THC,
I normally limit my participation in this thread to lurking but I thought you all might be interested in the enclosed from this week's Barron's.
Cheers,
Larry
NOVEMBER 15, 1999
Ho-Hum Silver
Price is flat despite good fundamentals
By Cheryl Strauss Einhorn
Silver has been one of the more disappointing commodity
markets this year, holding in a range of $5-$5.50 an ounce,
while other prices have rallied. That's despite positive
fundamentals, notably that production will fall short of
demand for the ninth straight year.
Even the experts aren't really sure why. Ross Beaty, chief
executive of Pan American Silver, says, "I can't account for
silver's lack of response to its strong market fundamentals
this year," or indeed for the entire decade. "We started this
company in 1994 because we fell in love with silver's
fundamentals. Nonetheless, prices have not done what we
expected. We thought silver prices would top $7 by the end
of the decade."
Silver's performance hasn't helped Pan American's shares,
which have been mired in a range of $5-$6 for the past
year, despite the disclosure in September that Microsoft
Chairman Bill Gates' investment fund, Cascade, had
acquired more than 10% of the mining company. That
contrasts with the bullish response to the news that Warren
Buffett's Berkshire Hathaway bought silver in early 1997,
which sent the metal's price soaring briefly above $7 an
ounce.
Asia has been a big part of the story. China, traditionally
an importer, has been selling silver, "a reasonably
significant change to the fundamentals," says Philip
Klapwijk, managing director of Gold Fields Mineral
Services. In 1998, China exported 21 million ounces, 2.5%
of the 841 million ounces of global supply. "This year, I
reckon they'll do the same," Klapwijk says. India, silver's
chief buyer, annually taking 14% of supplies, saw a 20%
drop in demand in 1998, amid a spike in prices. Nor has
demand recovered in 1999, slumping an additional 11%
through August despite a 4% drop in local silver prices.
Notwithstanding lackluster prices, silver mines are quite
profitable at current levels, with total costs in the mid-$4
range. To lock in profit margins, Beaty says that "50
million ounces, or 10% of world mine supply, has come
onto the market this year in the form of forward sales."
Although supplies increasingly fall short of demand,
warehouses still contain five years' worth of stocks,
despite the worsening economics of storing silver.
Yet Mark Clark, president of Delaware Depository
Service Co., which stores silver and also trades metal
coins for retail investors, says his warehouse stocks are
down amid robust demand from photography and
electronics companies. "Our holdings are down
substantially since 1996." He adds that it isn't unique to his
shop. "All reportable stocks are down."
Indeed, many silver warehouses have closed in recent
years, including sites owned by the Bank of Delaware,
Citibank, Bank of America and Wilmington Trust, leaving
only a handful of depositaries. Part of the reason is that it
is less profitable to store metal. Lease rates to borrow
silver, which were under 1% for most of the 1990s, are
3% for a six-month loan today.
The forward curve of the futures market also has flattened.
Where deferred contracts once commanded an attractive
7% premium, today they trade flat with, or at times at
below, spot prices. "It is no longer profitable to store
metal," says Jeff Christian, head of research firm CPM
Group.
Clark professes to be confounded by current silver prices
given the brisk retail demand he's seen as the millennium
approaches. His sales of one-ounce U.S. Silver Eagle
coins are up 20% recently. Nationwide, Silver Eagle sales
are up 242% through July from a year ago. These coins are
legal tender worth $1 and retail for $9. "Demand has been
so strong lately over available supply that the Eagle is
commanding a premium price over other comparable
legal-tender silver coins."
Clark's silver-coin business has been much stronger
recently than gold coin sales, which slipped over the
summer. "At $5, investors believe silver has a much
greater chance of rising than gold at $295 an ounce."
"Silver is a low-risk buying opportunity," agrees Christian,
who has liked silver's prospects for some time. And
although he has backed off from his bullish $7 forecast
owing to the market's quiescence, he still thinks $6 is
possible. "Five dollars is the floor," he contends. Christian
notes that although silver failed to rally this year, it rose in
1998 when many other commodities fell. And while
lackluster, silver has held up better than some other metals.
For instance, compared with silver's average annual price
in 1998 of $5.53-its best yearly level recently-the metal is
off 7.2%. In contrast, gold peaked in 1996 at an average
price of $389.13; today it's 23% lower. Copper has fared
even worse, peaking in 1995 at an average of $1.32 per
pound. Yet despite rallying in '99 amid supply cutbacks,
prices are 40% lower since then.
Key Commodity Index Table
CRB Group Indexes
11/12
11/05
Yr. Ago
CRB Futures
205.63
203.02
204.32
Industrials
184.91
189.01
201.28
Grain/Oils
156.76
162.70
184.91
Livestock
230.50
220.72
189.16
Energy
231.96
222.66
160.73
Precious Metals
246.38
242.40
233.11
Barron's ~ Bridge Telerate |
