Silver - Investment Opportunity of the Decade

August 26, 2004

The environment for investment opportunities is, right now, in the process of undergoing a radical change that only a relative handful of investors has come to recognize. A vastly greater number of people believe they are going to become wealthy over the next decade by investing in technology stocks, rather than in the areas we have targeted. When all is said and done at the end of the next decade, we believe silver and silver stocks will have been by far the best performing asset classes on the planet.

First, we think it is appropriate to view the historic bear market that has unfolded since (not 1980 as many believe when silver hit $50, but) 1477 when silver hit an equivalent $806 per ounce!

When one views this stunning chart (see above link), it is most amazing that for one to appreciate the investment merits of silver, it is not even necessary to rely on silver returning to its historic role as money, although that would truly be the icing on the cake.

Silver is an industrial metal whose price has fallen so low that only a handful of primary silver producers are efficient enough to produce silver profitably. Much of the world’s silver production today is produced as a byproduct of gold, copper, lead, and zinc. Many market observers are dumbfounded and question why these producers would continue to sell their product into the market at a loss. Some observers, most notably Jason Hommel and Ted Butler have prodded managements to do the opposite, by either withholding their production or using their excess cash to buy silver. In light of the increasingly rapid money creation, this appears to be a brilliant strategy. Silver Standard (SSRI) has lead the way by purchasing silver on the open market, and Nevada Pacific Gold (NPG) – Toronto is another producer that has announced it will withhold some production.

The truth of the matter is that supply is rapidly drying up. The US Government had a 60-year stockpile of silver that has been completely depleted. There has been a supply deficit in silver for 15 years running and this year the deficit could be as high as 50 million ounces. It is uncertain how or if this deficit will be filled. Whereas 95% of the gold that has been mined still exists, estimates run that only between 250 and 650 million ounces of the silver that has been mined is still in existence, excluding silver jewelry. This means that there is probably as much as seven times as much gold still in existence as silver. In addition, silver is incredibly cheap relative to gold. The long run price of gold to price of silver ratio has been about 16 to 1. Currently, the ratio exceeds 60 to 1 which suggests that silver should appreciate several times the rate of appreciation of gold. The reason this could be explosive is there are a multitude of commercial uses for silver that are difficult if not impossible to replace. Much is made of the replacement of traditional photography with digital photography and its bearish implications for silver usage. Realistically, a good portion of the world’s population does not own a computer and in the huge population centers such as China and India, it is much more likely that growth will be seen from these countries in the traditional photography area which uses silver. Silver’s unusual chemical properties ensure increased demand in high technology and medical markets which make up 40% of demand. Among its most important properties: it is superconductive, highly reflective, malleable, ductile, it endures extreme temperature ranges, and has electrically low contact resistance. While demand from these areas alone are enough to make the silver story an exciting investment theme, the real home run is if silver returns to its more traditional role in history as money. Incredibly, while not given much publicity this is already happening in at least two US states.

We feel strongly that paper fiat money systems are already in the process of failing. Ever more desperate measures are being taken by the Fed and government statistical agencies to present economic releases in the most favorable light, in an effort to cover up a financial system that is coming apart at the seams. For gold and silver to return as money for the entire world, a combination of money destruction in the form of defaults and a tremendous increase in the prices of gold and silver by many, many times will be required. The world is deluged in credit that must not be stopped, or slowed for that matter, or the system will surely implode. Gold and silver have long been trusted as a barometer for the economy and financial system. There are a number of market commentators, Ted Butler in particular, whom have provided overwhelming evidence that gold and silver markets are being manipulated to project a message that all is well with the financial system. The silver paper traders at the COMEX know their days are numbered as the physical demand for the above mentioned uses will overwhelm their limitless paper sales. Financial derivatives now number $392 TRILLION according to the Bank of International Settlements, and are increasing at a parabolic pace that can not sustain the sheer magnitude of such numbers relative to the total value of, well - Earth!

So, we have an investment opportunity, with $6.50 downside and $800 upside to its old high, that is in a supply deficit, is rarely produced at a profit at current levels, has growing and irreplaceable industrial demand, and is hardly even being used in its traditional role as money!

SILVER - What are you waiting for?

August 26, 2004
Richard J. Greene
Thunder Capital Management