secondary silver producing deposits. Existing deposits will be expanded, and previous, high-grade narrow veins will find the marketplace. All the way down to the literal pick and shovel, possible donkey. See what I mean, the danger in not defining terms? This is not just semantics, but goes to the core {sorry} of future silver fundamentals. You cannot attempt to predict the future based on incomplete data.

We must continually remember that the listed reserves and resources are projected at near current silver market prices. If a company is drilling and not finding economic silver (at current $5 POS for example), do they continue drilling to prove up a resource anyway? Absolutely not! They shut the operation down and move on to something that may prove profitable. $5 - $10 POS and $35-$50 POS are two entirely different beings. No one has been looking for silver that would be economical at $50 POS. Why would they?

Let us sum up before moving on to more silver details. Category one (reserve) is incomplete, category two (resources) is incomplete and category three (future underground silver supplies) is such an unknown entity that it has sparked this essay and many questions to boot. We ignore category three at our own peril and should make no long-term investment decisions based on incomplete information.

I will briefly mention category four silver, that being aboveground silver that is not officially recognized or known, and will state 2 indisputable facts for this essay:

     1.Nobody knows the current aboveground silver supply!
     2.Nobody knows the current underground silver supply!

We have already talked about the underground unknowns and will actually get into that in more detail. As far as above-ground supply ­ it is all estimates, murky at best, rumors abound, and there is much international and historical intrigue on this issue: "Black Silver" if you will, silver outside the official numbers. This is another issue entirely, but it cannot be totally overlooked.

Are there masses of silver available to come out of the Philippines or Indonesia? It is possible, but it is also unlikely for numerous reasons. Let us discount this category four for now and focus on the more identifiable silver factors. (If there is much "unknown" above-ground silver, it is still of a limited amount and it is uneconomical, to say the least, to waste it on the current silver market.)

Before going on, I must remind the gentle reader, once again, that I am a mega silver bull in spite of anything you have read so far. Silver will blow up on the manipulators, sooner or later, likely sooner. Again, however, it does make me pause when experts write of a perpetual silver shortage.


Mining and commodities are nothing if not cyclical. Low prices for a commodity such as silver brings decreased exploration and production, which brings forth a reduction in silver supply. This, inevitably, brings higher prices and a subsequent increase in exploration, mining, and production. The higher prices cause hoarding and overproduction as humans extrapolate the current trend far into the future.

Does this happen overnight? Nope, it typically takes five to fifteen years, depending on size to bring a silver mine from discovery to production. We will have our run away silver bull, but it will be contained by the mining sector's natural cycle, within ten to fifteen years, not fifty years or indefinitely! I suggest you not plan to pass all of your silver and silver related investments down to your grandchildren, as the cyclical phenomenon will be upheld in silver.


For the purposes of this essay I have queried numerous silver miners and resource experts, asking them: "Is there plenty of remaining underground silver?" I have yet to talk to a silver mining expert that believes otherwise. I have absolutely no doubt that mining is fully capable of ramping up silver supply, given sufficient time, to ration down and meet silver demand.

Let us now analyze the two different categories of silver mining; primary silver mining and secondary silver mining. Primary silver mining means simply that the major economical mineral in the mining operation is Silver. These mines are absolutely scarce and hard to find, especially at today's POS. Silver more commonly occurs in combination with gold, lead, zinc, copper, or other minerals. Silver has been found mostly near surface and most of the easy pickings and massive deposits, have already been discovered. Silver can and will be found deeper, say 3-5,000 feet, as future silver economics allow.

On the other hand, $30 - $50 POS is a far cry from $5 POS! Mines that are currently worked for the 35% silver content will then become primary silver mines. There will be untold numbers of previously drilled properties where silver was found but deemed uneconomical, that will become primary mines. Give an explorer or a current struggling producer a $50 POS and his eyes will light up. Watch him go, slowly, but go he will. All the properties that have received a few drills that proved mineral existence, yet not economic mineral existence will be re-analyzed and frequently re-drilled.

There is also a stockpile of silver properties being presently accumulated by the likes of Silver Standard Resources, in which I own shares. They have approximately 400 million ounces of silver resources that are mostly not currently economic to produce. This silver is documented and largely permitted and ready to begin production when silver hits a mere $8 - $10. Think they have any more or can find any more at $30 - $50 POS. Still thinking an endless $200 POS?

Silver Standard is only used as an example of mining capabilities; they will be a small part of the overall coming mining picture. Let there be no doubt that primary silver mining will increase greatly with the coming silver bull. Ten to fifteen years is actually an extremely long period of time for a mining cycle to have its effect. This just demonstrates, once again, how out of kilter the current silver market is. Why is it out of kilter? Our friend Ted Butler has amply documented the reasons. The billions of ounces as the result of past mining have been unceremoniously dumped onto the market for the last 50 years. They have literally managed these assets until they are nearly gone, from their coffers at least. Oh, the game we play!

The other category of silver production is secondary silver production. This currently accounts for 2/3 of today's mining production. A common metal sometimes found with silver is gold. The fundamental behind each of these metals is bullish in the extreme. A run in price in either or both metal will bring an increase in production of both metals. Lots of silver will come out of these types of mines when reality returns to these markets. In all fairness, gold/silver mines are much rarer than other types of mines such as lead/zinc/silver or copper/gold/silver mines.

Depending on what percentage the economics of the mine is determined by the silver content will determine how much production is ramped up to access this silver. Some of these mines may actually become primary silver producers as the POS rises. Others will ramp up production to get more of the end product silver, and others will be largely unaffected if their silver content is quite low.

An interesting part of this equation relates to the secondary silver producers in a mine such as a copper or nickel mine that, incidentally, produces silver credits. Some have suggested that secondary silver mines will ramp up production to get increased silver and subsequently kill the price of the base metals associated with the silver in the process. This would, in the end, decrease silver production because the base metal production and its economic benefits would be gone. I will explain why this will not happen. If 70% of your end profit comes from copper and only 3% from silver, you may slightly alter production or mineral extraction to get more silver, but you would never produce so much copper that you would kill your primary market. Miners might increase silver production to the point that copper would be hit for a few pennies {because the Cu would also be over produced}, but never for a twenty-cent blow to the market. Better to shut it down and wait for the particular metal cycle to turn. A tenfold increase in the POS would not be sufficient for some of these mines to alter their production formulas. Mining management, mining efficiency, nothing more, nothing less.

In summary of secondary mining, it is a mixed bag as far as future silver mining production increases are concerned. Some mines will not be able to ramp up production a whole lot to get silver, but many of the secondary producers will have an absolute picnic at $50 POS. Both primary and secondary silver miners will show free market (finally) dynamics in action. Not overnight, but merely the typical time to explore and produce.

{I would like to present a couple of items of interest now in regards to ongoing silver mining. Most silver deposits are epithermal in nature and will be found between 1,000 and 5,000 ft. depth. Between sea level and 3,000 meters in altitude the vast majority of ground has already been explored, at least to some degree, for silver. Silver Standard Resources has been seeking for 10 years for economical or near economical silver resources and have only been able to prove up 400 Million ounces {give them a $50 POS and this number would receive a multiplying factor}. Reserves are calculated with the CURRENT POS. A 2 oz/ton silver deposit can currently be mined via open pit. A 5 oz/ton is necessary to have a successful underground mine. At a $50 POS, which is more than a 10 fold increase from today's price, these numbers would translate to .2 ounce/ton for open pit and .5 ounce/ton for an underground mine. In general, at $30 POS, an ounce of silver per ton would become ore.}


Let's look at another common silver misconception before wrapping up this article: what is the magnitude of the coming short squeeze in silver? The indefatigable Ted Butler has estimated and outlined as much as 3 Billion ounces of silver shorts. I greatly admire his work and have absolutely no reason to doubt his figures. These shorts are from our own COMEX, European silver banking agreements, as well as Central Bank leasing "games". Are we going to someday have a massive 3 Billion ounce short covering rally? There may, indeed, be 3 Billion ounces in above ground existence, but overall AVAILABILITY is the key factor here. The silver is widely dispersed across the globe and frequently in such a form, such as jewelry or religious artifacts, that it will likely never see the market again. How much remains in the hands of Govt/Banking officials that wish to suppress the poor man's gold, that's the key question?

In posts at the premier gold and silver website named EagleRanch Mr. Butler has acknowledged and confirmed that he seriously doubts these shorts can be covered with physical silver. How will they be Žworked out' if that is indeed the case? It will look in many ways like business as usual for our economic authorities: paper settlements, defaults, taxpayer bailouts, rule changes, as well as Central Banks doing what they do best, simply managing their {our} assets until they are totally gone from the balance sheets. Then we get to hear those infamous words, "OOPS, SORRY!!".

Where will this leave us in relationship to the massive mountain of accumulated silver shorts? They will likely be written off with all the book squaring tools just mentioned, and the silver market will then trade according to its underlying supply/demand fundamentals. A massive bull market will still unfold regardless of these shorts not having to be physically covered. This is exactly why it is so essential to parse the future mining factors to get a read on what is heading our way. Short squeeze?

YES! A short squeeze of 3 Billion ounces or even 1 Billion ounces? Unlikely!

Let's fast forward some 30 years from now, time for a mega-bull silver market and time for a subsequent silver low from there. The subsequent silver bull, the one following the upcoming one will not be put out by existing known mining supply and techniques!

There will then not exist sufficient below ground supply to be brought into play. Maybe some Grandchildren could use a few silver coins after all. Will technology likely catch up and find/process silver economically at that time? It will be a challenge, no?


There are just a few more issues to look into before closing. Let us look at categories of future silver supply that will ration down the future POS. Scrap and recycling are currently a very significant part of silver; in fact now larger than primary silver mining from what I have been told. Recycling is presently what can be called a "cottage industry" in comparison to what it will be at $30 - $50 POS. All that future ramped up silver mining product to make great profits at $30 will also be largely recycled as recycling will then be exponentially more profitable. American ingenuity at its best.

Dis-investment is another issue. Absolutetly, tons of silver bags and bars have been purchased sub $5 per ounce in order to make some form of profit. Is not it likely that a lot of this silver will find itself back on the market when a 6 to 10 fold increase has been
 "bagged"? Some will hold out for $100 or a multiple of that and, bless them, they may find it. Some will also buy and hold so long that they may never see a profit from their venture.


This whole line of reasoning started because claims of a Žperpetual' silver bull market were becoming commonplace. That could only happen if we are running out of underground silver, and I hope I have convinced at least a few, that is not the case. Mining is not my day job, but I have asked enough questions of the silver experts to realize that there is a vacuum of information as to how much silver remains yet to be discovered. No one really knows, but no mining expert yet has told me that we will run out any time soon.

Usually, when the right questions are asked, the answer will be forthcoming. That is the purpose of this exercise. Will we have our glorious, once in a lifetime silver bull market? No doubt, we simply must be patient. Will it last indefinitely? What do you now think? For the cowboys amongst us: ride the bull for the full eight second and then dismount gracefully and pick up your trophies. How much silver can, the pros find at a sustained $30 - $50 POS? Let us keep an eye on these guys, no? I would love to advance this line of reasoning and can be reached at

 Thank you.

 Rusty McDougal



 I am not an investment advisor and this essay is simply my personal opinion and should not be construed as investment advice.