|
A
lot has happened since publishing “Silver on Sale,” in the June 2004
edition of our International
Speculator. As predicted in that article, the
price of silver has risen strongly, more doubling from $6.09 to the
current $12.18, with a peak of as high as $15 in May. The performance of
silver has outshone even gold: silver was up almost 31% in 2005,
compared to gold’s gain of almost 18%. Now some investors are asking:
“Was that it?” And if we aren’t near the top for silver, then how
high will it go?
To answer those questions, let’s revisit the fundamentals, look at
what specifically is driving the market today and then make some
predictions.
Silver—The Fundamentals
There are important differences between silver and gold. The demand for
gold is almost entirely a demand for holding the stuff for financial
purposes (protection and profit) and for uses, such as jewelry. Very
little gold is actually consumed. In this respect gold is the polar
opposite of a base metal, such as iron, that people buy exclusively for
purposes that use it up. Silver has a foot in both worlds; some is
bought for uses that will consume it; other ounces are held for
financial protection or profit.
Most of the gold ever mined (including the metal in Baal,
Cleopatra’s necklace and what Alexander looted from the ancient cities
of West Asia) remains above ground in various easy-to-melt forms. The
reasons for gold’s physical persistence are chemical—it is nearly
inert, so it doesn’t corrode—and economic; because of its great
value, very little gets lost or discarded as waste. Annual mine
production is small compared to the existing stockpiles—on the same
order as the small amount of gold that is lost or consumed each year. So
the size of the existing stockpile doesn’t change much. Fluctuations
in the price of gold come almost exclusively from fluctuations in the
demand to hold the stuff.
Ounces of silver, on the other hand, come and go—not as quickly as
tons of iron but as inevitably. Silver, unlike gold, is chemically
active. When silver is used, much of it gets used up—consumed beyond
practical recovery. And because silver is so much less rare than gold,
less effort goes into salvaging and protecting it. Annual mine
production and consumption are large compared to existing stockpiles, so
fluctuations in price come from changes in both those factors and also
from changes in the demand to hold silver for financial purposes.
Silver Today
The uses for silver in modern industry are growing. It is the best
conductor of both heat and electricity, the most reflective, and (after
gold) the second-most ductile and malleable element. It is used in
photography and for many electrical applications, particularly in
conductors, switches, contacts and fuses. Silver alloys are used in
batteries as cathodes. As a bactericide, silver is used in water
purification and air-handling systems—we recently came across an ad
for a silver-lined washing machine that claims to need no detergent to
produce clean laundry.
The
uses for silver are so numerous that, despite the dwindling role in
photography, you can expect demand to remain strong as long as
industrial economies remain strong. And they have been so for some time
now—with China and India leading the charge.
But since the Hunt brothers’ ill-fated attempt to corner the silver
market back in 1980, there has been little investment demand for silver
from the public in developed countries. This has clearly and
unequivocally changed, as evidenced by the new silver exchange-traded
fund (ETF) from Barclays.
Supply Side
Most silver mines are really lead-zinc-silver mines or copper-silver
mines or gold-silver mines, from which silver is a byproduct. In fact,
70% to 80% of all silver comes as a byproduct of copper, lead and zinc
mining. Because the byproduct element is so large in the supply of new
silver, production doesn’t respond much to price. This puts the few
mines that do produce primarily silver in an extremely risky position.
Over the last two decades, with silver being dug out by copper, lead and
zinc miners regardless of how low the price went, most pure silver mines
consistently lost money, and none were especially profitable. For more
than 20 years preceding 2003, no pure silver mining company generated
free cash.
However, there are many known silver deposits and proven reserves poised
for production as soon as silver crosses whatever price line makes them
economically viable. Furthermore, low silver prices don’t necessarily
halt exploration: it’s the prices of copper, lead and zinc that drive
exploration.
So, with silver hitting record highs and base metals doing the same
(increasing the flow of silver as a byproduct), hundreds of millions
more ounces of silver will be heading for the market. According to the
latest projections in the CPM Group’s CPM Silver Yearbook 2006,
there may even be a production-consumption surplus of 48.4 million
ounces of silver in 2006, the first such surplus since 1989. However,
those figures don’t include investment demand. The
production-consumption surplus means that inventory will increase, but
that still doesn’t tell us where the price is headed. If financial
demand (to hold silver for protection or profit) increases faster than
the accumulating physical inventory, the price will keep going up. But
will it?
Demand
For
one thing, consumption has been eating into above-ground stocks of
silver at a phenomenal rate for decades, eroding total world bullion
inventories from an estimated 2.1 billion ounces in 1990 to around 400
million ounces today—a drop of 1.7 billion ounces. A large chunk of
the drop, about 240 million ounces, came from government sales. But that
source is almost gone, with governments holding only about 87 million
ounces at the end of 2005.
For another, silver is like uranium as an industrial metal, in that it
is hard to replace and it is used in such small relative quantities,
that the price could double or triple without having a major impact on
industrial usage. But the main reason, as mentioned above, silver is
being rediscovered as an investment vehicle, most notably in Barclays’
new silver ETF (SLV).
The advent of Barclays’ silver ETF has been a big factor in the price
of silver lately, if only through the expectations of speculators. The
popularity of the streetTRACKS Gold Shares ETF (GLD), which has raised
$8.13 billion since it began trading in November 2004, suggests that
Barclays’ silver ETF will pull a lot of silver off the market. As of
this writing, August 7, 2006, it has already sucked up 92.4 million
ounces of silver. There goes the supposed surplus.
And as silver gets back on trend, and gets noticed by an increasing
number of investors, the ETFs will make it easier for those investors to
participate. That is also true for certain institutions—most of which
are barred from owning physical metals – so they will, in essence,
uncork a latent source of investment demand. And Barclays’ silver ETF
may be even more important than GLD. In Europe you have to pay a VAT
(17.5% in the UK) on the purchase of silver bullion bars, as the metal
is used in manufacturing. This is a blight on active trading—a market
niche the new ETF accommodates free of VAT.
Throw in well-deserved concerns about the U.S. dollar and about the
at-least-it’s-not-the-dollar euro, and increased financial demand will
almost certainly outstrip any increase in global silver production for
the next couple of years. And, of course, if there’s a major economic
crisis, the production-consumption surplus will be utterly swamped in
the mad dash to get out of paper and into precious metals—a transition
the ETFs will facilitate greatly.
What About Scrap Silver?
There is another potential source of silver—the tons of it that people
hold in the form of old junk. If a high price for silver starts getting
people excited, won’t the masses send their broken candlesticks and
seldom used spoons and trays to scrap dealers? Will that source of
supply turn into a flood, as it did so dramatically during the 1980
price spike? At some price, yes - but probably not for a while.
Stable higher prices will encourage people to sell. But rising prices
and the reasons for the growing financial demand will encourage people
to put off selling even their unloved, broken candlesticks. Even as the
incentive to melt down Grandma’s tea set increases, the “silver is
money” factor pushes the other way.
In 1974, silver was at $6.70, about twice today’s price in constant
dollars, but supply from all secondary sources was less than 170 million
ounces. And in 1980, when silver reached its peak at $48.70 per ounce,
secondary sources provided just 302 million ounces—a big number, but
nothing like 20 billion ounces. Furthermore, the great bull market in
silver that ended in 1980 came after a hundred years in which the public
accumulated relatively cheap silver. A lot of that was cleared
out—melted down—in the early 1980s, and there hasn’t been as much
time to replace it. Not only that, we suspect that relatively few people
have bought much made of pure silver since 1980; if you can’t afford
gold, why pay for solid silver when you can get something electroplated
that looks just as good for a fraction of the cost?
Conclusions
Will silver hit its previous 1980 high? It was $48.70 then, but that’s
$120 in today’s dollars—almost 10 times the current price. Given
that just below the surface, the threats to the U.S. economy are even
greater today than in the late 1970s, we can easily envision silver
closing in on its previous high and even going way beyond it.
When will this come to pass? No telling. But, periodic and inevitable
corrections aside, it’s going to happen, of that we are confident.
And, more to the point of our service, when it does, the silver stocks
we follow on behalf of our readers won’t just go to the moon,
they’ll leave the solar system.
© 2006 Doug Casey
Editorial Archive
(Ed.
Note: DOUG CASEY
and his subscribers have made millions investing in under valued natural
resource stocks. Doug is the author of Crisis Investing which was #1 on
the New York Times Best-Seller list for 26 weeks. His company, Casey
Research, publishes the International
Speculator - now in it’s 26th year - one of the
nation's most established and highly respected publications on gold,
silver and other natural resource investments and the Casey
Energy Speculator a monthly newsletter dedicated to energy
opportunities with the very real potential of at least 100% growth
within a year.)
If
you like uranium like I like uranium and are looking to leverage
your returns through investments in a junior uranium play, do
yourself a favor and start getting a lot more selective in what
you own. If you fail to do so, not only do you risk missing the
next big leg-up, you risk throwing your portfolio into reverse.
You
don’t have to go it on your own!
Doug
Casey publishes his favorite uranium and other junior energy
stocks every month in the Casey
Energy Speculator, a monthly newsletter helping
subscribers looking to make 100%, 500%, even 1000% profits from
early stage energy companies. For a limited time only, you can
subscribe for just $79 a year and your subscription comes with a 6-month,
100% money-back guarantee. You take no
risk to discover just how profitable the Casey
Energy Speculator can be! Learn
more now.
www.caseyresearch.com
and www.kitcocasey.com
|
