If
You Like Gold Buy Silver
Sean Rakhimov
Oct 10, 2005
Editor: Silver Strategies
The world is running out of
silver. Or is it? Let us qualify that: the world is running out
of cheap silver. And how, you ask, we arrive at such conclusion?
And I turn it right back at you, and say - show me the silver!
With the price of every commodity going up what do you think
it will do to the price of silver?
As we look around the world
we find all but two-three dozen silver companies. That's against
a backdrop of hundreds of gold, oil, natural gas companies. Uranium
is a hot topic. As of about 20 months ago. And we suddenly have
over a hundred uranium companies (or companies that claim to
be in uranium business). You don't know them? Apparently, you
don't have to, for them to survive and flourish. We are not making
it up, we refer you to the man who made a fortune in uranium
stocks and is presently Senior Editor of Casey Energy Speculator,
Phil
O'Neill.
Oil is all over the headlines.
Oil is the headline of the year. So far, anyway, because from
the looks of it gold may steal the limelight before year end.
Are we running out of oil? I believe we are, but that is not
the reason why oil is making headlines. It's the PRICE of oil
we're most concerned about. (We have enough oil to last us another
few decades so why worry about peak oil now?) Oil price is largely
the reason uranium is back in fashion and incidentally, uranium
price has more than quadrupled since the bottom at $7 and change.
So did the oil price.
Why is gold in the news the
last few weeks? Because gold price just made a 17-year high.
It crossed the $470 mark recently. Where is that relative to
the bottom? Not even a double. But gold, oil, uranium are highly
political resources. That's why the media tends to focus on them.
What else is in the news? Natural gas. What about lead, zinc,
copper, timber, iron-ore, nickel, etc? Are they not worthy of
a discussion? Jim Rogers thinks they are. But I would like to
zero in on another ignored metal - silver.
David Morgan calls silver "the
most important metal" and merits of it have been discussed
before and will be again. So why is it ignored by the majority
of investors? Because SILVER IS CHEAP! Cheap as in undervalued.
But wait a minute, isn't that what investors are supposedly looking
for? Didn't the best investor of all times, Warren Buffett, get
where he is now due to his value investing approach? Doesn't
Buffett own 129 million ounces of silver? Then why investors
shun silver?
Silver is bulky, I hear. Hmm.
Buffett didn't think so. He didn't buy gold, he bought silver.
Why is it bulky for the average Joe? Because SILVER IS CHEAP!!
Because you can still buy quite a bit of silver for your investment
dollar. I will bet my rent money that at $50/oz silver won't
be bulky at all, and those who didn't want to hear about it at
$7 and $8 will be lining up to get some, because at $50 they
will be carrying home a substantially lighter load.
Doug Casey says, silver gets no respect, because for the most part silver
is mined as a by-product of copper, lead, zinc and gold therefore
it is mined regardless of silver price. However, that may be
changing before your eyes. Silver Wheaton (AMEX: SLW) has pioneered
the concept of unlocking the value of silver by-product by buying
silver production from mines that earn their bread in other metal.
Coeur D'Alene Mines (NYSE: CDE) has followed suit with its recent
deal in Australia. Silver Standard Resources (NASDAQ: SSRI) and
Vista Gold (AMEX: VGZ) have similar arrangements on some of their
projects. The latter two had them even before Silver Wheaton,
but due to the fact that their properties are not yet producing
few investors paid attention. The attitude was - so long as it
is in the ground, doesn't matter who holds the rights to which
metal. We know of more companies looking into similar opportunities.
Silver companies can't make
money mining it, comes another argument. That is mostly true,
but not entirely. We know at least two
silver mining companies that are profitable on operating
basis today and two more that are getting close to profitability
at current prices. But isn't it the function of free markets
to regulate asset prices? What happens when companies cannot
make money selling their product (we have to speak in these terms
to make our point)? They go out of business, the price of their
product goes up and the higher it goes, the more companies get
back in the business until the market finds balance between supply
and demand. The above development of silver by-product being
bought and sold as an asset of its own will do wonders for the
industry.
The total amount of money that
bought Silver Wheaton's production as it stands today is about
US$285 MM (the entire story was thoroughly discussed here).
At $7.5 silver and annual production of 10 MM oz with cost fixed
at $4 (it's $3.90 but we round it up for convenience) we arrive
at $35 MM in free annual cashflow. That means the investment
should pay for itself free and clear within 8 years counting
from the beginning of 2005. Everything beyond that is pure profit.
How do you like 'm damn apples? Of course, the company could
do other things that may or may not be as profitable, but the
current setup is very attractive to say the least. But the punch
line is the silver price which I expect to be much much higher
in the coming years.
Silver is not money, they tell
me, it's a commodity. Duh! Is that supposed to be bad for silver?
Are we not in a commodities bull market? Oil is a commodity and
you don't see the oil price suffer from it. "Oil is different,
it's a source of energy" - argue skeptics. What do you have
to say about molybdenum, rhodium, copper, lead? Those are not
energy sources but have been showing some pretty returns in the
last several years. If silver is a commodity, which of course
it is (we'll get to monetary aspect shortly), it will play catch
up to the rest of the group. Last time I checked we were in a
commodities bull market and those tend to last for 15-20 years.
If, for arguments sake, we agree that it started around the year
2000, we still have about a decade or more of it ahead of us.
I want to get back to silver
as money. Let's see what we have here. English is my second language,
but wasn't the colloquialism "pay in silver" widely
used till about 100 years ago? Don't we have silver coins in
most countries around the world? Doesn't the US Constitution
state that gold and silver are only viable money? Doesn't the
word "silver" mean "money" in some 50 of
the world's languages? And lastly, don't the financial markets
treat silver as money? According to CPM
Group gold and silver are regarded as money by the financial
markets because the open interest in these two metals is comparable
to same in Foreign Exchange markets, i.e. currencies. No other
commodity comes even close to gold and silver in that respect.
That's not me saying it. That is the world financial system in
action.
I will take a chance here and
tell a joke. Hopefully readers will look past its politically
incorrect bias and focus on the point it makes.
A spokeswoman for a feminist
group announces the results of a comprehensive study on gender
induced properties of logic and says the following: "We
ought to admit that men's logic is superior to that of women,
but at the same time, women's logic is no worse by any means".
Let's sum up. Gold is money.
Silver tracks gold, trades like it, but it's not money. Some
logic there. You catch my drift.
A few words about currencies.
Currency is NOT money. Money is a store of wealth and buying
power. Currency is merely a medium of exchange. It's the stuff
you carry around to pay for coffee. The two are confused because
historically gold and silver were used as both. What are the
chances of silver returning as currency? It's not impossible.
Hugo
Salinas Price has the all 31 Governors of Mexican states
supporting a silver based currency. Bernard von NotHaus of Liberty
Dollar was able to convince thousands of people to use it and
I have to agree with Bernard on this one - government controls
the currency, not the money. Money is a universal store of value
and wealth, and does not require sanctioning.
You have to laugh at gold bugs
that shun silver. They know all the reasons why gold will go
up, but they can't muster a couple for silver. "This time
it's different", isn't it? Is it different for silver? Which
part is different? As of this writing gold/silver
ratio stands at 62. I am betting that before this bull market
is over you'll see that number slashed at least in half. My message
to gold bugs is - if you like gold, buy silver.
Oct 10, 2005
Sean Rakhimov
editor: Silver
Strategies
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Information
contained herein is obtained from sources believed to be reliable,
but its accuracy cannot be guaranteed. It is not intended to constitute
individual investment advice and is not designed to meet your
personal financial situation. The opinions expressed herein are
those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation
to update any such information. The author, entities in which
he has an interest, family and associates may from time to time
have positions in the securities or commodities discussed. No
part of this publication can be reproduced without the written
consent of the author. ©Copyright 2004-2010 by Sean Rakhimov.
All Rights Reserved.
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