By : Theodore Butler
In a moment, I’d like to describe a new development in silver that should prove quite bullish to the price, but first I’d like to review some continuing facts that are significant in their own right. It would appear that the confluence of many factors point to sharply higher silver prices dead ahead. Yes, I know the price has recently collapsed. Ironically, it is that very price smash that is the basis for the coming price launch higher.
Since the recent top in July, the price of silver has undergone a dramatic collapse. As proven by data released in government reports, a large U.S. bank or two sold a massive number of COMEX silver futures contracts into the top and subsequently has covered a good number of those short contracts on the resultant price decline. Quite simply, this is the single most important factor behind the price collapse. The latest data appear to indicate that the price decline is now largely behind us.
The latest data in the Commitment or Traders Report (COT) indicate a near-record shift in market structure over the past three months. The total net commercial silver short position has been reduced by approximately 50,000 contracts (250 million ounces). This is an absolutely massive amount of commercial buying, and has pushed many COT measurements to their most extreme bullish readings in years. Similar commercial buying has occurred in COMEX gold futures.
Make no mistake, this massive commercial buying was no accident. This was precisely why silver and gold dropped sharply, namely, to enable the commercials to buy at the expense of speculative long liquidation. The commercials don’t do anything on this scale by accident. To think otherwise is naïve. Ask yourself this - if silver’s price smash did indicate we faced a long term future of lower silver prices, then why would the commercials, the dominators of the market, buy every contract they could get their hands on?
By no small coincidence, other unusual factors suggest silver prices should soon embark on a significant price rally. A notable increase in demand for 1000 oz bars can be seen in tightening price differentials between nearby futures contract months and by reports in the physical market, a marked increase in deliveries in the nearby October silver delivery contract, as well as recent withdrawals in COMEX silver inventories from those taking delivery on October futures. All are supportive of a pending shortage in 1000 oz silver bars, the industry unit of trade. When the shortage of 1000 oz bars becomes apparent, all talk that silver has only experienced a "retail" shortage, will be dashed. Coupled with the bullish COT structure, it adds up to strong upside price potential ahead.
But the sharply lower price of silver and other commodities has introduced a new bullish development that, quite frankly, I had not anticipated. It has resulted in unintended consequences that all should recognize shortly. So potentially bullish is this new factor that it appears to be on the order of a coming shock to the silver pricing structure.
It is said, in the world of commodities, that the cure for low prices, is low prices. In other words, according to the law of supply and demand, low prices discourage production and encourage consumption to the point at which the low prices are replaced with higher prices. The unprecedented deep declines in the price of silver and base metals, such as copper, lead, zinc, and nickel promise to disrupt the production of these metals. After all, no one can produce at a loss indefinitely. Almost without exception, the price of all these industrial metals has fallen deeply below the cost of production for most producers. This is not just anticipatory, as daily reports confirm continuing mining production cutbacks. In addition, smelter cutbacks, especially in China, the world’s largest refiner, have been ongoing for months.
What makes the sudden price declines so unusual is that have apparently occurred not so much due to specific supply/demand fundamentals in the metals in question, but more to general dark sentiment about general overall concerns about prospective industrial demand and credit issues. All commodities have been smashed, almost indiscriminately. But there is a highly unusual feature to the price declines. For the first time in half a century or longer, the price declines have come at a time of generally low inventory levels, in marked contrast to prior price declines.
Normally, the industrial metal cycle tops out with high prices amid high inventories. Then, the high prices diminish demand, which in turn pressures price, often to levels below the cost of production. Mines react to the low prices by curtailing production or shutting down, which stimulates demand and eats up the high inventories. When inventories reach levels too low to support further draw downs, prices rise until the next peak in prices and inventories. These normal free market cycles take years to unfold.
This time, prices have collapsed even though inventories are on the low side. Therefore, in spite of the fears of reduced industrial consumption, because of the sharply lower prices, production promises to fall faster, and the already low inventories can’t support draw downs for long. Although it is not currently widely expected, even in recessionary times, shortages can and will occur if supply (production and inventory draw downs) can’t satisfy demand, even though that demand may be reduced.
Separately, the resource boom over the past five years was characterized by a noteworthy lack of increase in additional production capacity of most non-ferrous metals. Now, with dramatic postponements and cancellations of new mining projects, due to economic and credit concerns, there will be significantly less production available if and when shortages occur.
The net result for silver could be profound. Not only is the current price below the cost of production for mines in which silver is the primary source of revenue, but the price of base metals like zinc, lead and copper, is also below the cost of production. Since the by-product silver from the mining of these three metals account for a full 60% of total silver mine production (400 million oz out of a total 670 million oz annually), the expected reduction in base metal production will have an exaggerated impact on silver production. Throw in the 200 million oz primary annual silver mine production and the vast majority of total silver mine production is in jeopardy. Finally, recycled silver of some 200 million ounces is perhaps the most price sensitive of all. Talk about the unintended consequences of sharply lower prices.
This is the first time since I have been studying silver that total production has been in such sudden danger of a sharp decline. In fact, it would appear to me that this could be the perfect bullish storm for silver. Please consider the facts. World silver inventories are the lowest they have been in hundreds of years, thanks to a century of industrial consumption. This is precisely at the same time of the most serious threat to production in memory. More than any commodity, silver has been demonstrating real signs of tightness, even before impending widespread production cuts.
What really sets silver apart from the other industrial metals that may quickly go into related shortage situations if prices remain depressed, is the special dual role of silver, as both a vital industrial material and as a primary investment asset that can be owned directly by investors of all means. Silver, like gold, is an asset desired by investors, particularly when financial conditions are unsettled. Copper, lead and zinc are not such assets. So whereas we can have easily see industrial shortages and sharply higher prices for base metals, even in a recession, if production declines enough, those sharply higher prices will not be accompanied by ordinary investors rushing to buy zinc coins or bars of lead. That, most definitely, will be case in silver.
In fact, as I wrote last week, it is not just that investors are likely to buy silver, there is already an historic silver investment rush in force. And this investment rush is even more significant since it has developed only in the past three years, after decades of net investment selling of silver. Again, I couldn’t make these things up if I tried. And please remember, even in a recession with lower industrial demand, if users can’t get the silver supplies they need, they will panic at some point and rush to build inventories.
I did not anticipate the brutal decline to below $9 an ounce. Fortunately, those who hold real silver on a non-margined basis, my consistent public advice, still hold their silver. The rise in premiums of many items, particularly U.S. Silver Eagles, has minimized the pain of the decline. New buyers, however, have just been given a gift beyond description. The collapse in price has had nothing to do with the merits of silver, but will have everything to do with the coming explosive rally. The uneconomic low price will shock the price higher.
I have written many times on the 700 year price history of silver. 
As can be seen from the chart above throughout history silver has sold for about 16 ounces for each ounce of gold. However in the last 200 years since the British tried to demonetise silver in the 1800's (because they had none) the ratio has increased dramatically. From (1808 – 2008), the ratio between gold and silver has been 33 ounces of silver equals one ounce of gold. More recently, say 1978 – 2008, the ratio has widened to on average, 60 ounces of silver buys one ounce of gold. At the extremes the ratio fell to 17:1 in 1980 as both metals peaked; and rose to 100:1 in 1991 during the depth of the recession.
During the 1976 – 1980 bull market in precious metals, the ratio fell from 40:1 to 17:1
During the 1990 – 1991 recession the ratio rose from 71:1 to 100:1
The latest bull market in silver began in 2003, and from then until mid 2008, the ratio dropped from 80:1 to 45:1.
A few months ago, as more and more people began to suspect that the world was heading for a recession, the ratio rose again, from 50:1 to the current 80:1
A LESSON FROM HISTORY.
The clear lesson from history is that we can expect silver to drop faster than gold during a recession, and silver will rise faster than gold during a bull market in the metals.
A simple application of this observation is to trade silver for gold in the middle of a recession, when a bull market in gold and silver is about to start, and to trade gold for silver at the top of a bull market in precious metals.
It behooves us to remember that the actual peaks only last for a few seconds. Though the action will show up as a line on a chart henceforth forever, the actual amount of any stock or commodity traded at the precise peak is minimal. Most of the action takes place when traders are convinced that a top (or bottom), is in place.
It is said that technical analysis works best when it is based upon fundamental analysis. The fundamentals for gold are very bullish. Supply is coming from three sources, gold mines, recycling and central banks. The gold mines are supplying less gold every year, as mines become depleted and new mines are not coming on stream fast enough.
Mining experts do not expect any large new gold mines, until the gold price rises above $1,200.00
South Africa’s gold mines, the world’s #2 suppliers, are still suffering from power shortages, and mines there are delivering about 10% less gold compared to a year ago.
The world’s #1 supplier, China, is reported to be keeping all the gold mined in China within its borders, to balance its reserves, which at last report were less than 3% of its huge ‘paper reserves.’
Supply of scrap gold has been rising, along with the higher price, but that supply is finite.
It will no doubt rise each time there is a sharp rise in the gold price, but eventually it drops off, as people run out of rings, bracelets and gold teeth.
The supply of gold from central banks was predictable at 500 tonnes per year, until the 2007-08 fiscal year, when sales dropped off noticeably.
The suspected reason for this drop is very likely the credit crisis, as central bankers realize they need to hold onto gold to create the illusion that the paper and digital money they have issued is safe, since they have gold with which to back up all that paper. Never mind that gold is no longer used for that purpose.
Demand for gold is very strong, especially at the investment level. Reports of shortages of coins and small bars have come in from all over the globe. Several Mints have stopped taking orders, and other mints are working overtime to fill orders. Dealers are paying a premium over bullion value in order to replace stock they sold earlier.
THE OUTLOOK FOR SILVER.
The picture for silver is even more bullish! Silver has been in deficit for the last 18 years. The dramatic rise in the price of silver that ended in 1980 enticed people all over the world to cash in, by selling old coins, silverware, cutlery as well as silver jewelry purchased over the years from manufacturers in Mexico, Peru and Italy. (As an aside, a large portion of silver jewelry, even though it will be marked .925, is actually silver plated. It pays to buy silver jewelry only after checking it over with a magnet! That goes for chains and bracelets that are for sale in ‘reputable stores’ as well! Caveat emptor).
It took the world’s economies about 10 years to convert this 1980’s excess silver back into useful format, and either use it up, or see it disappear into an investment portfolio, and today it is estimated that the world ‘consumes’ 1.5 ounces of silver for every 1 ounce the mines are producing.
The majority of silver that is used in industry, is applied in very small amounts such as cell phones, computers, TV’s, refrigerators, medical applications, satellites, weapons systems, electrical wiring applications etc. In the majority of cases this silver is never recovered.
THE MAIN DRIVER.
The main driver for the rise in the silver price between 1976 and 1980, and the concurrent dropping in the ratio, was investment demand. People were concerned about the dramatic rise in price inflation they were experiencing.
Ironically history is repeating again! Not only are we seeing dramatic increases in the price of the foods we eat and the products we use, but this time we have problems in the banking sector as well. Since we know that governments fight problems by throwing money at the problem, we can be sure that inflation is going to be with us for quite a while.
AN ADDED FACTOR.
When we compare the supply vs demand factor for silver, we need to be aware of the fact that since 1980 we have almost 2 billion consumers who were not in the marketplace in 1980. Most of them live in India and China, and large numbers among them are moving up into middle class status. Middle class people all over the world love ‘gadgets’. Gadgets require silver. It just happens that people in those two countries also have an affinity for precious metals.
Thus we have confluence of factors on the demand side of both silver and gold: Investment demand, industrial demand, along with the fear factor, due to the current credit crisis (which will be with us for years to come).
THE BLACK SWAN.
Hiding behind some tall weeds is a black swan. As outlined above, the time to switch from silver to gold is when a bull market in precious metals is about to start (or to resume after a correction). Precious metals have corrected since March of 2008, and may well be ready to resume rising. The black swan is the almost certain fact that a number of bullion banks, aided by central banks have taken on very large ‘naked short positions’ in gold, and especially in silver. The fact that we are now witnessing a dual pricing system in gold and especially in silver, (‘paper silver a-la-Comex’ versus ‘real silver’ which applies to anyone attempting to buy physical silver), is a direct result of this blatant manipulation in the precious metals markets. When this manipulation ends, it will add extra energy to the bull market.
Just ask yourself this simple question: If a billionaire (and there are lots of them out there), wanted to buy 1 billion dollars in gold could he do it?
If the same billionaire wanted to buy 1 billion dollars in physical silver, could he do it?
The answer to both questions is ‘yes’, but while buying the silver, he would drive the price up by multiples of the current price. Silver is scarce!
Since 1984 a trading range has developed in the ratio. With the ratio near 45 it makes sense to trade silver for gold, until the ratio breaks sharply below 45 and thereby indicates that it is starting a new trend. With the ratio near 80, and even if it rises back up to 100 it makes sense to trade gold for silver.
IN CONCLUSION.
The bull market in precious metals very likely has not even reached the half-way point in either price or time. (Gold started in 2001 and silver in 2003). “Real interest rates” are currently negative (T-bill minus CPI), and gold always thrives in that kind of environment.
The credit crisis will be with us for a number of years and governments will continue to ‘print’ money to ‘solve’ the problem. The US Federal Reserve is currently expanding the Monetary Base in excess of 20%! Money supply is growing on a global basis. The US budget deficit this year will be another record.
Investment in the metals is just beginning to move from ‘stealth’ into main stream. This process takes years, as people are slow to change investing habits.
The recent rise in the US dollar was caused by at least two factors: First: hedge funds were unwinding positions that were short the dollar and long oil. Oil appears to have bottomed at 80, thus that factor is now ‘in the market’. Second, it was thought that the Euro (which makes up 57.6% of the US dollar index), was going to be even more negatively affected by the credit crisis than the dollar. That condition is now also ‘in the market’, and leaves the dollar vulnerable to a sell-off. In the past, weakness in the dollar has translated into strength in metals.
Silver is now scarcer than gold! This factor alone makes me steer my investment dollars into silver, rather than in gold for the time being. My long-term target for the ratio is 10:1, and I base that on the growing demand for silver as an industrial metal in combination with silver as an investment, while the supply of silver continues to dwindle. In the 1960’s, the US government had a stockpile of 2.5 billion ounces. That silver is gone, used up! Before the ratio drops again, it could rise above 80, and could even reach 100 again as it did in 1991. If that happens, I will become even more convinced that it is time to trade gold for silver.
Many people often say to me bullion pays no interest so I prefer cash. The Keynesians have spent almost 40 years of well oiled propaganda positioning gold as a non interest bearing investment relic. Lets examine the facts: The loss of purchasing power of paper currency is best demonstrated by some simple and observable facts: Prior to 1971 a family financial structure was dramatically different: Dad could work a blue collar 40hr per week job and mum could stay home and raise the kids but they could still afford a Sydney house with a small 10 year mortgage. They owned one car outright and paid cash for the annual beach holiday. Kids schooling, pensions and healthcare were government funded. Life was simple. Fast forward to 2008: Dad and mum are working 60 hr weeks. A 30 year mortgage buys a suburban box 1hr 20 mins from CBD. Both cars are fully financed, the annual holiday is paid on credit card, self funded childcare and education, personal super contributions and private healthcare. Life is crazy. This is inflation........the loss of your purchasing power. Why has this happened? 1971 is the year that the US dollar replaced gold as the worlds reserve currency. The spending discipline enforced by the gold standard no longer remained. The US dollar was now backed by nothing other than faith, a promise to pay. All currencies would now be measured in US dollars, meaning gold was effectively replaced by the US dollar as the global monetary check and balance. The printing presses have been running 24 x 7 for 37 years now. The supply of money with nothing backing it is acting as a hidden tax for every citizen. It has turned entire countries of net savers into net debtors with no hope of repayment. This is why Joe sixpack, the factory worker in 1970, enjoyed a better standard of living than most people today – inflation through paper currency debasement. This concept is nothing new. In Roman times Emperors struggling to fund the expanding war effort debased gold and silver coins by slicing edges or mixing cheaper alloys into production. History is littered with examples of how governments swindle money from its people. Looking at recent events with the massive financial global bailouts (they are not just in US) the printing press spigots have been ratcheted to a level never seen before. In fact today the use of digital dollars means they don't even need to waste paper to increase the money supply. Governments call it liquidity injections, emergency funding, temporary loans, asset swaps etc etc but it all means something very simple: your money is being debased at record pace and inflation is going to accelerate to unimaginable levels as a result. We are headed for a global currency crisis, hyperinflation ala Germany & Zimbabwe. Unfortunately the masses will learn the concept "what is money" the hard way. Their digital and paper dollars will become worth less and the kings of currency, gold and silver, will resume their rightful place as the only real money. Still care about gold not paying interest relative to cash?????
Less than you think! In the world there are currently somewhere between 120,000 and 140,000 tonnes of gold 'above ground'. To visualise this imagine a single solid gold cube with edges of about 19 metres (about three metres short of the length of a tennis court). That's all that has ever been produced. Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimetres each. This equates to about $250 - $350 worth per person on Earth, depending on the current price. The value of that short tennis court sized cube is about $3.6 trillion. This compares to the US government's sovereign debt of $11 trillion, which until 1971 was part-backed by gold. The US Gold Reserve is just over 8,000 tonnes - which is about 6% of the total gold ever mined. It is worth about $200 billion, or 1.8% of the US national debt. $3.6 trillion is about one fifteenth of the paper based international bond markets, which themselves, at about $55 trillion, are about two thirds composed of western government sovereign debt almost all of which has appeared, co-incidentally, since 1971 and the declared supremacy of paper money, which was what allowed governments to borrow without caution. The total gold content of the world would pay - at current values - about 7% of the international bond market's sovereign debt. But of course 75% of the world's gold is not available to governments - being held privately as jewellery, bullion and coin. In fact only about 30,000 tonnes, about 1% of the world's sovereign debt is what is held in central bank gold reserves. Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets. The world has placed absolute trust in paper currency denominated assets. Investors have shunned gold for about twenty years while the notional value of paper based financial assets has exploded. About 30,000 tonnes of the world's gold [20-25% of above ground inventory] is held in central bank vaults. Major Central Bank Reserves (2000) Nations & institutions Reserves (Tonnes) USA 8139 Germany 3469 IMF 3217 France 3025 Switzerland 2590 Italy 2452 The totals for other central banks tail off rapidly after these main holders. Most only hold a few hundred tonnes, and together they make up a bit over 30,000 tonnes in all. The rest is held by individuals in the form of gold jewellery [approx 70,000 - 80,000 tonnes], coin and privately held bullion [combined at 20,000 tonnes]. 90% of the gold above ground has been mined since the start of the California gold rush in 1848. Modern power machinery and chemicals have steadily lowered the price at which gold can be extracted. The average production cost of the world's biggest producer - South Africa - is about $238 per troy ounce. 1997 industry estimates by the Federal Reserve Board suggested an average production cost worldwide of $300 per ounce. Where it is known about with reasonable confidence, and can be extracted economically, un-mined gold appears on the books of mining companies as 'reserves'. There remains as reserves about 40% of the total of gold above ground - i.e about 50,000 tonnes. South Africa has 50% of the world's known stock of un-mined gold. Gold is difficult to find in commercial quantities. It also takes time, typically 5 years, and plenty of money to bring mines into production. In this sense the supply side of the gold equation is relatively constant. One of the features of this is that boom times encourage investment which takes a considerable time to work through to production and - eventually - to worked out mines. After a boom, when investment decisions may be made on over-inflated expectations of ultimately achievable prices, there is a tendency to subsequent overproduction and poor prices for a considerable period. The gold price boom of 1979/80 resulted in steadily increasing production all over the world from a stable base of 1200 tonnes annually to a peak of above 2600 tonnes in 1999. All major producing countries except South Africa substantially increased production in this period. Production then levelled out and started to dip slightly, as mines were exhausted and poorer mines shut. Also the uninspiring gold market encouraged a decrease in exploration which now means there are a lower number of new mines coming into production than is expected to be required by the market. Nonetheless for the time being gold is still being mined and refined at the rate of almost 2,600 tonnes per year. Thus the world supply of above ground gold is increasing - or inflating - at just over 2% annually. At current rates the gold supply is growing the under-sized tennis court cube at about 12 centimetres a year. It will reach a full tennis court sized cube in about 20 years time. The following table compares kilogram quantities of gold with monetary values, spatial volumes, and meaningful human measurements, to get a feel for the numbers. Kilograms Value @ 780$ / Oz Litres How much 0.008 $200 0.00041 A British sovereign coin 0.031 $780 0.00161 US Eagle / Canadian Maple coin 0.100 $2,508 0.00518 0.500 $12,538 0.02591 1 $25,078 0.0518 1 kilo - a golf ball sized sphere 2 $50,156 0.1036 3 $75,232 0.1554 4 $100,308 0.2073 5 $125,386 0.2591 6 $150,462 0.311 A can of 'Coke' 7 $175,540 0.363 8 $200,618 0.415 9 $225,684 0.466 10 $250,772 0.518 12 $312,000 0.645 A standard 400 oz bullion bar 20 $501,444 1.04 A litre bottle of water 50 $1,357,845 2.59 100 $2,507,716 5 A good sized deposit box 1,000 $25,077,160 52 10,000 $250,771,802 518 Half a cubic metre - fits in a corner of a small bank vault. 100,000 $2,507,166,025 5,181 1,000,000 $25,771,160,000 51,813 A small living room - and more than twice Britain's gold reserve. 8,139,000 $204,102,504,000 421,710 The US gold reserve fits into a town house. Fort Knox is mostly empty space! 30,000,000 $752,320,190,000 1,554,404 The world's total financial reserve of gold (central banks + significant global financial institutions) 100,000,000 $2,507,166,048,000 5,181,347 The approximate total of all privately held jewellery, bullion and coin 140,000,000 $3,501,802,468,000 7,253,886 All the gold in the world - A block with edges 3 metres short of a standard sized tennis court. $11,000,000,000,000 The current US sovereign debt (which excludes future pension and health obligations, none of which have been reserved against in the public accounts)
This podcast is a must listen for any bullion investor. It highlights extraordinary demand and puzzling discrepancy between physical and paper bullion.
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One of the most common questions we get at Bullionmark is should I buy 1000oz bars or 1oz coins? Logic suggests you should buy maximum number of ounces as close to spot as possible. However in most cases this approach does not maximise your returns.
When investing in silver you must consider that you are warehousing silver today for sale at a higher price sometime in the future. So deciding the target market for the future sale has a pretty important influence in your purchasing decisions today right?
If an investment mania in silver occurs it will be the average Joe who will bid up the price for your warehoused stocks. Average Joe is going to pay the biggest premium for bullion coins because it is recognisable, real money, transferrable, trustworthy. Most of those qualities do not apply to large bars. You are an early entrant into this investment opportunity, just be smart about your choices today and you will do well. This is a business not just a fun hobby, so think clearly about your exit plans. Think about who will buy your silver in future and plan your mix accordingly.
As an example right 1oz silver coins are selling at over 100% premium to spot up from 50% 6 months ago and 25% in 2007. It is not your buying price thats critical its demand potential and selling price (margin) that counts. Coins have and will continue to provide the best margin potential and greatest demand. Alternatively if you buy a 1000oz bar today I pay $15.50 but only get $13 in resale a 16% decline versus spot. Why because the only demand is from a dealer who has to make his own margin at your expense. I know paying such high prices over spot is somewhat counterintuitive but owning the products that will have the greatest demand is the best route to profitability.
- Coins are portable for trading goods & services and resale to joe sixpack at some date in the future
- Mid sized bars are a good convenient store of value easily go in safety deposit boxes or safes. Are reasonably easy to trade with Joe sixpack if branded by recognisable mint.
- 1000oz bars are for your families store of wealth & security if you can securely store them and transport when necessary. Strategically safe and accessible storage is critical, but very expensive and complex. Due to a limited target maket they are difficult to offload and likely to be the worst retun on investment
Whilst I support the quest to accumulate as many ounces as you can afford, make sure they are profitable ounces.
The historical high for silver was set 531 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce. By comparison, the price of silver less than $19 an ounce today, and was only about $5 an ounce in 1998, after having bottomed at under $4 an ounce in 1992.Now, fast-forward to today as our 2008 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price of silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2008 dollars! Over a thousand dollars an ounce! For silver! In case you haven't noticed, we're unmistakably coming off the lows of a 530-year bear market in silver and, theoretically, entering a long bull market, which ought to be exciting to people who have a lot riding on silver gaining so much in price (me), or even just keep up with this kind of thing, like, for instance, Israel Friedman, writing at InvestmentRarities.com, who notes that there are 5 billion ounces of gold sitting around someplace in the world, but that there are only 2.5 billion ounces of silver, even though 5 times as much silver is mined every year than gold.Therefore, silver is being consumed at prodigious rates, which is why Mr. Friedman says, "Silver is needed to maintain and improve future standards of living. Gold is needed for luxury and emotional reasons. Silver is for the optimist, gold for the pessimist."In that optimistic vein, Mr. Friedman says, "I honestly believe that silver must eventually sell for five to ten times what the price of gold may be."
Some important things you should consider as silver bullion investors.
· Silver in bullion form is a very safe investment – it is no one elses liability
· In your possession it is totally removed from the financial system & government
· On almost any inflation adjusted measure silver’s true value is well in excess of $100 per oz but it may take years for the market to recognise this
· Silver is money at all times under all circumstances – paper money has and will come and go, silver has stood as money in all cultures for hundreds if not thousands of years
· Silver is a great inflation hedge – its buying power has stood the test of time. Silver still buys the same litres of oil as it did in 1950 or same bushels of wheat it did in 1600.
· Silver is a great catastrophe hedge – war, famine, disease, financial meltdown . Unlike financial assets silver excels in these environments.
· Silver ownership by the masses is at the lowest point of history
· It took 1000 ounces of silver to buy a house in Sydney in 1980, today it takes over 35,000
· Silver is dramatically undervalued versus gold – 500 years of ratio 15-1 (sometimes even parity) today it is 60-1
· Unlike gold most of the silver mined in history no longer exists
· Silver mining supply is diminishing rapidly due to rising mining costs and the fact that silver is most often a by product of other metals such as zinc or copper
· Silver has the most patents pending of any metal due to its unique medicinal, antibacterial and conductive properties
· Silver is the most conductive of all metals its use in nano technology is rising dramatically
· Silver is set to compete with platinum for use in catalytic converters for diesel engines
· Demand for physical silver is increasing rapidly at industrial and investment level
· Worldwide shortages of physical investment coins and bars is an early sign smart money is mobilising into silver
· Most wealthy families in history have used gold and silver as a store of wealth
Alternatively,
· Silver and Gold are political metals inciting war and deception throughout history
· Silver and gold are the governments and banking systems worst enemy because they hold governments to account on printing money, controlling interest rates, are difficult to tax and generate little commission because they are hoarded not traded.
· Silver is a volatile metal – price can fluctuate 30% in one trading day
· Paper silver (futures, ETF’s options, derivatives, shares etc) often trades at a significant discount to real market prices for physical
· Silver (&gold) are manipulated in price by central banks and governments
· Manipulation to restrict the price is actually a good thing because it creates value for those willing to buy on discount hold for the longer term
· Gold has been confiscated and deemed illegal to own by governments including US (1930 – 1971)
· Paper silver would be impacted by government price controls or ownership restrictions, but physical gold and silver would likely thrive in underground market (as happened in depression & WW2)
· Never give (sell) your bullion back to the government under any circumstances – bury and say its lost.
· Silver can be melted down if you require smaller denominations
Day to day rules,
· Don’t watch the daily price – this is a minimum 4 year investment I would recommend no selling until at least Mar 2012, but prefer 2018.
· In my view we could see a worldwide collapse of the financial system within 6 months, under these circumstances it is almost certain paper gold & silver will go down as leverage is unwound and people strive for cash. However, in this situation the physical market will thrive with the paper market catching up shortly after as bankers realise the only safe haven will be gold & silver. Great buying opportunity.
· Dont panic!!! Silver will never be worth nothing like paper money will be.
· If you can average down, buy more as the price declines
· Price is not important, its all about how many ounces you own!!!
· Even if silver goes to $5 per ounce petrol will be 50c per litre. Your buying power in todays dollars will be maintained. Dont see this happening though do you?????? Especially with peak oil with us.
· Remember in 1980 dollars 400z of silver is just under half a Sydney house!!!!!!
· Be patient................
CPM Group
Precious Metals and Commodities Research and Consulting
The precious metals markets are secretive places. That is one of their attractions to many investors and
others who value privacy. It poses problems for all market participants, however, because it makes these
markets, so small and illiquid compared to other financial markets, susceptible to rumors and manipulation.
While there is nothing new to this, in recent weeks and months the silver market has been repeatedly hit by
rumors spread by traders and others seeking to scare users and investors. Market professionals cite the
persistence of these rumors as a major factor in the decline in silver prices below $4.90 since
October 2000.
It is important to distinguish among myths, rumors, beliefs, and misinterpretations. In free markets, as in free
countries, everyone is entitled to his or her opinion and beliefs. The precious metals markets are no exception
to this, with some individuals holding strong beliefs that do not necessarily measure up to empirical market
evidence. The point of this brief discussion is not to seek to sway anyone from deeply held beliefs, but rather
to set the record straight on certain fundamentals that have been distorted by persistent rumors and
misrepresentations.
Myth 1: The Chinese government is selling large amounts of silver from its stocks
The issue of silver sales from Chinese government stocks has been one of the most pervasive topics of
discussion in the silver market, and perhaps the most misunderstood. The topic came to a head in early 2000
when rumors were circulated of large amounts of silver entering the market. Not so coincidentally, these
rumors began at the same time that the liberalization of the Chinese silver market was taking a great leap
forward on January 1, 2000. The Chinese silver market has been closely controlled by the People's Bank of
China since the Communist Revolution in 1949. The PBOC has been moving toward deregulating the gold
and silver markets within the country, and extricating itself from the role of national market maker. This has
led to massive shifts in the flow of silver around China, compounded by structural changes in the
Chinese photographic industry that has led to large amounts of silver that formerly went to Chinese film
makers now being available for export. These changes have radically transformed the entire metals market
within China, and have led to increased exports of silver, and gold, over the past few years.
The inaccuracy is the assumption that these exports represent here have been some sales from these stocks,
but they are a small portion of the total amount of metal being exported. Some estimates by PBOC silver
sales run as high as 60 million ounces. Chinese government sales actually have been around 10 million
ounces or so per year in recent years, and are expected to be roughly 12.0 - 14.5 million ounces in 2001.
Most silver exports have been by domestic refiners processing base metal concentrates and domestic scrap.
In the long run the new laws may lead to a decrease in exports as domestic refiners now can receive higher
prices within China, reducing the incentive to smuggle metal out, and domestic consumers and investors now
can pay lower prices for silver within China.
Myth 2: Digital photography already is sharply decreasing silver use in photography
It has been repeatedly suggested for nearly two decades that digital photography would one day replace
traditional silver-halide based photography entirely. More recently, there have been suggestions that the
declines are already in place and eroding photographic demand for silver. Again, this is not accurate.
Silver use in photographic materials—papers and films—is estimated to have risen about 6.0% worldwide in
2000.
Demand is estimated to have increased 8.3% in the United States, and 6.3% in Japan. Major photographic
companies are increasing their manufacturing capacity in the face of stronger demand growth. From 1980
through 1998 the compounded annual growth rate in silver use in photography was around 4.0%. Last year's
increase was 50% above that long term trend growth rate. This represents a definite acceleration in the
demand for a silver-bearing photographic product that flies in the face of the rumors that digital is killing this
market. One of the main reasons for the recent strength—ironically enough—has been the advent of digital
photography, although most of the increased silver use reflects expanding traditional photography. Consumer
appetites for conventional photography have been growing stronger world-wide. The Advanced Photo System
introduced in the late 1990s has boosted both picture taking and the number of reprints being made, while
rising disposable income from Asia to Latin America has increased demand in these countries. Also, most
consumers are not ready for digital photography at this point, with the cost still prohibitively high for most
people in the world and many consumers not yet computerized.
Many observers had presumed that pure digital photography, which does not use silver in actually capturing
the image, would naturally lead to a decline in silver usage. However, just as the 'paperless office' has
prompted a surge in paper use, digital photography is increasing the popularity of photography and of
traditional photographic demand. Much of the digital imaging business is actually a combination of traditional
imaging techniques and newer digital technologies. The images are captured on conventional film, and much
of the final output still uses either conventional photographic papers or other silver-coated papers. In between,
the images are digitized, edited, and manipulated. In sum, digital photography is not necessarily a negative
for silver.
In fact, if one is objective about the impact of digital photography on silver, one needs to calculate both the
possible long-term losses in silver demand on the consumption
side of the market and the reduction in supply that would occur due to reductions in silver recovery from spent
photographic products, which accounts for around 85% of the 190 million ounces recycled each year.
Myth 3: Kodak has bought forward a year's worth of silver, removing the world's largest silver user as
a source of demand for the next year.
Another report that circulated throughout the market had to do with Eastman Kodak, one of the world's largest
silver users. In December 2000 a news item reported that Kodak had hedged its silver needs through 2001.
This was perceived by some observers as bearish for the silver market, as these observers intimated that this
source of demand for silver consequently would be absent the silver market. Actually, this fact was nothing
new and can be found in the company's regular quarterly filings with the Securities and Exchange
Commission. Most of the company's silver requirements are purchased through annual supply contracts, as
has been the case for decades. Similar statements can be found in Kodak's previous filings with the SEC.
Myth 4: Berkshire Hathaway has sold its silver
Berkshire Hathaway has found itself at the center of intense public scrutiny since it announced in February
1998 that it had purchased 129.7 million ounces of silver between July 1997 and January 1998. Since then, it
has often been suggested that various periods of silver price weakness have been directly related to sales by
Berkshire Hathaway.
First, one can look at why Berkshire Hathaway bought silver in the first place. In the February 1998 press
release accompanying the announcement of the purchases, management stated that "the equilibrium
between supply and demand was only likely to be established by a somewhat higher price." Moreover,
Berkshire Hathaway has long hailed itself as a long-term investor, and does not seem likely to sell its recently
acquired assets on relatively minor price fluctuations. The average purchase price of Berkshire Hathaway's
silver was less than $5.00.
This, however, did not stop some observers from suggesting that Berkshire Hathaway had sold some or all of
its silver position. Offered as evidence of these sales was the fact that a major refiner in Europe, which had
been known to be storing silver for Berkshire Hathaway, told its clients and others that the bulk of the silver
being stored at its facilities had recently been moved. Another piece of "evidence" was that Salomon Smith
Barney recently delivered a net 1.8 million ounces of silver into the December 2000 Comex delivery period.
(Berkshire Hathaway often is viewed as the major silver customer of Salomon.) These two factors do not
necessarily mean that the silver has been sold. It may have been moved in an attempt for greater opacity.
Myth 5: Barrick hedging
In the third quarter of last year, market discourse focused on the prospects of current and future forward silver
sales by producers. Barrick Gold was the target of much of the initial speculation, as some market reports
focused on the fact that Barrick reported in a regular quarterly report that it had spot deferred silver sales
contracts in place. As with Kodak, the existence of these positions was not new; the fact that the market
decided to focus on it at that time was.
As of the end of 1999, Barrick had entered into spot deferred contracts to deliver 14.3 million ounces of silver
over the following five years. As of the end of 2000, Barrick had 20.0 million ounces of spot deferred silver
contracts at an average price of $5.32 per ounce, for 2001 and beyond. These hedges were for future output
at the Pascua mine, development of which has been deferred, so further hedging is not expected until such
time as gold and silver prices rise to levels that lead the project back toward development.
Myth 6: Other producers are selling forward
The focus on hedging data from various producers and manufacturers led some market observers to opine
that other producers must also be selling large amounts of silver, and that this was contributing to the
weakness in silver prices. This phenomenon is not new, as the gold market has constantly been plagued by
suggestions that for-ward sales by producers have created conditions of 'over-supply.
Forward sales do not work this way. When a producer sells silver or gold forward, it commits to delivering a
certain quantity of metal at some point in the future. At the time of the transaction, no extra metal actually
enters the physical market.
Myth 7: Mexican output is rising sharply
Refined silver production in Mexico rose 8.4% in 2000. Many observers have trumpeted this as a cause of
lower prices. Again, closer examination reveals the true under-lying causes. Mexican output was reduced in
1999 when the Torreon lead, zinc, and silver refining complex owned by Met-Mex Penoles was closed for a
time due to a pollution problem. This reduced output in 1999. In 2000 the refinery was back on-stream. Not
only did it operate fully processing 2000 mine production, but it produced additional amounts of refined silver
from the back-logged 1999 mine output.
Myths in the Silver Market
Last year Mexican silver mine production is estimated to have totaled 90 million ounces. This was up from 83
million ounces in 1999, but only slightly higher than the 86 million ounces produced in 1998. The rate of
increase was skewed in 2000 due to events at Torreon, which will not be repeated in 2001 and beyond.
Silver Market Rumors are Not New Rumors have confounded the precious metals markets for centuries,
dating back to the Lost city of Atlantis and the quest for El Dorado. There have been persistent
rumors floated by bulls and bears alike. In the late 1970s, after they had acquired the bulk of their silver
position, the Hunt brothers began telling everyone they knew what a great investment silver was. Others
entered the market as buyers, with several acquaintances of the Hunts even using the same floor traders as
the Texans. It got to the point in late 1979 that the one agent for the Hunts only had to walk onto the
Comex trading floor for the buying to send silver prices higher.
Myth 8: Mine production is rising sharply worldwide
Total silver mine production rose at a 6.4% annual rate from 1997 to 1998 as several new mines came onstream.
The rate of increase slowed to 3.9% in 1999 and 4.6%in 2000. A few more new projects are slated to
start in the next few years, but others have been deferred or delayed. Barrick’s deferral of the Pascua project
already has been mentioned. Other projects in Argentina, Australia, Russia, and elsewhere have been
delayed or scaled back. A few existing operating mines, particularly in North America, are at risk of being
closed. Mine production will not rise as fast as had been expected, and in fact is projected to fall
over the next couple of years. Not All Rumors Are Bearish The preponderance of the rumors floated in the
silver market in recent months have been bearish, often circulated with the apparent intention of scaring
investors and others into selling, or at least not buying, silver. There have been a few rumors floating around
the silver market that have been primarily bullish, however.
Myth 9: Large secret silver stockpiles
Perhaps the most interesting rumor is one that could be called either bullish or bearish, depending on one's
interpretation of it. This is the rumor that there are large secret stockpiles of silver held by wealthy investors.
This could be interpreted as being bullish for silver prices, if one concluded that there are several savvy
investors who are bullish on silver and, like Berkshire Hathaway, have purchased physical silver to profit from
an inevitable price rise. It could be bearishly read, however, in that it would suggest there still is that much
more silver around that ultimately can be sold to fabricators to meet industrial demand. Evidence suggest that
such positions, purchased in the middle 1980s and middle 1990s, have been liquidated,
however.
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