SILVER - READY TO ROLL

 

This year silver rose over 40% yet is only starting to draw attention from the investment crowd. A lot of effort is being made to keep the wheels from falling off the increasingly sickly world fiat currencies. These efforts include inconceivably inaccurate government statistics as well as frequent smack-downs in gold and silver, the long-term proven superior forms of money. Recent action suggests the marketplace is learning quite well how to deal with these smack-downs……wait for them patiently and then buy as much physical gold and silver as possible.  The gold and silver ETF’s have added tremendous amounts of gold and silver while the price got clobbered recently.  In November alone the gold ETF added 52 tons of gold and the current total held now exceeds 452 tons.  The silver ETF has had an even more stunning accumulation.  While silver fell almost $2 an ounce silver tonnage increased almost 10% to well over 3700 tons and on December 21 st alone, almost 280 tons were added which was more in one day than in the four prior full-month additions. When we look at these recent purchases we are astounded by the implications and the dramatic potential for the upside in the silver price if this kind of investment demand were to continue.

For the full year of 2005 silver demand was estimated at over 900 million ounces by a leading industry source while production was only a little over 640 million ounces. One thing we have noticed over the past several decades is the steady growth in the demand for silver despite the discontinuation of using silver in coinage around the mid-1960s. More recently, photography demand has taken a hit as the move to digital cameras accelerated. A multitude of alternative uses for silver has helped to stem declines in these two huge areas.  The anti-bacterial qualities of silver are being rediscovered in both biomedical uses and consumer products.  Many have long forgotten one of the key reasons silver was used for eating utensils, (still generally referred to as silverware even if it’s plastic), was its anti-bacterial effects on food from simply touching it.  Tupperware has just started using silver to line containers resulting in killing bacteria and extending shelf life of leftovers. Clothing manufacturers have starting using silver in specialty applications to control odor, heat, and cold.  Silver is the best conductor of heat and of electricity even surpassing gold and copper. It is also the most reflective which is why it is used in photography and in mirrors. In fact, there have been more recent patents issued involving silver uses than all other metals combined. With so many new growth areas perhaps now you can see why there is little room for investment demand, particularly now that stockpiles which once totaled a 60-year backlog are essentially gone. With this advantage of so many growth areas for silver compared with gold which is largely jewelry and investment demand, one can easily see why we expect the gold price to silver price ratio to continue to gravitate to the long-term average of 16 to 1 from the current 49 to 1.

One of the interesting facts about silver production is that over 70% is produced as a byproduct of mainly copper, zinc, lead, or gold. This provides an interesting opportunity for pure producers or producers that get the bulk of their production from silver. As silver moves up in price capital should flow to those producers with heavier concentrations in silver. This should allow those producers to bring on enough production to keep the price from getting too high which would otherwise kill off some demand thereby extending the cycle. In 2005, Peru leapt ahead of Mexico as the leading producer of silver. Mexico’s superior political safety will help money to flow to that area which could well help them regain the lead.

Looking at the long-term chart of silver spanning hundreds of years, if you update the chart to the present you can see the dramatic move that silver has made off the bottom. In light of the fundamentals mentioned above it is highly likely that silver is in the very early stages of being recognized as an ever-enhancing and value-holding asset just as fiat money is in the early recognition phase of being totally discredited…….AGAIN!

 

Richard J. Greene
Clearwater, Florida
January 1, 2007