A NEW SILVER LINING
By George Kleinman
I must admit, when the cat was let out of the bag I thought silver prices would surge. I'm referring to February of '98, the time we found out Warren Buffett had been involved in massive silver purchases. It looked like the makings of one of those major silver bull markets. The type of market move not seen for many years in the precious metals. The reality was a bit different.
After Buffet revealed that he had purchased 130 million ounces of silver (he started in July of 1997 and continued through the end of January 1998), prices did run to about $7.50/ounce. They haven't been there since. In 1998, the silver futures market traded as low as $4.68 and ended the year at $5.02.
Consider this: we calculated Buffett's average purchase price at approximately $5.50/ounce. 130 million ounces at $5.50 per ounce requires a cash investment of $715,000,000. This is just the beginning however because Warren also paid for shipping from New York to London warehouses, plus has daily storage costs. So with all this silver off the market, why didn't silver prices surge? What does Warren Buffett (who still owns all this silver) see in this market to begin with, and what is his ultimate objective? Is this still an opportunity?
Let me answer the last question first. In my opinion, there is a terrific investment and trading opportunity today in silver. I see it moving much higher in price. I look at silver as not just one of the big winners for 1999 but into the new millennium. I am not alone in this assessment. Jeffrey Christian, head of the respected New York based metals research firm the CPM Group, in February predicted silver prices would reach $7.50 by the second half of this year and $10 per ounce in the year 2000. As of this writing, prices are rising but still under $5.75.
Let's discuss why prices were weak last year. Actually, in many respects silver acted like a champ. Commodities as an asset class were extremely weak in 1998 for a number of reasons, but most notably Asia. The CRB Index of leading commodities traded at 20 year lows in 1998 and into this year, yet silver, while weak, was one of the few leading commodities able to remain comfortably above its 5 year lows. Certainly, the declines in Asian demand for silver associated with their economic crisis hurt. Japanese and Hong Kong imports both fell by about half, and Korean imports fell an astounding 90%. With the Asian economies bottoming I do not see additional declines this year. Jewelry demand, which has grown by 6% per annum since 1990, continues to grow. Mine output, which increased by 1% last year, should fall sharply this year. This is because 80% of silver output is a by-product of base metals mining (such as copper and zinc), and the output for these metals is projected to drop sharply due to a lack of profitability for many mines. Christian is looking for a 144 million ounce supply/demand deficit for this year. This means demand will exceed new mine production by this much, which doesn't even take into account the fact that an estimated 20% of the free world's above ground silver supplies are locked up in Warren Buffet's warehouses!
Then there is the COMEX stocks factor. I believe the best means we have of measuring supply is to look to the COMEX (the world's largest silver futures Exchange) warehouse supplies. They have fallen substantially since 1993, when 250 million ounces were in these warehouses . Today, this number is 75 million, very close to the lowest levels in Exchange history. In other words more silver is being removed than replaced. Is this compatible with prices in the lower end of the decade's range?
Due to these factors, I can see a big move in silver prices coming and it probably has already begun. I started in the commodity business during the Hunt brothers era of $50 per ounce silver. Based on what we have seen in years past, eight or nine dollar silver is still cheap. If the market can have a sustained move above the eight to nine dollar level, I believe new mine production could be stimulated. Yet, this does not occur overnight as it takes months and a major capital investment to re-open a dedicated silver mine which has been boarded up for years. In the meanwhile, prices will need to rise to a level where demand is rationed, and today's levels do not appear to be it. |
