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Silver
Poised To Skyrocket
Todd Stein & Steven
McIntyre, November 16, 2004, The Texas Hedge Report courtesy of
www.texashedge.com
We think that silver is a once in a lifetime opportunity
to participate in the meteoric rise of a dramatically undervalued
commodity. The real story on silver is the massive inventory depletion
that has taken place over the last decade as depicted in the graph
below. Since 1991, the above ground silver supply has declined from
about 1.4 billion ounces to an estimated 600 million ounces (130 million
of which legendary investor Warren Buffett may or may not still own from
his 1998 purchase). Silver deficits now run between 50-100 million
ounces per annum. 130 million ounces and possibly much more of the
roughly 500-600 million above ground ounces are owned by investors like
Buffett, who have no intention to sell anytime soon. In all likelihood,
less than 350 million ounces are available to fill supply deficits at
anywhere near current prices. We are running at critically low silver
reserves and it is entirely possible that some time in the next few
years that silver shortages may occur.
The only way to bring the supply/demand in balance for silver is higher
prices. This is where the dynamics of the silver market become very
exciting for silver bulls. Silver has a dual role as both an industrial
metal and a precious metal. The majority of silver's current demand (560
million of 840 million ounces) comes from industrial and photographic
uses due, in part, to its high conductivity. The rest of the silver
demand is filled in by jewelry, silverware, and coinage. Investment
demand in the last few years has been minimal but is picking up as
concerns about the U.S. dollar abound. Silver supply is perhaps an even
more intriguing situation. 65% of silver mine production is the
by-product from copper, zinc, and lead mines. Only 35% of silver demand
comes from pure silver mines and from gold primary mines where silver is
a by-product. This interesting dynamic sets the stage for a potentially
explosive move higher in the silver market.
We believe silver will do well, even if we are wrong about the economy's
weakness to come. In a strong economic scenario, a resurgent industrial
and electronic demand should propel silver demand higher, creating
50-100+ million ounce annual deficits, which should force prices
significantly higher as inventories are depleted. Even better for silver
would be the weak economy scenario, which we believe is destined to
occur. In that scenario, silver's unique supply characteristics could
cause a very large price increase. As strange as it may sound, zinc,
copper, and lead prices are the primary driver of silver production in
the form of by-products. Zinc, copper, and lead are base metals used in
broad ranges of industrial production applications. These base metal
mines (65% of silver mine supply) will produce more silver when the
economy is doing well and less when the economy is struggling and base
metal prices are depressed.
In a weak economic scenario, you could see many base metal producers
shutter production and as a consequence, the world silver supply would
decrease. At the same time, a weak U.S. economy may lead to a weak
dollar, which spurs investment demand for both gold and silver due to
the monetary nature of the two precious metals. In such a scenario of
declining silver production and rising demand, the price increase
required to bring on material amounts of silver supply could be quite
large. To quote Warren Buffett, "and because demand is relatively
inelastic, we don't think [that the] price change required to
reestablish an equilibrium between supply and demand would necessarily
be minor."
Both gold and silver have long been neglected commodities, but we
believe they are still in the early stages of a secular bull market for
precious metals. We think that gold could again challenge its early 80s
highs of 800 bucks an ounce. But, as bullish as we are on gold because
of its constrained mine production and the continued debasing of all
fiat currencies (particularly the dollar), we believe the move up in
silver could be several times higher than gold. And in what we believe
is a very unlikely scenario of the economy and the dollar doing well in
the next few years, silver will hold up much better than gold because of
the tightness in supply/demand and its industrial nature.
We appear to have another catalyst coming in 2005 to drive the silver
price higher. A silver ETF (Exchange Traded Fund) is in the works of
being introduced. A gold ETF is slated for next month, and once it is
done, the Silver Institute intends to follow suit. Estimates we have
seen floated of up to 200 million ounces in demand seem quite possible
to us (you have got to remember just how difficult it has been for
individual investors to buy, transport, and store silver in the past).
The chart above shows the net asset value for the 10 largest U.S. ETFs.
It is illogical to think that a gold or silver ETF might have anywhere
near the investment interest of the S&P 500 or Dow or even the Russell
2000. That said, we do not think that the investing public's demand for
the "Russell 1000 Value" index is extremely high yet it has $2.7 billion
in net assets. Why couldn't a gold ETF have investment demand at least
high as the Russell 1000 Value Index? And why couldn't a silver ETF be
perhaps one third the size of a gold ETF? At that rate, the silver ETF
would be $900 million in size and at a current price of $7.40 an ounce
that would chew up roughly 125 million ounces of silver (about two years
worth of annual supply deficit cushion gone). The great thing about a
silver ETF is that we do not think that it would drain much demand from
other silver assets, but rather be additive as individuals who didn't
take the time to buy silver in the past (because of the hassle) can now
push a button on E-trade and own silver. If the silver ETF takes off,
all of the sudden you might have less than a year's above ground supply
to fill the deficit and there is no practical way that additional mine
supply can come on-line that quickly. Throw on the uniquely bullish
fundamentals of silver itself and it is easy for us to be bullish on the
grey dog when everyone else seems to be so bearish.
November 16, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report
Todd Stein & Steven McIntyre are internationally known analysts and
editors of The Texas Hedge Report, a market newsletter that highlights
under and overvalued securities in the equity, bond, currency, and
commodity markets
http://www.gold-eagle.com/editorials_04/stein111604.html
History of Banking Fraud:
The Coming Battle
By M. W. WALBERT
The Coming Battle
documents from Congressional records, newspaper reports and writings by
the founding fathers and others a chronology of events long forgotten that
shaped our fledgling nation from 1776 to 1899. Read about the manipulation
of our money and its supply, the intentional creation of recessions,
depressions and panics, manipulation of the stock markets, and the
demonetization of silver.
Secrets of the Federal Reserve
by Eustace Mullins
Eustace Mullins' carefully
researched and documented treatise picks up from Walbert's expose' and
brings it to the mid 1980's
Taking Back Your Power
by Allen Aslan Heart
WHAT CAN YOU DO? Stop playing THEIR game. Take back
your power. Stop paying taxes that are not legal or lawful. Stop paying
bills you don't really owe. Stop using THEIR money. There ARE ways if you
open your mind and look for the gaps in their fences that keep the sheeple
in their pasture. Are you chattel or a real person? You are the one who
makes that choice.
© 2007,
Allen
Aslan Heart / White Eagle Soaring of the
Little Shell Pembina Band,
a
Treaty
Tribe of the Ojibwe Nation
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