ted butler (@Would a recession be bad for silvah?) ID#370209:
Copyright © 2000 ted butler All rights reserved
Since I sense a wide-spread belief that a recession would be bad for silver, let me post an excerpt from my new piece for Jim Cook, that pertains to the topic. It would seem that logic and historical precedent would suggest silver not being harmed by a recession. When it gets put up, I'll post the url.
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Everything I have written to date has aimed at explaining silver's great value and its sharp discount to the current price. I won't rehash the whole argument here, but let me address what I feel is the most popular explanation for silver's most recent price weakness. The current or developing economic recession is the explanation I hear most often. After all, silver is an industrial metal, and demand for industrial items are weak during a recession. Therefore, if the price has been weak, that's an explanation that is readily acceptable. Fact is, there is a measure of truth in that statement. But only a little. Of course, there has been some softness in industrial silver demand. How could there not be? Silver is used in hundreds, or thousands, of industrial applications. There is no metal more versatile or necessary. But when you look at the whole picture, something else emerges.
If you look at silver's number one use, photography, there is no sharp falloff in demand. Here, we have public records, from public companies, that document silver usage. If an analyst takes the time to read Eastman Kodak's legal filings and earnings reports, he will see no diminution in silver consumption. Of course, it's a lot easier to look at the price, and conclude that digital photography is killing silver. It's amazing what passes for research and analysis. OK, so the chief industrial use for silver is holding up, what about the other industrial uses? While economic conditions are contracting, don't automatically confuse a slowdown in total sales and profits with a slowdown in unit volume. You must watch unit volume, the number of items sold, like cars, houses and computers, to gauge silver consumption. Also, you must recognize that sales of items like sterling dinnerware are more related to weddings and other demographic occurrences. Even in jewelry, a recession should have less impact on silver than its higher priced competitors - gold, platinum and diamonds.
In fact, some if not most, of silver's biggest bull price moves have come in recessionary times. Over the past 30 years, the price of silver has doubled or more on 5 different occasions, in 1974, 1979-80, 1980, 1982-83, and 1987. With the exception of 1987, those were tough economic times, and 1987 wasn't exactly a winner. A mean-spirited, selfish silver investor might even root for a recession, as distasteful as that may seem. That’s because silver is a byproduct of other types of mine production. Fully 75% of silver mine production comes as a result of other mining - such as gold, copper, lead and zinc. It’s also because of the wide variety of finished products where silver is both indispensable and irreplaceable.
In a recession, demand for copper, lead, zinc and gold always fall faster than demand for silver. We all know this. But, what we may not all know is the timing sequence. By that, I mean it is a lot easier and quicker for manufacturers to stop ordering supplies if they choose to curtail production than it is for a copper or zinc miner to stop mine production. Therefore, early on in a recession, we see or think we see evidence of demand slowdowns, with no corresponding cutbacks in mine production. Since mine shut downs take time to develop, it seems the mines will never curtail production, no matter what the price. Let me state emphatically, at current prices it is just a matter of time until we see substantial lead, zinc, copper, and even gold mine curtailments. Just a matter of time. More importantly, in the event of a silver price spike, don't look for a big increase in mine production if the price of these other metals stay where they are. What's most remarkable is that in spite of growing inventories of the base metals and gold as a result of a slowing world economy, there is no documented rise in silver inventories. A recession may be bad for most assets, but it should not be for silver. |
