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December 17, 2009
By: Mark O'Byrne
Silver remains very undervalued on a historical basis
(charts below) and is undervalued even against gold (chart below). While gold has
begun to receive some interest from a small minority of retail investors, silver
remains the preserve of relatively few contrarian investors and the media and financial
press rarely, if ever, covers silver. And yet silver is quite likely in the intermediate
stage of a bull market that will rival or surpass that of the 1970s.
Silver is currently worth less than $17.00 per ounce.
It rose to a recent nominal high $20.88/oz in March 2008. After an 18 month period
of correction and consolidation, silver looks set to challenge that high in the
coming months. We continue to be bullish on gold and particularly silver and believe
that silver will likely surpass its non inflation adjusted high of $48.70 per ounce
and its inflation adjusted high of some $130 per ounce in the coming years.
Why Silver is in a Bull Market and How High Could
it Go?
Precious metals has been the best performing asset classes
in recent years with gold and silver outperforming equities, property and most asset
classes over a 3, 5 and 10 year period. This out-performance looks set to continue
in the coming months due to the very bullish fundamentals. The primary reason for
our bullish outlook on silver is due to the continuing and increasing global macroeconomic,
currency 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 perhaps most importantly significant and increasing investment demand.
Gold, oil and nearly every major commodity, stock indices
and property market surpassed their record highs in recent years. Favourable supply
and demand factors, continuing global macroeconomic and geopolitical risk and concerns
regarding the emergence of inflation and stagflation as the massive global monetary
and fiscal reflation affects the value of fiat currencies all point to higher silver
prices in the long term.
In the 1970s silver rose from under $1.50/oz in 1970 to
nearly $50/oz in 1980. Thus, silver rose by more than 25 times or by more than 2,400%.
Were silver to replicate its performance in the 1970s, it would have to rise by
more than 25 times again. The average price of silver in 2001 was $4.37/oz and 25
fold increase would result in silver rising to over $110/oz. While this price target
may seem outlandish to some, it is worth remembering that silver's record high in
1980 adjusted for inflation (according to US government inflation figures) was some
$130/oz.
Admittedly, the final phase of the silver blow off was
a speculative bubble as the billionaire Hunt brothers attempted to corner the silver
market. Unlike in 1979, today there are hundreds of billionaires, some multi billionaires,
thousands of millionaires, hedge funds and many sovereign wealth funds. Small allocations
by any of these will see sharp moves up in the price. Indeed, the silver market
is so small that it could very easily be cornered again (as appears to be happened
in the tin market in recent weeks). > Is Silver About Returns or a Hedge Against
Inflation & Systemic Risk?
Silver is a hedge against macroeconomic, systemic and
inflationary risk with the attractive added potential for significant capital gains.
Real asset allocation and prudent diversification would be an important reason to
have an allocation to silver. Silver is highly correlated to the safe haven of gold
and is in effect a leveraged sister of the precious yellow metal. Thus, informed
investors use gold more for wealth preservation purposes and silver in order to
make a return.
Silver: Declining Supply
In 1900 there were 12 billion ounces 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 less than 1 billion ounces in above ground refined silver.
It is estimated that more than 90% of all the silver that has ever been mined has
been consumed by the global photography, technology, medical, defence and electronics
industries.
On current supply/demand trends, the amount of above ground
refined silver is projected to shrink to even lower levels in the coming years.
Industrial demand has been outstripping mining supply for most of the last 20 years,
driving above ground supply to historically low levels. Few in the investment world
are aware of this important fact.
Silver production has been flat in recent years while
demand has been increasing. 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.
Very importantly, silver is very unusual as
its supply is inelastic.
This means that silver production will not ramp up significantly
if the silver price goes up. Supply didn't increase significantly in the 1970s when
silver rose more than 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 stagflationary or deflationary slowdown, demand for base metals would
likely fall thus further decreasing the supply of mined silver.
There are only a handful of pure silver mines remaining
- many with depleting reserves. 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, commodity or investment that is price inelastic
in both supply and demand. This is another powerfully bullish aspect unique to silver.
Silver: Increasing Industrial Demand
Industrial applications for silver have always been significant,
but they have increased significantly in recent years. 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 economic growth in China, India, Vietnam, Russia, Brazil and other emerging economies
in South America, the Middle East and Asia. 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 likely increase.
Silver is known as the 'healthy metal' and has many and
increasing medical applications.
In a world that is showing increasing concern about the
spread of diseases and pandemics such as swine 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.
Increasingly, silver's antimicrobial and antibacterial
qualities are seeing it being used in all sorts of medical applications and this
looks set to become a very significant source of demand in the coming years.
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.
It is important to note that silver, unlike gold, is heavily
used in industry and because of gold's much higher value, it gets recycled and all
the gold mined in the world ever is still with us but a huge amount of silver has
been used in photography, mirrors and other industrial uses in the last 200 years.
The low price of silver makes recovery and recycling uneconomic.
Unlike gold, silver is like oil - as it is consumed in
these many industrial applications it is gone forever.
Silver: Increasing Investment Demand
Investment demand for silver has risen in recent years
as investors concerned about the value and safety of property, equities and deposits
allocated funds diversify to the finite commodities and currencies of silver and
gold. More recently, there have been increasing concerns about the value of paper
currencies themselves (voiced by many including Alan Greenspan, John Paulson and
George Soros) which is leading to further diversification into hard assets and precious
metals.
There has been a marked increase in investment demand
for silver in recent years. Some of the reasons why this trend is likely to continue
are - the introduction of ETFs that track the price of silver, a new 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.
The Bank for International Settlements has estimated that
the total value of derivatives contracts was $592 trillion at the end of 2008 (up
exponentially from $260 trillion in June 2006). Thus, dwarfing the GDP of the entire
world which was estimated at some $61 trillion at the end of 2008.
There is still a debate as to whether derivatives are
a good or a bad thing. Alan Greenspan recently warned they could lead to "cascading
cross defaults." Warren Buffett is similarly concerned and has warned that
they could trigger "serious systemic problems." Buffet said that "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."
For this reason Buffett presciently called derivatives
"financial weapons of mass destruction" in 2003.
Investors in silver bullion coins and bars are hedging
themselves against further deflation and falls in property and equity markets. They
are further protecting themselves against rising inflation, possible currency devaluations
and still very prevalent geopolitical and macroeconomic risks such those posed by
the humongous global derivatives market.
Silver is undervalued versus gold with the gold silver
ratio at 60:1 ($1050oz/$17/oz). This is particularly the case on a long term historical
basis. The long term historical average gold to silver ratio is 15:1 and this is
because it is estimated that geologically there are some 15 parts of silver in the
ground for every one part of gold. In 1980 the ratio nearly reached 15 ($850oz/$50oz=17)
and the average in the 20th century has been around 40:1.
Many analysts believe that silver's ratio to gold will
revert to its mean average in recent years, below 40:1. Even if gold only remained
at some $1,000/oz this would see silver rise to some $25/oz ($1,000oz/40=$25/oz).
A picture or a chart truly is worth a thousand words and
the chart above showing silver prices adjusted for inflation shows how seriously
undervalued silver remains.
Conclusion
Silver is unique in terms of being both a monetary and an industrial metal. Silver
is priced at less than $17/oz today. The average nominal 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/oz
and $44/oz in 1979 and 1980. It is for this reason that we believe silver will be
valued at well over $50/oz in the coming years and silver remains the investment
opportunity of a lifetime.
GoldCore Recommendation
Prudent investors should have an allocation to silver.
Buy Silver Eagles at the most competitive prices for delivery
or storage in one of the safest international precious metal vaults in the world.
Silver Eagles are the official silver bullion coin of
the United States and are guaranteed to contain one troy ounce of 99.99% pure silver.
Since 1986 over 70 million American Silver Eagles have been bought by prudent investors
and savers. Silver Eagles have become the most popular bullion coins in the world
because of their beauty, quality and the assurance of weight and purity by the U.S.
Mint.
Silver Eagles are authorized by the United States Congress
and the American Silver Eagle bullion coin may be used to fund Individual Retirement
Accounts (IRAs) and in many self administered pensions internationally.
Silver Eagles are issued by the US Mint and are US dollar
legal tender and can thus be imported and stored in many jurisdictions (including
with Via Mat Zurich) without any VAT being applicable.
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