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
![](myers_signature.gif)
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.
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321gold
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