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silver Why the silver price is set to soar
Precious metals remain the most undervalued of all the asset classes.
Precious metals, and particularly silver, remain the most undervalued of
all the commodities. Silver is even more undervalued than gold and is
undervalued when compared to other strategic commodities such as oil and
uranium.
Silver is currently trading at just below $14 per ounce. Gold
Investments continue to believe that silver will surpass $20 per ounce
in 2007, its non inflation adjusted high of $48.70 per ounce before 2012
and its inflation adjusted high of some $130 per ounce in the next 8
years.
The fundamentals reasons for our very bullish outlook on silver is due
to continuing and increasing global macroeconomic and geopolitical
risks; silver’s historic role as money and a store of value; the
declining and very small supply of silver; significant industrial demand
and most importantly significant and increasing investment demand.
Silver price: global macroeconomic and geopolitical risks
Property markets and equity markets in the western world are near or at
all time record highs. There is increasing macroeconomic and
geopolitical uncertainty in the form of the sharp slowdown in the US
housing market, increasing trade friction between the US and one of
their prime creditors China (the negative impact of the introduction of
US trade tariffs on Chinese paper products and the US’ WTO piracy claim
may not have been fully realised by and priced into the financial media
and the markets) and the continuing geopolitical tensions with Russia,
Venezuela and in Iraq, Iran and the wider Middle East. These factors
look set to at least curb returns in most property and equity markets.
Indeed these and other significant risks such as record debt levels in
the western world, the huge and unprecedented US trade, budget and
current account deficits and the massive fiscal profligacy of the Bush
administration are not subsiding. These factors have ramifications for
the predominant global reserve currency of recent times – the US dollar.
The IMF, World Bank and OECD have warned that the global economy faces
increasing "downside risks" including rising oil prices, falling stock
markets and trade imbalances. The IMF’s semi-annual World Economic
Outlook (released April 5th 2007) said an economic slowdown in the US
would have only a modest global impact if it were confined to the
property sector.
The IMF report warned, however, that the shock to the global economy
could be more significant if the property downturn spread to consumer
spending and business investment. This seems likely as the US consumer
is more indebted now since 1933 with little or no savings whatsoever.
The Comptroller Auditor General of the US, David Walker stated “last
year (2006) was the first year since 1933 that Americans spent more
money than they took home and, as you probably recall, 1933 was not a
good year for the United States.”
The US’ national gross debt is $8,883,212,488,519 trillion ($8.8
trillion) and growing. When George Bush came to power US’ national gross
debt was $5.7 trillion. Even the most sanguine, tunnel-visioned bull
would have to admit that the fundamentals of the US economy are bad and
deteriorating.
Other long term risks and challenges facing the global economy come in
the form of the threats posed by a bird flu pandemic, peak oil and
global warming.
Silver price: historic role as a store of value
Thus the monetary metals and safe haven assets of gold and silver are
likely to continue to outperform other asset classes. Also they are
likely to outperform other commodities such as the base metals, oil and
uranium. These commodities would be likely to experience a fall in price
were there to be a significant slowdown in the global economy which
would create demand destruction.
Because of their historic and continuing role as monetary or currency
metals and as safe haven assets gold and especially silver are likely to
outperform. This is because they are not simply commodities but also
currencies which cannot be debased like our modern fiat paper and
electronic currencies.
Gold and silver has been used as money in more regions and countries and
for longer periods of time than the relatively modern use of paper
currencies. Interestingly, silver has been used in more regions and
countries and for longer periods of time as money than gold. Nobel
Laureate Milton Friedman, said of silver "The major monetary metal in
history is silver, not gold.” In Mexico today, there is a movement to
return to using silver as money with a bill being put before by the
Mexican Congress by Hugo Salinas. The currency of India is the rupee and
it comes from the Sanskrit word ‘raupya’ which meant silver or coin of
silver. The French word for money is ‘argent’ which came form the Latin
argentum meaning silver. The franc was established as the national
currency by the French Revolutionary Convention in 1795 as a decimal
unit (1 franc = 10 decimes = 100 centimes) of 4.5 g of fine silver.
Most countries in the world used silver for smaller denomination coins
in the 19th Century and through the 20th Century up until the 1950’s,
1960’s and 1970’s when currencies were gradually debased. Debase means
to degrade, dilute or devalue. For instance, in the US up until 1965,
silver dimes and quarters were made of 90% pure silver. In 1965, the US
government debased and devalued the currency and reduced the silver
content to 40% pure silver. These legal tender silver bags are still
bought today by savvy investors.
Silver price: declining supply
Before looking at the demand side of the silver equation it is important
to consider the supply side.
In 1900 there were 12 billion oz of silver in the world. By 1990, the
internationally respected commodities-research firm CPM Group say that
figure had been reduced to around 2.2 billion ounces of silver. Today,
that figure has fallen to about 300 million ounces in above ground
refined silver. It is estimated that 95% of the silver ever mined has
been consumed by the global photography, technology, medical, defence
and electronic industries. This silver is gone forever.
CBS Marketwatch published an article in March 2007 entitled ‘Silver may
shine brightest among metals’, in which Kevin Kerr wrote that “Due to
current supply/demand trends, the amount of silver above ground is
projected to shrink to a critically low level in 2010. As supply
shrinks, prices will keep rising steadily to new highs. Many in the
investment world are unaware of this part of silver's story. Industrial
demand has been outstripping mining supply for the past 15 years,
driving above ground supply to historically low levels.”
Silver production was flat this year and is expected to be flat again
next year. Incredibly, the amount of mined silver has been less than its
demand every single year for the last 15 years. This hasn't resulted in
significantly higher prices yet because the world has been able to fill
the gap from inventories and official government stockpiles.
However, today the U.S. government's stockpile is all but gone, and
sales from other official sources, such as China, Russia and India, are
declining, too. The decline in refined silver stocks, from around 2.2
billion ounces in 1990 to around 300 million ounces today means that
silver stocks are near an all time low.
The supply of silver is inelastic. Silver production will not ramp up
significantly if the silver price goes up. Supply didn't increase in the
1970’s when silver rose 35 fold in price – from $1.40/oz in 1971 to a
high of nearly $50/oz in 1980. Importantly, silver is a byproduct metal
and some 80% of mined silver is a byproduct of base metals. Higher
prices for silver will not cause copper, nickel, zinc, lead or other
base metal miners to increase their production. In the event of a global
deflationary slowdown demand for base metals would likely fall thus
further decreasing the supply of silver.
There are only a handful of pure silver mines remaining. This inflexible
supply means that we cannot expect significant mine supply to depress
the price after silver rises in price. It is extremely rare to find a
good, service, investment or commodity that is price inelastic in both
supply and demand. This is another powerfully bullish aspect unique to
silver.
Silver price: significant and increasing industrial demand
Another important factor as to why silver is likely to outperform other
asset classes and commodities besides the declining silver supply is
increasing industrial demand.
Why is this indispensable metal in such demand? The reasons are simple.
Silver has a number of unique properties including its strength,
excellent malleability and ductility, its unparalleled electrical and
thermal conductivity, its sensitivity to and high reflectance of light
and the ability to endure extreme temperature ranges.
Silver has the highest electrical conductivity of all metals, even
higher than copper. It was used in the electromagnets used for enriching
uranium during World War II (mainly because of the wartime shortage of
copper). Silver has the highest thermal conductivity and optical
reflectivity of all metals. Silver’s unique properties restrict its
substitution in most applications.
Non investment demand for silver is based primarily on industrial demand
including electrical, medical and photography and also in jewellery and
silverware. Together, these categories represent more than 95 percent of
annual silver consumption. In 2005, 409.3 million ounces of silver were
used for industrial applications, while over 164.8 million ounces of
silver were committed to the photographic sector, and 249.6 million
ounces were consumed in the jewellery and silverware (‘don’t sell the
family silver’) markets. Jewellery and silverware are traditionally made
from sterling silver. Sterling silver is 92.5 % silver, alloyed usually
with copper.
Industrial applications for silver have always been significant but have
increased significantly in recent years. Industrial applications for
silver have increased since 2001 to a record in 2005, according to
London-based researcher GFMS Ltd. In their most recent report, they
predict a 6% growth rate in industrial applications of silver in 2007.
Silver is used in film, mirrors, batteries, medical devices, electrical
appliances such as fridges, toasters, washing machines and uses have
expanded to include cell phones, flat-screen televisions and many other
modern high tech devices.
Increasing industrial demand for silver is forecast due to strong
economic growth in China, India, Vietnam, Russia, Brazil and other
emerging economies in Eastern Europe, Asia and the world. Growing middle
classes are now demanding the quality of life and standard of living
enjoyed by many in the West and thus the demand for silver will
increase.
Silver is known as the healthy metal and has many and increasing medical
applications. While silver's importance as a bactericide has been
documented only since the late 1800s, its use in purification has been
known throughout the ages. "Born with a silver spoon in his mouth" is
also a reference to health as well as wealth. In the early 18th century,
babies who were fed with silver spoons were healthier than those fed
with spoons made from other metals, and silver pacifiers found wide use
in America because of their beneficial health effects.
Today silver is used in many health-care products. Specifically, the
‘silver bullet’ is used by nearly every hospital in the world to prevent
bacterial infections in burn victims and allow the body to restore
naturally the burnt tissue. Increasingly, wound dressings and other
wound care products incorporate a layer of fabric containing silver for
prevention of secondary infections. Surgical gowns and draperies also
include silver to prevent microbial transmission. Other medical products
containing silver are catheters and stethoscope diaphragms.
In a world that is showing increasing concern about the spread of
diseases and pandemics such as bird flu, silver is being increasingly
tapped for its biocidal properties. Research is ongoing on the use of
silver and its compounds for therapeutic uses and on its potential use
as a disinfectant in hospitals and other medical facilities.
Silver has many unique properties which make it ideal and indeed
essential in global industry – especially in the global photography,
technology, medical, defence and electronic industries. Yet, silver is a
finite resource and the supply of silver is increasing only very
incrementally.
Silver price: significant and increasing investment demand
According to the CPM Group, there are some 300 million ounces of refined
silver in the world. That means that with silver priced at $14/oz.,
there is about $4.2 billion (300 million oz x $14) dollars worth of
silver in the world. This means that the total silver market
capitalisation is a very small $4.2 billion.
The increasing demand caused by investment demand is very compelling.
Especially due to a number of key investment factors - the introduction
of the iShares Silver ETF, the huge short position, the global liquidity
bubble, the significant growth in the global money supply, the
proliferation of millionaires, ultra high net worth individuals and
billionaires, the proliferation of hedge funds and the exponential
growth in derivatives.
ETFs
Investment demand for silver has also been rising rapidly the past few
years with investors hedging themselves against rising inflation,
possible currency devaluations and geopolitical and macroeconomic risk.
The silver market is currently in a transitional period where investment
demand is starting to have a real impact on silver prices. Much of the
new demand comes from iShares Silver ETF launched in April 2006. The
fund has so far attracted 120 million ounces of silver investment. It is
up nearly 30 million ounces since the start of 2007. It's important to
remember that the silver market is very small - only some 300 million
ounces.
That means the ETF alone now accounts for more than one-third of the
global silver market, and growing investment into the iShares ETF should
drive prices much higher. If even a small amount of money flows into the
silver market from investors, ultra high net worth individuals (ultra-HNWIs),
hedge funds, pension funds and institutions around the world, silver
will almost certainly reach the nominal non inflation adjusted high it
reached in 1980 of nearly $50 per ounce.
Huge short position
Perhaps the foremost analyst of the silver market today is Mr Theodore
Butler. He believes that gold and particularly silver are the laggards
in the commodity complex due to price manipulation. At over 300 million
ounces, the largest 8 traders on the COMEX are short more silver bullion
than exists in total known world inventories, including total SLV
holdings and total COMEX inventories.
Butler sums it up succinctly, ”If there is one thing that separates
silver from any other asset class, or any other item in any asset class,
it is the presence of an unprecedented concentrated short position in
COMEX silver futures. It is the existence of this concentrated short
position that will, at some point, launch the silver price to the
heavens. This short position has grown so large, and is held by so few
entities, that it no longer matters how it will be resolved. It must be
resolved and, whether that resolution involves default or buying by
short covering, it will have the same bullish impact on price. You don’t
have to look any further than the concentrated COMEX short position as
to why silver has not outperformed every other commodity. Just as it
explains price under performance, it is telling you why there must be
overperformance in the future. At some point, the price of silver must
accelerate upward to price levels that are truly shocking.”
Money Supply
There is some $50 trillion worth of bonds and $40 trillion worth of
paper money in the world.
Money supply is increasing at extremely high levels globally. The
annualised growth of some national broad money supplies are United
States M3 up 10%, Eurozone M3 up 9.0%, UK M4 up 13%, China M2 up 15.9%,
South Korea up 10.6%, Australia M3 up 13%, Russia M2 up a staggering
48%.
This has given rise to increasing inflationary pressures, a huge
liquidity bubble and to ripe valuations in many stock and property
markets.
Huge Increase in Billionaires, Multi Millionaires and High Net Worth
Individuals
There has been an unprecedented increase in wealth amongst a tiny
segment of the population in recent years. The number of millionaires in
the world is multiplying very rapidly and there are now approximately 9
million millionaires in the world. There are approximately 70,000 ultra-HNWIs
who have a net worth of more than $30 million.
Forbes recently estimated that there are now a record 946 billionaires
in the world. In 2006, there were 178 new billionaires. These included
19 Russians, 14 Indians, 13 Chinese and 10 Spaniards, as well as the
first billionaires from Cyprus, Oman, Romania and Serbia.
Bill Gates and Warren Buffet are worth some $51 billion and $40 billion
respectively. One man’s net worth increased in one year by multiples of
the total value of all silver in the world. Carlos Slim Helo, is a
Mexican of Lebanese origin whose net worth increased from $20 billion in
2006 to almost $50 billion in 2007 or by some $30 billion.
All the billionaires' combined net worth increased by $900 billion to
reach $3.5 trillion. There are a total of 8.7 million millionaires
around the world, representing a total wealth of a mind boggling $33.3
trillion. A trillion is an extremely large number and difficult for most
to comprehend. It is one million million or 10 to the power of 12. It is
an absolutely huge number and it is important to remain conscious of the
sheer size of this number.
Conversely, the total value of all above ground stock of silver is a
very small $4.2 billion.
If only a tiny fraction of these millionaires, ultra-HNWIs and
billionaires decided to diversify out of their extensive property and
stock portfolios and invest even a very small amount of their portfolios
in silver it would result in the silver price increasing in price
exponentially. Given the extremely strong investment fundamentals of
silver this seems likely.
Hedge Funds
Globally, hedge fund’s speculative capital have doubled to more than $2
trillion (or two thousand billion) in the last three years. Some hedge
funds have started moving into the silver market. Charles Supapodok of
Artemis Capital Management is seeking to raise a $300 million hedge fund
to invest mainly in silver. Artemis Silver Fund, advised by Artemis
Capital Management, will put 80 percent of the fund's holdings in
silver.
Again due to the incredibly small size of the global silver market if
even only a percentage of the roughly 9,000 to 10,000 hedge funds in the
world decide to take positions in the silver market the price will
increase in value by multiples.
Derivatives
The Bank for International Settlements has estimated that the total
value of derivatives contracts was $450 trillion at the end of 2006 (up
from $260 trillion in June 2006) and is increasing exponentially.
There is still a debate as to whether derivatives are a good or a bad
thing. Ben Bernanke and most in the financial industry believes they are
good as they create liquidity and help spread risk throughout the
system. Greenspan was a little more sceptical and warned that they could
create ‘moral hazard’ as they did when LTCM collapsed in 1998 sending
shockwaves through the financial system. He also warned that they could
lead to "cascading cross defaults."
Warren Buffett is similarly not as sanguine: “Charlie [Munger] and I
believe, however, that the macro picture is dangerous and getting more
so. Large amounts of risk, particularly credit risk, have become
concentrated in the hands of relatively few derivatives dealers, who in
addition trade extensively with one other. The troubles of one could
quickly infect the others. . . . Linkage, when it suddenly surfaces, can
trigger serious systemic problems.”
“The derivatives genie is now well out of the bottle, and these
instruments will almost certainly multiply in variety and number until
some event makes their toxicity clear. Knowledge of how dangerous they
are has already permeated the electricity and gas businesses, in which
the eruption of major troubles caused the use of derivatives to diminish
dramatically. Elsewhere, however, the derivatives business continues to
expand unchecked. Central banks and governments have so far found no
effective way to control, or even monitor, the risks posed by these
contracts.”
For this reason Buffett has called derivatives “financial weapons of
mass destruction.”
The systemic risk posed by the near infinite creation of hundreds of
trillions of dollars of derivatives means that the finite currencies and
safe haven assets of gold and silver are likely to be diversified into
increasingly.
If only a tiny fraction of the humongous derivatives market was to
reallocated into the silver market, silver would increase in value
exponentially.
Silver's price history
Silver remains historically undervalued. Despite the incredibly bullish
fundamentals outlined silver has so far underperformed nearly all the
other commodities. Silver has gone from below $5 to some $14 and is up
some 190% in the last 7 years.
This seems like a lot but when compared to other commodities and metals
it is very little:
Oil is up from $10 to $63 or 600% and more than 6 fold.
Zinc from $.35 to a high of $2.00,. now $1.50/lb or nearly 5 fold.
Copper, from $.75 to a high of $4.00, now $3.58/lb or nearly 5 fold.
Lead from $.20 to $.90/lb or nearly 5 fold.
Nickel from $3 to $22/lb or more than 7 fold.
Indium, Molybdenum, Selenium, Cobalt are all up 1000% or 10 fold and
more.
Uranium is up a phenomenal 1300% or 13 fold.
Many commodities are up between 5 and 13 fold. Silver is not even up 3
fold. If silver were to catch up with these other less rare and less
precious metals, it would have to increase in value by some 500%. From
the bottom at some $5/oz in 2001, that would result in silver being
valued $25.
Silver reached $50 briefly in 1980 when just one billionaire Bunker Hunt
(one of a handful of billionaires in the 1970’s) attempted to corner the
silver market causing the price to surge (in conjunction with many
investors seeking to hedge themselves from the stagflationary 1970’s). A
lot of technical orientated analysts, investors and hedge funds are
looking at this figure and as nearly all the other asset classes and
commodities are all at near all time records there is every reason that
silver will do likewise in the coming years.
Silver is priced at some $14/oz today. The average price of silver in
1979 and 1980 was $21.80/oz and $16.39/oz respectively. In today’s
dollars and adjusted for inflation that would equate to an inflation
adjusted average price of some $60 and $44. It is for this reason that
we believe silver will be valued at over $50 in the next 3 to 5 years.
Why silver is the investment opportunity of a lifetime
Finally, it is important to put today’s total value of all above ground
refined silver in the world - $4.2 billion – in context.
$4 billion worth of Boeing planes was bought by Ryanair in 2005. $4
billion was the cost of stamp duty tax on Irish property in 2006. €8
billion worth of overseas commercial property was bought by Irish
investors in 2006. Scottish Ministers are in charge of £2 billion (some
$4 billion) of tax revenues. Macquarie, the Australian bank, recently
acquired the O2 Airwave police radio business for £2 billion. The 2006
Sunday Times Rich List UK estimated that there were 20 people with a
minimum wealth of £2 billion (some $4 billion) residing in the UK.
Further context is provided in the fact that the actor Will Smith has
had a worldwide career box office of $4.4 billion. Microsoft is growing
revenues at over $4 billion a year. In March and April of 2007, just two
months, one man’s wealth increased by $4 billion. Since Forbes
calculated its 2007 wealth rankings, they recalculated that in two
months the Mexican tycoon Carlos Slim’s fortune rose $4 billion to $53.1
billion.
Rarely are there 'no brainers' in life and very rarely are there ‘no
brainer’ investment opportunities. Invariably, ‘too good to be true’
investments turn out to be just that.
However, this is not the case with silver. It remains the investment
opportunity of a life time.
Silver is unique in terms of being both a monetary and an industrial
metal and having the highest optical reflectivity and the highest
thermal and electrical conductivity amongst all metals. Silver
industrial and investment demand is increasing very significantly and
meanwhile supply is falling. The fact that the huge majority of the
investment public and financial services industry remains ignorant of
the fundamentals in silver means that the bull market in silver remains
in it’s early stages. Silver remains probably the most undervalued asset
class.
How to Speculate in Silver
• Silver options and futures
• Silver ETF
• Silver mining stocks
• Spread bet silver
How to Invest in Silver
• Perth Mint Government Silver Certificates
• Allocated and unallocated silver accounts
• 1000 troy oz bars – (weigh some 31 kgs) These bars are COMEX good
delivery bars.
• 100 troy oz bars – (weigh some 3.11 kgs) These bars are among the most
popular with retail investors. Popular brands are Engelhard and Johnson
Matthey.
• 90% Silver Bags
• 40% Silver Bags
(Pre-1970 U.S. legal tender 90% and 40% silver coins, which were used as
money until they were replaced by the precious metal free coinage
introduced in 1970 and used today. Bags of U.S. dimes, quarters,
half-dollars containing 90% silver or 40% silver are traded based on
their precious metal silver weight.)
Silver bars and silver bags can be taken delivery of but due to the
volume, weight, difficulty to store securely and cost of insured
delivery most investors buying silver in volume opt for unallocated and
allocated silver accounts or government silver certificates due to their
being no annual and ongoing storage/ insurance fees. |
