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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