The Dollar's Silver Lining John Myers November 17, 2003 Most investors aren't aware of it yet, but the battered buck has a silver lining -- literally. Take a look at the following charts. Note the similarity in price action in the euro and silver? The only real difference is a 15-month lag. This similarity makes sense when you view strength in the euro as just a manifestation of weakness in the dollar -- which indeed it is. Because it takes more dollars to buy an equivalent amount of silver, one would expect these two charts to mimic each other. What's the reason for the lag? We suspect it could be inventory that was purchased or hedged when prices were low that is just coming to the market now. However, if the lagged price action of silver continues to mimic the price action of the euro, sharply higher prices could be just around the corner, providing investors with a "backdoor" way to play the greenback without having to chase the market. A price increase to $7 and $8 per ounce could be right around the corner. Eager for Precious Metals Silver is not just a backdoor play on the weaker dollar; it is also a play on China and other developing countries just beginning their Industrial Revolutions. China's rapid development is creating a huge demand for industrial metals. The growth rate for metal consumption in China is already the highest in the world. China's growth could also have a huge impact on precious metals. The Chinese have always been hoarders of precious metals. As the Chinese economy continues to grow, more and more people will be able to afford the metals the Chinese people view as timeless assets. The government is currently in the process of loosening controls on the ownership and importation of precious metals. This, along with growing Chinese affluence, could be a powerful combination. Because silver is both an industrial AND a precious metal, it could be in a perfect position to capitalize on both of these trends. But even without China, I find silver's supply/demand fundamentals to be bullish. Silver is still recovering from the 1980s' run-ups that saw prices rally as high as $48 per ounce. It is a market that has been living off stockpiles. 2002 saw the biggest drop in new mine production since 1994. Mine output dropped to roughly 586 million ounces while demand was 863 million ounces. Where did the 277 million ounce difference come from? It came from aboveground stockpiles. The problem is that aboveground stockpiles have been making up the difference between demand and new mine supplies for 14 out of the past 14 years! This can't go on indefinitely... These stockpiles are eventually going to run out, and when they do, supplies will need to come from other sources. That leaves mining... Demand Conquers Supply The problem is, most primary silver mines are shuttered due to low silver prices and high extraction costs. Roughly 80% of all silver mined today does not come from primary silver mines but is a byproduct of mining for other metals like copper and zinc. In order to get these shuttered primary silver mines to reopen, prices will eventually need to rise and stabilize over $7 per ounce. When will this happen? I don't know... but once it does, I expect prices to rise fairly quickly as hedge funds and other big players who have been borrowing silver and selling it into the market, as well as mining companies that have been selling future supplies forward, are forced to cover their short positions. In other words, the same thing that is happening now in gold. Silver has not kept pace with gold in the yellow metal's rally, but we suspect that will change as gold becomes more and more expensive. Silver is in the process of regaining its luster as "the poor man's gold." We suspect rising prices will go a long way to burnish silver's image, making it more of a "precious metal" and less of an "industrial metal." Indeed, the one thing missing from the bullish equation for silver up until now has been investment demand. But that is now changing as silver has begun what is quickly and quietly developing into a bull market. Why Silver Is So Golden for Investors Demand has been greater than new supply for 14 consecutive years Low prices mean most primary silver mines shut down 80% of newly mined silver is a byproduct of mining for other metals Stable prices over $7/oz. needed to open primary silver mines Global mine output dropped to 585.9 million oz. in 2002 -- biggest drop since 1994 Demand won't keep trumping supply forever Silver is a "backdoor" short dollar play Silver is also a play on rapidly growing China and other developing countries John Myers November 14, 2003 John Myers - son of the great goldbug C.V. Myers - has been helping readers earn suprisingly lucrative returns in stocks largely unknown to Wall Street's wunderkinder since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits - including oil, gas, energy and gold. John has recently put together a report on terror in the Middle East and its effect on the oil price. Had you read it, the recent attacks in Riyadh would have come as no surprise...nor the oil spike that followed. For more information, you can find John's report here: After Iraq... America's Next Crisis This article appeared on the The Daily Reckoning website. ________________ 321gold Inc ref: 08435