John Myers: "SILVER, The White Metal"
Calgary, Canada --
dailyreckoning.com
"...Silver is different...and it always has been different. For more than 3,000 years it was used as money. However, silver has not been used as money since the 1960s. Even so, the white metal is inherently valued higher than it would be if it were simply an industrial metal, especially during inflationary periods! I believe the federal government will be able to reflate the economy, and the result will be higher inflation. The price of silver will react the same way today as it did 30 years ago..."
Twelve years ago, I was at the National Committee for Monetary Reforms' annual hard-money convention, founded by the late and great precious metals forecaster Jim Blanchard. After giving my speech, I had an opportunity to listen to Dan Rosenthal lead a round-table discussion on silver.
Dan had made a fortune for his subscribers in the 1970s with his Gold & Silver newsletter and was telling this gathering that by the end of the decade, the federal government would be forced to reflate the economy. When that happened, he predicted the price of silver would skyrocket.
At the end of the round table, Dan fielded questions. I raised my hand, trying not to look like an overly eager third-grader, and said, "In the modern economy isn't silver just another industrial metal, no different from tin or zinc?"
"If that were the case," said Dan, "you wouldn't even be here."
He was right, of course. I mean, how many people follow the daily price of lead? Silver is different, though, and it always has been different. For more than 3,000 years it was used as money. However, silver has not been used as money since the 1960s. Even so, the white metal is inherently valued higher than it would be if it were simply an industrial metal, especially during inflationary periods!
Stuck in the Middle
Almost 40 years after silver was taken out of U.S. coinage, most North American investors buy gold before they buy silver when the dollar weakens and inflation is looming. This tendency partly explains why silver has not had the rally that gold has experienced in the past two years.
But there's another reason. Most institutions see the white metal as being in a no man's land, between a possible deflation and potential inflation.
Deflation would have a crushing impact on the industrial side of the silver price equation. And as we mentioned, inflation would light a fire under the price of silver on the investment side.
A Coin Toss
So, what side will win out? I think we can expect the dollar to continue to weaken. That will make imports more expensive, pushing up the Consumer Price Index (CPI), which officially increases at about 3% annually. (I say officially because it is the federal government's pronouncement of the rate of inflation.)
The CPI, calculated monthly by the Bureau of Labor Statistics, is an inflation indicator. The CPI is an estimation of the price changes for a typical basket of goods and services. In other words, the prices of everyday things such as housing, food, education, clothing, etc., are compared from one month to the next, and the difference represents the CPI.
The index is calculated in relation to a base period set from 1982 to 1984 where it was set at 100. (The original CPI base dated from 1967, but the number got so huge that the federal government started all over again.) Even at 4% CPI, the value of a dollar is halved every 19 years. At 13%, a level it reached in the 1970s, the dollar's value is cut in half every 5 1/2 years!
The graph below created by Robert Sahr, an associate professor at Oregon State University, shows that being a millionare today isn't as tough as it used to be. In the early 1960s, it took a net worth of $200,000 to equal the value that $1 million has today. The graph also shows how inflation has become a permanent economic fixture. Notice how steeply the line has been rising since the early 1970s, or since President Nixon cut the gold/dollar tether in 1971.
If this number rises steeply, it means that the cost of living is rising, and therefore we have inflation. That is what happened in the 1970s, and the price of silver soared.
I believe the federal government will be able to reflate the economy, and the result will be higher inflation. The price of silver will react the same way today as it did 30 years ago.
White vs. Yellow
While many look at silver as a poor cousin to gold, it has at times significantly outperformed gold. It certainly did that during the 1970s. From 1971 to 1980 the price of silver skyrocketed, climbing from $1.30 per ounce to $50 per ounce. That was a gain of 3,746%! During the same period, the price of bullion rose from $35 per ounce to $800 an ounce -- a gain of 2,186%.
Since 1980, silver has been in a bear market with only the occasional spike, such as the breakout it had in early 1998, when it soared to $7.50 per ounce.
In 2001, silver established a 28-year bottom of $4.14 per ounce. In 2002, it moved its floor price to $4.50 and has moved up over the past few months, putting it in striking distance of the psychologically important $5-per-ounce benchmark. Once it clears $5, the next technical resistance is in the $5.60 to $5.90 range. If it breaches this barrier, the white metal will not face any technical resistance until $7.70.
That means that silver is very cheap at its current price. It also has very attractive fundamentals as an industrial metal.
Drawdown in Silver Supplies
The current supply and demand picture is extremely bullish. For 13 years annual demand has outpaced new supplies -- in some cases by huge margins of as much as 100 million ounces. In fact, the cumulative deficit rung up over the past 13 years totals 1.2 billion ounces, more than total annual world demand.
Any first-year economics major will tell you that supplies cannot fall behind demand indefinitely without a resulting increase in price. So why hasn't silver moved up in light of the drawdown in aboveground supplies?
"The problem," says Sue Rutsen, a commodity broker at Fox Investments, "is nobody really knows the size of aboveground supply, which includes not only silver bullion held by bullion banks but also the silverware and bagged coins stuck in display cases and sock drawers all over the world."
The void between new mine production and world demand has been made up for the past two decades by all the aboveground silver supplies. But commodity analysts believe that aboveground silver supplies are close to exhaustion.
"The highest estimate of remaining aboveground supplies I've seen is 500 million ounces," says Sue. "That means that given current rates of mine output, the world will literally run out of silver in five years."
The good news for silver investors is they do not have to worry about the U.S. government's strategic stockpile. It has been severely drained. The consensus estimate is that it holds only 200 million ounces.
As aboveground supplies of silver run down, demand will have to be entirely met by new mine production. But that will be an impossible order for the mining industry to fill. You see, the rolling recession of the 1980s put most of the nation's silver mines out of business. Where once there were dozens of North American silver mining companies, there are today fewer than five. Almost 80% of newly mined silver is a byproduct of copper mining operations. Old silver mines cannot be opened quickly regardless of how high the precious metal's price climbs.
Therefore, it is safe to assume that supplies of newly mined silver will probably not increase dramatically in the near future.
Silver has come off its lows, and that tells me that the "smart money" is already buying some inflation insurance in the form of silver. Once inflation becomes more apparent, silver will probably behave as it always has -- explosively.
A breakout above $5 would attract a lot of investor interest. And like gold and platinum, silver is a thin market. It would take very little buying to drastically push up the price of silver.
Just how high could it go over the next 18 months? I don't think $12 per ounce is out of the question.
John Myers - son of the great goldbug C.V. Myers - has been helping readers earn suprisingly lucrative returns in stocks largely unknown to Wall Street's wunderkinder since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits - including oil, gas, energy and gold.
John has recently put together a report on terror in the Middle East and its effect on the oil price. Had you read it, the recent attacks in Riyadh would have come as no surprise... nor the oil spike that followed. For more information, you can find John's report here:
After Iraq... America's Next Crisis
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