Fleck on Silver
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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:Nasdaq - news - commentary - research - analysis) , 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. |
