My first three essays were an attempt to help the general investment community understand the evolving silver story. [See] This essay is specifically directed at today’s silver investor.

By and large, the silver investment community is blessed with several first-class spokesmen and top-notch professional analysts. Among those more actively carrying the silver torch are: Mary Anne and Pamela Aden, Ted Butler, Doug Casey, Jim Dines, Jason Hommel, David Morgan and Jim Puplava. I read virtually everything in print about silver and on occasion I think I see a few problems and note a few omissions, thus the following.

1. USING TECHNICAL ANALYSIS …. IS WRONG!

Technical analysis usually plays a major part in most of my investment decisions. I rely on TA about 98% of the time. But the important question here is, “What about the remaining 2%?” In other words, “In what circumstances should technical analysis not be trusted?” Take a moment and give it some thought. Done thinking? My answer is, “in a market where both a sustained and large price distortion has taken place.” In my view, looking at a technical chart of silver’s price history is akin to looking at one of those pre-Columbus flat-maps of the world. Both contain just enough sketchy information to give them the appearance of truth. In reality, both are an illusion. They are fraudulent. Leave it to Professor Edga Macation to remind us that if the basic laws of supply and demand are not controlling the market price of the product, then the data inputs used to construct a price chart are also erroneous, resulting in an erroneous chart. Duh! In other words (stated in reverse), if we really had a free market in silver, the chart would look nothing like the silver charts that “the experts” pour over today …. plotting imaginary moving averages, identifying resistance levels and drawing fictional uptrend channels to name a few. More below.

2. PLACING TOO MUCH EMPHASIS ON “OUNCES IN THE GROUND.”

Certainly, knowing the number of silver ounces in the ground is an “important” piece of information in assessing a silver project. However, knowing the answers to many other key questions are also “important.” For example: What country is the deposit in? Geopolitical risk? What did the property cost? Why did the other guy sell it? At what cost? Proximity to infrastructure? How deep is it? Open pit or underground? Ore grades? Recovery percentages? By-product credits? Cost to build the mine? What royalties are in place? What is the all-in cost of production? Who are the principals running the show? Etc, etc, etc. I recently read a promotion for a mineral deposit that had some meaningful “ounces in the ground.” In reading the “fine print” I discovered that the “wonder deposit” was located 350 air miles from the nearest small town where you might be lucky to buy a screwdriver. I not only became very un-interested in the property, I also became very un-interested in the company and the people that were so loudly promoting this package. To make it simple, instead of “ounces in the ground,” I suggest, “Will the prospect likely become an economically productive mine?” Not an easy question to answer. However, if you can answer my question, you probably have done enough homework to make a fairly sound investment decision.

3. SILVER INVESTORS THINK THEY KNOW HOW HIGH THE PRICE OF SILVER WILL GO.

Ask almost any silver investor how high silver is going to go …. and they will give you an answer!! $10, $20, $100, $500. There isn’t an answer my friend! We have not seen a free-market price of silver for so, so long that any number than you or anyone else can dream up is an exercise in foolishness. There are five, large “contributors” that have negated (trumped) the free market and therefore make price estimating impossible. One, Doug Casey has said that 80% of the silver produced is by-product of gold, copper, lead and zinc mining. Since the advent of modern mining techniques in the early 1900s, literally, multi-billions of ounces of by-product silver have flowed into the market irrespective of price and profit. Two, starting around 1945, the United States government began selling-off the world's largest-ever silver stockpile. The selling went on for nearly 60 years until “the well finally went dry.” Three, during the 20-plus-year bear market in silver, overly-discouraged silver investors and other governments of the world dumped large amounts of the “white shiny” into the market. Four, during the last 15 years, millions of ounces of leased-hedged silver has pounded the market ever-lower. And five, massive paper short positions on the COMEX are presently having a profound, negative effect on price. The powers that be in New York have repeatedly demonstrated that they can “drive” the price of silver in any direction that they darn well please…. for the time being. For example on 12-7-2004, Pearl Harbor Day, the price of silver was smacked for 70 cents or nearly 10% in a single day! Just as an aside, it should be noted that there was no meaningful silver mining news announced on or near that day. So, you still think you know what silver is worth? O.K. If the above isn’t enough, any price prediction must also account for the number of “future” dollars the governments of the world will “print-up” (inflate) over the next few years …. and the governments themselves don’t even know the answer to that one yet!

4. SILVER IS A “ONCE IN A LIFETIME OPPORTUNITY” (OLO).

Few recognize this obvious fact. There are two uncommon requirements that must be met for a market to generate an authentic OLO. Both must happen. First of all, everything that could possibly go wrong over an extended period of time .… has. A couple of examples that come to mind are the buggy whip industry in the United States and Communist Cuba. Buggy whips got “put out to pasture” in the early 1900s by the motorcar and Cuba went into rapid-reverse when Fidel Castro came into power way back when. Long, powerful, sustained downtrends both. The second requirement is a market where everything that can possibly go right ….does! Snatching one of the examples above, when Castro finally loses his grip, and if the new guys on the block follows the model of Communist China, the resulting economic opportunities in Cuba would be profound! What about silver? You name it and it’s gone wrong for a very, very long time. Unloved, unwanted, unheard of in the investment community. At one point the mining stocks of the companies that dodged bankruptcy, were down 98% from their highs. That’s not all. Silver bullion at $3.50 per ounce, when measured in inflation adjusted dollars, was practically being given away! But the good news …. the news that today’s silver investor is already well aware of …. is that a great many powerful forces are now poised to cause silver to “do everything right” in a very big way, for a long period of time. Repeat after me, “Silver is a once in a lifetime opportunity!”

5. JUST RECOGNIZING AN OLO IS NOT ENOUGH.

For several years running, my brother and I both attended many financial conferences. Russ not only got pretty good at talking to the company reps and separating the fact from fiction, but he also knew most of the big name conference speakers on a first name basis. We always had a good time ….brother to brother quality-time .... and it seemed that he had all the key investment concepts sorted out. After a few years of this, one day I casually asked Russ which companies he owned and the size of his positions? I was a little suspicious, but mostly un-prepared for his answer. He didn’t own anything! He had never bought anything! For whatever reason, he could “talk the talk,” but couldn’t quite “walk the walk.” I have since found this to be true of a great many other, would-be investors. What next? Folks, I live and die by a set of investment rules that I have developed for myself. I am grateful that Russ helped me create a new rule: Ski's action formula says, "It makes almost no sense to purchase or otherwise acquire good economic advice and not make purchases, adjustments, or otherwise heed the advice by putting at least some of it into practice." So what is the moral of the story here? Just recognizing an OLO is only half of your battle…. you must also force yourself to act on your acquired knowledge for it to do you any good!

6. NOT OWNING ENOUGH SILVER ON A PERCENTAGE BASIS.

The “great commodity boom of the 21^st century” has begun. Precious metals, base metals, hydrocarbons, grains, currencies, natural resources, etc. Practically without exception, almost any commodity that you name is now in a major bull market. I like to think of this as a horse race that involves perhaps 25 horses and will take ten or more years to “finish.” Prudent investors would be advised to study each of the horses carefully because the “winning horses” will be the steeds that attain the highest percentage returns for the “owners.” My own examination indicates that Hi Ho Silver will finish the race very near the top. In the field of investing, I think that the mind of Jim Dines is one of America’s National Treasures. The ability to see into the economic future is a gift that few have. One of his “inventions” is a long list of Dinesisms, which are simply-stated, market-truths that he has learned from his years of diligent experience. For example: DITRULL…. When a trend is flat, dull, or unclear, assume that the previous clear trend has remained intact until proven otherwise. My suggestion for his esteemed list is: DINOLO….If you ever see a truly “once in a lifetime opportunity”, be prepared to temporarily re-adjust your normal diversification strategy to take greater advantage. To apply this rule to our horse race …. when the other commodity horses come your way, reach into their saddlebags and grab a hand full of money (take a position). But when Hi Ho Silver comes by …. grab TWO hands full! In other words, consider doubling your bet from what you already think is prudent.

7. THINKING THAT BOTH GOLD AND SILVER ARE GOOD INVESTMENTS.

During the “great commodity race,” the main competitor for the silver investment dollar is gold. Indeed, gold is a “good” investment …. but silver is a “tremendous” investment. Tremendous: a. such as may excite trembling and tremors. b. astonishing by reason of extreme size, power, or greatness. As a legitimate challenge, I (and others) have stated on numerous occasions that silver is expected to make a much greater percentage move than gold this time around. I have earnestly attempted to find a piece of genuine evidence that I may have overlooked. What have we found? To support the belief in gold, the gold argument boils down to …. opinion, noise and fuzzy logic. Their arguments can be equated to an old, broken toy that when squeezed can only say the words, “buy gold, buy gold” .… without benefit of a powerful reason. To support the silver argument, the reasons put forward usually fall into one of two categories …. facts and pure logic…. the strongest of all arguments. I am well aware of the fact that people don’t like to change their minds …. but holding on to an outdated opinion is not a recipe for making big money.

8. NOT RECOGNIZING THE SIGNIFICANCE OF A SHIFT FROM A BUYERS MARKET TO A SELLERS MARKET.

The silver market will soon make a radical shift from a buyers market to a sellers market. In a buyers market, the product is found in abundance and the price is set by the lowest cost producer. One could argue that the buyers market (abundant silver) actually began with the discovery of silver in the New World . The catalyst for changing the whole structure of the market to a sellers market is…. shortage. When a shortage is finally triggered on or before Zero Inventory Day (ZID), a sellers market will begin in earnest. When ZID arrives, and a sellers market ensues, it will no longer be the low cost ounce that will set price, but the high cost ounce … in fact, the very highest cost ounce…. the last, expensive, profitable ounce mined in Lower Slabovia needed to satisfy requirements. Not only will the word profit be resurrected in silver literature …. but the three words: profit, shortage and silver will finally be reunited in the New-New Silver World!

9. A BELIEF THAT THE BIG SILVER MINERS STAND READY TO FLOOD THE MARKET.

Indeed, many silver mining entities are already scouring the earth for the remaining deposits. I have absolutely no doubt that they are finding the goodies. However, it is the relative size of the world’s silver miners and their reserves that need to be reviewed. One would think that with a rapidly rising price environment, millions of ounces would soon come rushing into the market and crush the price. You’d be wrong. Don’t forget that by-product production brings 80% of the metal to market. With that in mind, it’s almost correct to say that silver doesn’t even come from silver mines. Comparatively speaking, silver mines and silver miners are small. The combined 2003 annual production from three of the majors, Coeur, Hecla, and Pan American Silver was 32.6 million ounces …. Divided by 880 million ounces of total annual demand…. we find that the three combined only filled 3.7% of the demand. If all three doubled production, they’d contribute 7.4% of annual demand. Whoopee! Let’s look at the problem in another way. Of all the major silver miners, Silver Standard Resources is ranked number one in total silver ounces in the ground. They have 962 million ounces located in 15 major silver deposits found around the world. But when we factor in that same 880 million ounces of annual silver demand, we discover that SSRI could only supply the market for a mere 13.1 months. After that, they’d be completely out of silver!

10. THERE ARE THREE DISTINCT CATEGORIES OF SILVER INVESTMENT AND ALL THREE SHOULD BE OWNED.

Silver mining stocks, investment silver, and insurance-legacy silver. Stocks are traditionally owned because they offer leverage to the price of commodity silver. When silver bullion goes up, the mining socks usually go up faster. End of story. I define investment silver as silver that you buy today, with the expectation of selling it in the future at a higher price. We are quite possibly entering a situation that has never before been seen on earth …. or at least to this degree. The world may run out of a vital commodity that is indispensable to modern civilization. (Or experience such an acute shortage that it will feel like it.) In an extreme shortage, where silver end-users are clamoring for the real thing, silver mining stocks representing metal in the ground, just won’t cut the mustard. On the Titanic, which was more valuable, a lifejacket or stock certificates of a lifejacket company? No one can know which of the two asset classes discussed above will appreciate the most, but doesn’t it make sense to own some of each to cover the bases? What about insurance-legacy silver? The insurance part is easy ….this represents the portion of your silver that you would normally not sell .… it’s the silver you save and then hope you’ll never need …. to cover your fanny or someone else’s in an emergency. The legacy part has to do with capitalizing on the distinct possibility that silver could be your ticket to “the good life” ….like the TV character, George Jefferson, who was always hopeful of “movin’ on up!” The history books are replete with examples of people being in the right place, at the right time and then doing the right thing to forever change their economic way of life. Don’t you want to be one of them?

11. THERE IS A POPULAR BELIEF THAT THE ONGOING PRICE MANIPULATION IS HURTING YOU.

Granted, if you need to sell your silver tomorrow, you are being hurt. But, I’m with Ted Butler’s friend, Izzy. Today’s silver investor is being handed three wonderful opportunities. One, the market keeps offering us silver at fire-sale prices. When I see an engineered crash to the downside, I get out the checkbook, put on a smile and buy more. “Thanks fellas!” Two, the manipulation is buying us time to accumulate more. If the manipulation had ended five years ago, we wouldn’t be able to own nearly as much. And three, the manipulation is compressing the supply and demand spring all the more. In other words, the act of holding back the forces of supply and demand will result in a far higher price than would have otherwise been the case. Be thankful! Take action! Do something! Otherwise, you may be calling silver the ….. could’a, should’a, would’a metal. Remember, this is the kind of market that will best reward the patient, steady buyer.

12. NOT PAYING SUFFICIENT ATTENTION THE PROVEN MARKET PROFESSIONALS.

Recently spoken of Jim Rodgers in The Daily Reckoning, “Everybody listens to him, everybody agrees with him, but still nobody follows his advice.” For some in-explicable reason, once venturing in the field of investing, normally intelligent people routinely fall into the trap of “overweighting” their own opinions rather than trusting in the wisdom of proven market professionals. Is it any wonder why they don’t succeed? In the book, “The New Market Wizards,” Stanley Druckenmiller recounts his early experiences of working for George Soros. He had this to say about his esteemed mentor. “I’ve learned many things from him, but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity….Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular….As far as Soros is concerned, when you’re right on something, you can’t own enough.” Would Warren Buffett also agree? Here’s what he said. “Diversification is a protection against ignorance. It makes very little sense for those that know what they’re doing.” Well folks, some of the greatest minds in the whole, wide world of investing have endorsed silver in a big way …. Jim Dines, Doug Casey, Warren Buffett, George Soros …. Do you believe them or not? Better still, do you own enough silver?

Until we meet again,

Douglas Kanarowski

© 2005 Douglas Kanarowski
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Douglas Kanarowski
Mariposa, California USA
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The opinions of FSU contributors do not necessarily reflect those of Financial Sense.