SILVER - Some
Questions and Answers PART ONE
SHINE ON SILVER!
David Morgan
Editor: The
Silver Investor
March 31, 2005
We have
received many inquires as to our thoughts on some recently published
information on the Internet. Although we cannot and will not
address every article pro or con on silver or gold, we chose
to address a few recently.
The first article
we will examine is by esteemed analyst Robert Prechter, who is
a disciple of the Elliot Wave Theory named after, "Ralph
Elliot - who contended that the stock market tends to move in
discernible and predictable patterns reflecting the basic harmony
of nature." A definition (according to government brochures):
"In technical analysis, [it is] a charting method based
on the belief that all prices act as waves rising and falling
rhythmically."
The second
article we will analyze is from Reuters and entitled "Silver
Losing Its Shine," - about silver's lacking pricing power
because it is no longer used so much in photographic development.
First let us
summarize Robert Prechter's observations on silver and the silver
market, written (for the record), with Steve Hochberg and Pete
Kendall and published this mid-February. Prechter begins with
the following: "The silver fever of the past year prompts
the observation that silver's cash price of $6.30 on January
4, 2005 is exactly where it was trading in 1974, over thirty
years ago." All right, but readers will also want to note
that the purchasing power of the U.S. dollar is far less than
what is was thirty years prior. Thus, in the real world the price
of silver at $6.30 is far undervalued to where it was 30 years
previous.
Prechter goes
on; "We are far from perfect in calling markets, but we
almost never get caught owning hot markets at the top, such as
silver futures above $8.20 last year." He then seems to
reverse course, adding: "The last time The Elliott Wave
Theorist bought silver was in 1993, just off its low at $3.50.
For two consecutive months that year, EWT recommended buying
bags of silver coins as a long-term hedge against a failure of
the banking system. I still have mine, with no plans to sell
them. If we're right, it will be the buying opportunity of a
lifetime before gold and silver really take off. That's the plan,
anyway. Of course, we might be wrong, and we will address a change
of opinion if the metals fool us and take off."
Prechter is
right about picking the bottom in true inflation adjusted terms,
of course, but he just as right to state that now is the "buying
opportunity of a lifetime," for silver and gold. And not
so much to rebut Prechter as to make a point about silver - and
silver investing - I would add that making money on precious
metals has less to do with where a commodity is at a given moment
and almost everything with where the market is headed. In other
words, the short-term swings are exciting but it is the major
long-term trend that you must use to base your decisions. Recall
that the price of silver went up to over $50 an ounce (in 1980
dollars) and might have gone higher still. If the Commodity Futures
Trading Commission did not enforce their rules! You could have
sold on the way up or the way down and made a boatload of profit,
assuming you got in toward the bottom. If you have been reading
my articles and my newsletter, you have hopefully begun purchasing
silver long before today - and we have much more upside in the
precious metals left.
As a foremost
Elliot Wave theorist, Prechter is a fairly vociferous deflationist,
arguing that historical cycles affect inflation and deflation
of money stock as much or more than central banking manipulations.
Prechter has been calling for a deflationary depression for a
long time, and while I won't get it into the details, I am not
averse to his analysis. I admit that all great inflations end
in deflation, I wrote about my present analysis on this in the
March Silver Investor. Even though Prechter anticipates a fairly
controversial deflationary depression, he still believes that
buying precious metals might constitute "the buy of a lifetime."
If readers
were not apt to be positive about silver before, perhaps that
last statement will provide an encouragement. Here is one of
the foremost deflationists arguing that silver is a great buy.
And meanwhile, I don't think you can find a single hard-money
inflationist who will not argue in a similar vein. Talk about
a "no lose" approach. I can't think of another investment
that could bring the deflation/inflation debate together on the
same page as effectively as precious metals here and now.
What's the
inflationist take? The more common view is that the West's monetary
position will continue as "stagflation," which is what
we had in the 1970s when precious metals did so well the last
time. During a stagflation, Western economies see continued inflation
with little or no job growth. The value of money erodes even
as people find it hard to find jobs or gain wages. Europe is
certainly facing the dilemma and increasingly the United States
is as well. Central bankers face a difficult predicament in a
stagflation since they need to raise rates and cut the money
supply but too much of that will choke off what little growth
there is. The usual attack in such a scenario is gradualism,
which is Alan Greenspan's approach. But gradualism can last a
long time - and with quarterly rate increases of only a quarter
point, you would need another five years to get into the mid-teens
as regard interest rates in the United States - and even then
you might not see much of an effect, depending on how much money
the Fed is printing.
SHINE ON
SILVER
Now let's take
a look at another article on silver from Reuters in Singapore,
written on March 4, 2005. The article begins with a quote from
John Reade, precious metals analyst with UBS Investment Bank
in London, as follows: "'We believe that the rally in silver
is getting rather long in the tooth. We forecast that silver
will average $5.80 in 2005 and $5.60 in 2006." It continues
in this negative vein: "Buying silver may no longer be a
sterling idea these days. Despite recent lofty prices, the outlook
for the precious metal that was once widely used in photographic
film is dimming due to oversupply and a switch to digital pictures.
The overall supply for silver is quite large. Analysts said the
metal's rise to an eight-month high of $8.15 an ounce in December
was solely driven by speculators inspired by gains in gold and
copper and not by fundamentals."
A few other
points the article makes: (1) "Sales of rolls of old-fashioned
film are projected to fall 17 percent to 2.9 billion rolls in
2008, from 3.5 billion rolls in 2000, photography industry figures
show. (2) Jewelry and silverware account for around 30 percent
of the market, but analysts said this demand would be stagnant
as owners of silverware and old jewelry cash in on the high price
and recycle rather than buy new silver items. (3) While the metal
may still challenge and
break $7.0/7.50 an ounce once more on speculative buying, [a]
move lower in other commodity prices [may] drag silver lower
later this year."
Points for
silver
Let's take
the last points first.
(1) Sales of
film are projected to fall 17 percent over the next two years.
This sounds excessive as the best analysts at the recent Silver
Institute conference and the Silver Institute itself looks for
maybe a 5 percent decline over several years. Regardless, what
is never mentioned is that photo silver comes back into the marketplace
anyway because it is recycled and there are other areas that
require silver besides photography.
(2) Jewelry
and silverware account for around 30 percent of the market, but
analysts said this demand would be stagnant as owners of silverware
and old jewelry cash in on the high price and recycle rather
than buy new silver items. I tend to get a bit crazy when confronted
with statements like this; I think about analysts shouting "buy,
buy, buy" as stocks goes up. How about this from Wall Street
stock analysts? - "Demand for stocks will stagnate as owners
cash in on the high price and recycle rather buy new items."
Sound silly. Yes, it is. You'll never hear that statement I guarantee
it. Higher prices of any commodity may depress the USE of a commodity,
but not the fervor for INVESTMENT. Higher prices inevitably DRIVE
investing. That's just how human nature operates.
Oh, yes, one
more thing: to lump all buyers of silver jewelry into one category
is loony! The buying cultures of India and Asia when it comes
to precious metals are alien to those of the United States with
its impoverished (and even middle-class children) buying "blings
and things" from the neighborhood jewelry shops. In India
and Asia, the purchase of silver jewelry is not for show but
as investment. A woman may well wear her family's fortune on
her body in times of great celebration. During times of impoverishment,
the "jewelry" may be sold to provide family resources.
This pattern is one of investment - and therefore consumption
of silver jewelry - at least in India and Asia where much of
the world's purchases take place - will probably be driven up,
not down, by higher silver prices.
(3) "While
the metal may still challenge and break $7.0/7.50 an ounce once
more on speculative buying, we expect the move lower in other
commodity prices to drag silver lower later this year."
I will dispose of this point by mentioning that as I write, silver
has once again crossed over the $7.50 making such "speculative
buying" an immediate reality. This is a very buoyant silver
market. To make a blanket statement that silver will move lower
this year (and buy logical extension stay lower) is ludicrous
as lumping the silver-buying habits of middle-class Indians and
Americans together. Simple-minded doesn't begin to describe it.
We've got immense U.S. inflation with the Iraq war as a driver,
the euro taking over from the dollar worldwide as a core currency,
the dollar on shaky ground anyway due to its immense sales by
the Treasury and the vast dollar holdings of Japan and China,
doubts about the stability of the world situation causing trepidation
and fear in the hearts of many investors at home and abroad -
folks, if this is not the kind of climate which drives precious
metals purchases, I don't know what is!
If pressed,
I think it would be appropriate to use Jim Puplava's description
of the economy as a "Perfect Storm." Various economic
factors conspiring to further the purchase of silver worldwide,
in Mexico, 31 governors have just voted to establish a silver-backed
Mexican currency. This struggle is not over and could play significantly
into silver demand and price in the future, but is not even considered
by the main analysts.
India, China
and, in fact, all of East Asia have been purchasing additional
gold and silver for several years now, and the trend will continue.
And let's recall the China factor, the Chinese economy is growing
at an astounding rate of almost 10%. And while much of this growth
is certainly boosted by the government 's monetary policy (loose
money) another great chunk of it has to do with the Chinese poverty
driver as a nation of 1 billion-plus gradually take advantage
of an increasingly free-market to build wealth while producing
an enormous quantity of goods for domestic and worldwide production.
I expect a downturn at some point in the Chinese economy but
I am not one who predicts it is coming anytime soon. The domestic
market, in my opinion, is just too big and will act as a giant
sponge, cushioning any relaxation in world demand for Chinese
goods and services. Thus, I expect Chinese demand for silver
and silver products supporting its technology will continue and
make up for any fall off in demand for silver from the film industry.
I took the
last points first, but I can't resist commenting on the first
point the Reuters article makes, as follows: Analysts said the
metal's rise to an eight-month high of $8.15 an ounce in December
was solely driven by speculators inspired by gains in gold and
copper and not by
fundamentals.
What kind of
thinking is this? The fundamental fact is there is 1.5 billion
ounces less silver today than in 1990. The U.S. government is
out of silver and had to pass a bill to purchase silver in the
open market to continue the Liberty (Silver Eagle) coin program.
New uses for silver are discovered continuously and the price
did not move on fundamentals?
Should gold
go to US$500 or US$600, silver shall travel far higher too. It
may reach US$10 or US$20 per ounce. At that point shall the business
wires write a story explaining that the gains are speculative?
Maybe they will. And who will care with gold and silver at those
prices. The statement is a good example of "talking silver
down." Claim prices are "driven by speculators"
as if that is a bad thing and imply, while you are trotting out
your explanation, that prices are about to collapse as speculative
interest fails and silver reverts to a pricing pattern based
solely on its worth as an industrial metal.
Well, wire
services I have news for your, silver has never been priced SOLEY
as an industrial metal. It is a precious metal as well. Its industrial
uses merely increase its overall value and often give silver
the opportunity to exceed the gains in gold given that it is
a commodity that needs to be re-supplied every year. Silver is
far more volatile than gold, possibly giving investors more opportunity
on the buy side.
In summary:
The drop-off in film demand for silver will be filled by increasing
demand for silver in various high-tech endeavors, especially
from China. Silver jewelry is looked on as an investment not
an ornament around the world and thus price rises in silver act
as an investment incentive, stimulating silver purchases worldwide,
not decreasing them. Finally, U.S. monetary policy, a combination
of administration wrong-headedness and the culmination decades
of financial policy fumbles are going to continue to encourage
economic instability and exacerbate the flight to precious metals.
As U.S. Treasuries - once perceived as the most solid investment
in the world - come under increasing attack along with the dollar
this up trend in precious metals will only acquire strength.
Interested in finding
out more? You should subscribe to my newsletter at www.silver-investor.com.
If, like me, you believe that history repeats itself when it
comes to silver, and that an ancient silver/gold will reestablish
itself eventually and perhaps even reach the 10 to one ratio
I forecast several years ago, then you will surely come to consider
the Silver Investor monthly reports.
March 30, 2005
David Morgan
email to : silverguru22@hotmail.com
321gold Inc
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