Silver, the Neglected Precious Metal
By Bill Fleckenstein
01/09/2003 18:20
Index Close Change
Dow 8775.49 +180.18
S&P 500 927.51 +17.58
Nasdaq Composite 1438.47 +37.40
Nasdaq 100 1076.09 +33.57
Russell 2000 395.97 +6.90
Semiconductor Index (SOX) 331.02 +8.58
Bank Index 791.56 +10.46
Amex Gold Bugs Index 144.92 -1.54
Dow Transports 2411.31 +40.66
Dow Utilities 226.97 +0.29
NYSE advance-decline +1,366 +2,205
Nikkei 225 8497.93 -19.87
10-year Treasury Bond 4.15% +0.167
Market's Breakfast Blend: Double Espresso : The overnight markets were in essence moderately weaker, but about an hour before the opening, our S&P futures staged a 1% rally, from a slight loss to a gain. The market opened with a flurry to the upside. In the first two hours, the indices were on a rip, with the S&P up 2%, the Nasdaq up nearly 3%, and the SOX up 5%.
Here, Kitty Catalyst : As near as I can tell, the catalyst in technology was an announcement by Foundry Networks FDRY that its fourth-quarter revenues would be between $84 million and $87 million, as compared with about $77 million the previous quarter. This extra $7 million or $8 million, and the fact that the company was going to make a little more money than last quarter, engendered considerable excitement about networking, which then spilled over into everything else. The party mood also was helped by some positive comments from SAP SAP , the German software company.
When Bubble Wrap Encases Market Cap : In any case, though Foundry reported only modestly better numbers, meeting its 2002 operating-margin target and showing sales that were slightly above a year ago, its news sufficed to unleash the speculative juices of many days gone by. For instance, in the first half hour or so, Cisco CSCO tacked on 50 cents, which added $3.6 billion in market cap, Foundry added about $150 billion in market cap, and Juniper Networks JNPR added about $200 million in additional market cap.
That was a common occurrence during the mania. A company would announce a couple million dollars in orders, and the market cap would increase by billions of dollars. This morning, nearly three years since the bubble burst, the same thing is still occurring, as people proceed to extrapolate any tiny piece of good news into something big, and deem all bad news to be company-specific.
P.M. Sluice Drains Some SOX Juice : The early-morning moonshots were basically all the fireworks that the day had in store. Most of the rest of the day was spent trading sideways, though the afternoon did have a modest downward tilt to it. But for all intents and purposes, the box-score prices you see are in essence the high of the day, save for the SOX, which saw its gains cut in half.
Today, after the early blast, the action was not so much in technology, but instead concentrated, it seemed to me, in the financials and the retailers, where there appeared to be quite a bit more sizzle. The only interesting thing I noted in technology was Dell's DELL inability to rally today. But obviously, I am sensitive to that, given the position I have taken, which I outlined in yesterday's column.
Away from stocks, the dollar was barely changed. Fixed income was hit pretty hard, with the long bond down 2%. The metals were slightly lower. (More about the metals below.)
Universal-Donor Delights : In the dividend tax-cut news, for anyone who is not yet aware, President Bush's plan includes a very complicated wrinkle known as the "deemed dividend." In essence, this amounts to a capital-gains tax cut, whereby if a company didn't pay out dividends, electing to keep them as retained earnings, then its shareholders would receive a tax credit as though a dividend was paid.
Walks Like a Duck, Acts Like a Dividend : That's fine, but given the intricacy and the impossibility of keeping good track of the various permutations (for instance, what would happen if write-offs were involved), I expect that this measure will never pass. Perhaps it is a stalking horse to bring about something cleaner and simpler, like a reduction in capital gains. In any case, news of the deemed dividend proposal percolated yesterday, and probably contributed to the early-morning excitement today, as tech stocks would now be dividend payers, even though they don't pay dividends, due to the previously discussed "wrinkle."
Weighing a Trip to the Silver Bowl : Turning to the precious metals, and following up on my comments last Monday about why gold would be accumulated, now I would like to articulate the bull case for silver. (For longtime readers, this will be a review of comments I have made in the past.) Basically, the desire for a precious-metals investment is driven by a state of mind that values owning something rare and not printable. When that attitude becomes prevalent enough to create a bull market for gold, I believe that all precious metals -- silver, platinum, etc. -- will tend to trade up, along with gold.
A Brief Case Monogrammed D-E-M-A-N-D : Silver is unique in that the silver market has been in a "deficit" for the past 12 years. By this I mean that demand has outstripped new supply from mines and scrap recovery during that period. The deficit has been made up by "dis-hoarding" from above-ground stocks. According to statistics compiled by the Silver Institute, fabrication demand has grown over the last decade, from about 700 million ounces to 900 million ounces. Supply from mine production, on the other hand, has been 500 million to 600 million ounces, with the difference being made up of scrap recovery and dis-hoarding. The latter has averaged about 100 million ounces a year, though it has fluctuated from roughly 50 million ounces to 150 million ounces.
Were it not for the fact that the majority of silver is a byproduct of other metals, I doubt very seriously if that deficit could have continued for this length of time, without the price having skyrocketed enough to bring on new supply to alleviate the situation. Nevertheless, the situation today is what it is. I do not believe that the market could take much investment demand without experiencing a significant price increase.
Foxy Silver Ferreting : In any given year, new gold production is roughly $25 billion, which is obviously much larger than the roughly $4 billion of silver produced from mine production and scrap recovery. Certainly, the silver market is much smaller than the gold market. Silver is a bit complicated from a mining-cost analysis standpoint, in that much of it is produced as a byproduct of gold, copper or lead/zinc mines. Thus, ferreting out the actual cost of production for silver can be rather difficult. If you look at a property that has a fair amount of lead and zinc in it, which is usually the case, you may be able to produce silver profitably at $4, if lead and zinc prices are high enough.
If, on the other hand, prices are lower, as they are today, you may need a $7 silver price to realize a profit. The bottom line is, there have not been many new silver mines brought to production in the last five years, as it has been mostly uneconomical to do so. If silver were to trade north of $6 or $7, you would be able to bring on some new production. But it would take a handful of years, and it would be a drop in the bucket, relative to investment demand.
Silver Bells Appeal on Price Potential : So, I like silver because the market is much smaller, and just a modest amount of investment demand will put the price up far more dramatically than is the case with gold. That said, silver will not lead the charge. Gold will see the bulk of the large investment dollars initially, as has been the case thus far. But I believe that once silver gets going, it could double more easily than gold could double, simply because the market is smaller, and it would take some time to bring on new production, that time being measured in years. Also, the dollar amount of above-ground stocks in silver is far, far smaller than gold, as measured in dollars. And , central banks don't have silver to sell, as they do with gold. Once again, the smaller market-cap aspect works to the advantage of the bulls.
Silverware-Withal : Meanwhile, due to the fact that silver has been selling basically at or below the cost of production for so long (measured by the price required to bring on new production), most companies in the silver business have been struggling for quite a while, leading to a dearth of suitable investment choices. Regular readers know that I am on the board of Pan American Silver PAAS , and that has been my silver vehicle of choice. Given my position on the board, I don't really want to comment on Pan American specifically. This is meant to be a recommendation to do research, not buy the stock. Please don't email me for additional information. To learn more about the company, or about the subject of silver in general, please refer to the company Web site at www.panamericansilver.com.
Prospecting for Introspection : In any event, that, in my opinion, is the bullish case for silver. As I said earlier, in a bull market for gold, all precious metals do well. It's up to each investor to find the idea that best fits his belief and risk profile, whether this be gold stocks, gold bullion, gold futures, silver stocks, silver bullion, silver futures, or a combination of the above. |
