by Mark O Byrne
Precious metals remain the most undervalued of all the
asset classes. Precious metals, and particularly silver,
remain the most undervalued of all the commodities.
Silver is even more undervalued than gold and is
undervalued when compared to other strategic commodities
such as oil and uranium.
Silver is currently trading at just below $14 per ounce.
Gold Investments continue to believe that silver will
surpass $20 per ounce in 2007, its non inflation adjusted
high of $48.70 per ounce before 2012 and its inflation
adjusted high of some $130 per ounce in the next 8 years.
The fundamentals reasons for our very bullish outlook on
silver is due to continuing and increasing global
macroeconomic and geopolitical risks; silver's historic
role as money and a store of value; the declining and
very small supply of silver; significant industrial
demand and most importantly significant and increasing
investment demand.
Property markets and equity markets in the western world
are near or at all time record highs. There is increasing
macroeconomic and geopolitical uncertainty in the form of
the sharp slowdown in the US housing market, increasing
trade friction between the US and one of their prime
creditors China (the negative impact of the introduction
of US trade tariffs on Chinese paper products and the US’
WTO piracy claim may not have been fully realised by and
priced into the financial media and the markets) and the
continuing geopolitical tensions with Russia, Venezuela
and in Iraq, Iran and the wider Middle East. These
factors look set to at least curb returns in most
property and equity markets.
Indeed these and other significant risks such as record
debt levels in the western world, the huge and
unprecedented US trade, budget and current account
deficits and the massive fiscal profligacy of the Bush
administration are not subsiding. These factors have
ramifications for the predominant global reserve currency
of recent times “ the US dollar ".
The IMF, World Bank and OECD have warned that the global
economy faces increasing "downside risks" including
rising oil prices, falling stock markets and trade
imbalances.
The IMF's semi-annual World Economic Outlook (released
April 5th 2007) said an economic slowdown in the US would
have only a modest global impact if it were confined to
the property sector.
The IMF report warned, however, that the shock to the
global economy could be more significant if the property
downturn spread to consumer spending and business
investment. This seems likely as the US consumer is more
indebted now since 1933 with little or no savings
whatsoever. The Comptroller Auditor General of the US,
David Walker stated last year (2006) was the first year
since 1933 that Americans spent more money than they took
home and, as you probably recall, 1933 was not a good
year for the United States.
The US’ national gross debt is $8,883,212,488,519
trillion ($8.8 trillion) and growing. When George Bush
came to power US’ national gross debt was $5.7 trillion.
Even the most sanguine, tunnel-visioned bull would have
to admit that the fundamentals of the US economy are bad
and deteriorating.
Other long term risks and challenges facing the global
economy come in the form of the threats posed by a bird
flu pandemic, peak oil and global warming.
Thus the monetary metals and safe haven assets of gold
and silver are likely to continue to outperform other
asset classes. Also they are likely to outperform other
commodities such as the base metals, oil and uranium.
These commodities would be likely to experience a fall in
price were there to be a significant slowdown in the
global economy which would create demand destruction.
Because of their historic and continuing role as monetary
or currency metals and as safe haven assets gold and
especially silver are likely to outperform. This is
because they are not simply commodities but also
currencies which cannot be debased like our modern fiat
paper and electronic currencies.
Gold and silver has been used as money in more regions
and countries and for longer periods of time than the
relatively modern use of paper currencies. Interestingly,
silver has been used in more regions and countries and
for longer periods of time as money than gold. Nobel
Laureate Milton Friedman, said of silver "The major
monetary metal in history is silver, not gold.†In Mexico
today, there is a movement to return to using silver as
money with a bill being put before by the Mexican
Congress by Hugo Salinas. The currency of India is the
rupee and it comes from the Sanskrit word ‘raupya’ which
meant silver or coin of silver. The French word for money
is 'argent' which came form the Latin argentum meaning
silver. The franc was established as the national
currency by the French Revolutionary Convention in 1795
as a decimal unit (1 franc = 10 decimes = 100 centimes)
of 4.5 g of fine silver.
Most countries in the world used silver for smaller
denomination coins in the 19th Century and through the
20th Century up until the 1950’s, 1960’s and 1970’s when
currencies were gradually debased. Debase means to
degrade, dilute or devalue. For instance, in the US up
until 1965, silver dimes and quarters were made of 90%
pure silver. In 1965, the US government debased and
devalued the currency and reduced the silver content to
40% pure silver. These legal tender silver bags are still
bought today by savvy investors.
Before looking at the demand side of the silver equation
it is important to consider the supply side.
In 1900 there were 12 billion oz of silver in the world.
By 1990, the internationally respected commodities-
research firm CPM Group say that figure had been reduced
to around 2.2 billion ounces of silver. Today, that
figure has fallen to about 300 million ounces in above
ground refined silver. It is estimated that 95% of the
silver ever mined has been consumed by the global
photography, technology, medical, defence and electronic
industries. This silver is gone forever.
CBS Marketwatch published an article in March 2007
entitled ‘Silver may shine brightest among metals, in
which Kevin Kerr wrote that 'Due to current supply/demand
trends, the amount of silver above ground is projected to
shrink to a critically low level in 2010.
As supply shrinks, prices will keep rising steadily to
new highs. Many in the investment world are unaware of
this part of silver's story. Industrial demand has been
outstripping mining supply for the past 15 years, driving
above ground supply to historically low levels.'
Silver production was flat this year and is expected to
be flat again next year. Incredibly, the amount of mined
silver has been less than its demand every single year
for the last 15 years. This hasn't resulted in
significantly higher prices yet because the world has
been able to fill the gap from inventories and official
government stockpiles.
However, today the U.S. government's stockpile is all but
gone, and sales from other official sources, such as
China, Russia and India, are declining, too. The decline
in refined silver stocks, from around 2.2 billion ounces
in 1990 to around 300 million ounces today means that
silver stocks are near an all time low.
The supply of silver is inelastic. Silver production will
not ramp up significantly if the silver price goes up.
Supply didn't increase in the 1970's when silver rose 35
fold in price “ from $1.40/oz in 1971 to a high of nearly
$50/oz in 1980. Importantly, silver is a byproduct metal
and some 80% of mined silver is a byproduct of base
metals. Higher prices for silver will not cause copper,
nickel, zinc, lead or other base metal miners to increase
their production. In the event of a global deflationary
slowdown demand for base metals would likely fall thus
further decreasing the supply of silver.
There are only a handful of pure silver mines remaining.
This inflexible supply means that we cannot expect
significant mine supply to depress the price after silver
rises in price. It is extremely rare to find a good,
service, investment or commodity that is price inelastic
in both supply and demand. This is another powerfully
bullish aspect unique to silver.
Another important factor as to why silver is likely to
outperform other asset classes and commodities besides
the declining silver supply is increasing industrial
demand.
Why is this indispensable metal in such demand? The
reasons are simple. Silver has a number of unique
properties including its strength, excellent
malleability and ductility, its unparalleled
electrical and thermal conductivity, its sensitivity
to and high reflectance of light and the ability to
endure extreme temperature ranges.
Silver has the highest electrical conductivity of all
metals, even higher than copper. It was used in the
electromagnets used for enriching uranium during World
War II (mainly because of the wartime shortage of
copper). Silver has the highest thermal conductivity
and optical reflectivity of all metals. Silver’s
unique properties restrict its substitution in
most applications.
Non investment demand for silver is based primarily on
industrial demand including electrical, medical and
photography and also in jewellery and silverware.
Together, these categories represent more than 95 percent
of annual silver consumption. In 2005, 409.3 million
ounces of silver were used for industrial applications,
while over 164.8 million ounces of silver were committed
to the photographic sector, and 249.6 million ounces were
consumed in the jewellery and silverware (dont sell the
family silver) markets. Jewellery and silverware are
traditionally made from sterling silver. Sterling silver
is 92.5 % silver, alloyed usually with copper.
Industrial applications for silver have always been
significant but have increased significantly in recent
years. Industrial applications for silver have increased
since 2001 to a record in 2005, according to London-based
researcher GFMS Ltd. In their most recent report, they
predict a 6% growth rate in industrial applications of
silver in 2007. Silver is used in film, mirrors,
batteries, medical devices, electrical appliances such as
fridges, toasters, washing machines and uses have
expanded to include cell phones, flat-screen televisions
and many other modern high tech devices.
Increasing industrial demand for silver is forecast due
to strong economic growth in China, India, Vietnam,
Russia, Brazil and other emerging economies in Eastern
Europe, Asia and the world. Growing middle classes are
now demanding the quality of life and standard of living
enjoyed by many in the West and thus the demand for
silver will increase.
Silver is known as the healthy metal and has many and
increasing medical applications. While silver's
importance as a bactericide has been documented only
since the late 1800s, its use in purification has been
known throughout the ages. "Born with a silver spoon in
his mouth" is also a reference to health as well as
wealth. In the early 18th century, babies who were fed
with silver spoons were healthier than those fed with
spoons made from other metals, and silver pacifiers found
wide use in America because of their beneficial health
effects.
Today silver is used in many health-care products.
Specifically, the 'silver bullet' is used by nearly
every hospital in the world to prevent bacterial
infections in burn victims and allow the body to
restore naturally the burnt tissue. Increasingly,
wound dressings and other wound care products incorporate
a layer of fabric containing silver for prevention of
secondary infections. Surgical gowns and draperies also
include silver to prevent microbial transmission. Other
medical products containing silver are catheters and
stethoscope diaphragms.
In a world that is showing increasing concern about the
spread of diseases and pandemics such as bird flu,
silver is being increasingly tapped for its biocidal
properties. Research is ongoing on the use of silver
and its compounds for therapeutic uses and on its
potential use as a disinfectant in hospitals and other
medical facilities.
Silver has many unique properties which make it ideal
and indeed essential in global industry “ especially
in the global photography, technology, medical, defence
and electronic industries. Yet, silver is a finite
resource and the supply of silver is increasing only
very incrementally.
According to the CPM Group, there are some 300 million
ounces of refined silver in the world. That means that
with silver priced at $14/oz., there is about $4.2
billion (300 million oz x $14) dollars worth of silver in
the world. This means that the total silver market
capitalisation is a very small $4.2 billion.
The increasing demand caused by investment demand is very
compelling. Especially due to a number of key investment
factors - the introduction of the iShares Silver ETF, the
huge short position, the global liquidity bubble, the
significant growth in the global money supply, the
proliferation of millionaires, ultra high net worth
individuals and billionaires, the proliferation of hedge
funds and the exponential growth in derivatives.
Investment demand for silver has also been rising rapidly
the past few years with investors hedging themselves
against rising inflation, possible currency devaluations
and geopolitical and macroeconomic risk.
The silver market is currently in a transitional period
where investment demand is starting to have a real impact
on silver prices. Much of the new demand comes from
iShares Silver ETF launched in April 2006. The fund has
so far attracted 120 million ounces of silver investment.
It is up nearly 30 million ounces since the start of
2007. It's important to remember that the silver market
is very small - only some 300 million ounces.
That means the ETF alone now accounts for more than one-
third of the global silver market, and growing investment
into the iShares ETF should drive prices much higher. If
even a small amount of money flows into the silver market
from investors, ultra high net worth individuals (ultra-
HNWIs), hedge funds, pension funds and institutions
around the world, silver will almost certainly reach the
nominal non inflation adjusted high it reached in 1980 of
nearly $50 per ounce.
Perhaps the foremost analyst of the silver market today
is Mr Theodore Butler. He believes that gold and
particularly silver are the laggards in the commodity
complex due to price manipulation. At over 300 million
ounces, the largest 8 traders on the COMEX are short more
silver bullion than exists in total known world
inventories, including total SLV holdings and total
COMEX inventories.
Butler sums it up succinctly. 'If there is one thing that
separates silver from any other asset class, or any other
item in any asset class, it is the presence of an
unprecedented concentrated short position in COMEX silver
futures. It is the existence of this concentrated short
position that will, at some point, launch the silver
price to the heavens. This short position has grown so
large, and is held by so few entities, that it no longer
matters how it will be resolved. It must be resolved and,
whether that resolution involves default or buying by
short covering, it will have the same bullish impact on
price. You don't have to look any further than the
concentrated COMEX short position as to why silver has
not outperformed every other commodity. Just as it
explains price under performance, it is telling you why
there must be over-performance in the future. At some
point, the price of silver must accelerate upwards to
price levels that are truly shocking.'
There is some $50 trillion worth of bonds and $40
trillion worth of paper money in the world.
Money supply is increasing at extremely high levels
globally. The annualised growth of some national broad
money supplies are United States M3 up 10%, Eurozone
M3 up 9.0%, UK M4 up 13%, China M2 up 15.9%, South
Korea up 10.6%, Australia M3 up 13%, Russia M2 up a
staggering 48%.
This has given rise to increasing inflationary pressures,
a huge liquidity bubble and to ripe valuations in many
stock and property markets.
There has been an unprecedented increase in wealth
amongst a tiny segment of the population in recent years.
The number of millionaires in the world is multiplying
very rapidly and there are now approximately 9 million
millionaires in the world. There are approximately
70,000 ultra-HNWIs who have a net worth of more than
$30 million.
Forbes recently estimated that there are now a record 946
billionaires in the world. In 2006, there were 178 new
billionaires. These included 19 Russians, 14 Indians, 13
Chinese and 10 Spaniards, as well as the first
billionaires from Cyprus, Oman, Romania and Serbia.
Bill Gates and Warren Buffet are worth some $51 billion
and $40 billion respectively. One man's net worth
increased in one year by multiples of the total value of
all silver in the world. Carlos Slim Helo, is a Mexican
of Lebanese origin whose net worth increased from $20
billion in 2006 to almost $50 billion in 2007 or by
some $30 billion.
All the billionaires' combined net worth increased by
$900 billion to reach $3.5 trillion. There are a total of
8.7 million millionaires around the world, representing a
total wealth of a mind boggling $33.3 trillion. A
trillion is an extremely large number and difficult for
most to comprehend. It is one million million or 10 to
the power of 12. It is an absolutely huge number and it
is important to remain conscious of the sheer size of
this number.
Conversely, the total value of all above ground stock of
silver is a very small $4.2 billion.
If only a tiny fraction of these millionaires, ultra-
HNWIs and billionaires decided to diversify out of their
extensive property and stock portfolios and invest even a
very small amount of their portfolios in silver it would
result in the silver price increasing in price
exponentially. Given the extremely strong investment
fundamentals of silver this seems likely.
Globally, hedge fund's speculative capital have doubled
to more than $2 trillion (or two thousand billion) in the
last three years. Some hedge funds have started moving
into the silver market. Charles Supapodok of Artemis
Capital Management is seeking to raise a $300 million
hedge fund to invest mainly in silver. Artemis Silver
Fund, advised by Artemis Capital Management, will put 80
percent of the fund's holdings in silver.
Again due to the incredibly small size of the global
silver market if even only a percentage of the roughly
9,000 to 10,000 hedge funds in the world decide to take
positions in the silver market the price will increase
in value by multiples.
The Bank for International Settlements has estimated that
the total value of derivatives contracts was $450
trillion at the end of 2006 (up from $260 trillion in
June 2006) and is increasing exponentially.
There is still a debate as to whether derivatives are a
good or a bad thing. Ben Bernanke and most in the
financial industry believes they are good as they create
liquidity and help spread risk throughout the system.
Greenspan was a little more sceptical and warned that
they could create 'moral hazard' as they did when LTCM
collapsed in 1998 sending shockwaves through the
financial system. He also warned that they could lead to
"cascading cross defaults."
Warren Buffett is similarly not as sanguine: 'Charlie
[Munger] and I believe, however, that the macro picture
is dangerous and getting more so. Large amounts of risk,
particularly credit risk, have become concentrated in the
hands of relatively few derivatives dealers, who in
addition trade extensively with one other. The troubles
of one could quickly infect the others. . . .
Linkage, when it suddenly surfaces, can trigger serious
systemic problems.'
'The derivatives genie is now well out of the bottle, and
these instruments will almost certainly multiply in
variety and number until some event makes their toxicity
clear. Knowledge of how dangerous they are has already
permeated the electricity and gas businesses, in which
the eruption of major troubles caused the use of
derivatives to diminish dramatically. Elsewhere, however,
the derivatives business continues to expand unchecked.
Central banks and governments have so far found no
effective way to control, or even monitor, the risks
posed by these contracts.'
For this reason Buffett has called derivatives 'financial
weapons of mass destruction.'
The systemic risk posed by the near infinite creation of
hundreds of trillions of dollars of derivatives means
that the finite currencies and safe haven assets of gold
and silver are likely to be diversified into
increasingly.
If only a tiny fraction of the humongous derivatives
market was reallocated into the silver market, silver
would increase in value exponentially.
Silver remains historically undervalued. Despite the
incredibly bullish fundamentals outlined
silver has so far underperformed nearly all the other
commodities. Silver has gone from below $5 to some $14
and is up some 190% in the last 7 years.
This seems like a lot but when compared to other
commodities and metals it is very little:
Oil is up from $10 to $65 or 550% and more than 6 fold.
Zinc from $.35 to a high of $2.00, now $1.50/lb or nearly
5 fold.
Copper, from $.75 to a high of $4.00, now $3.58/lb or
nearly 5 fold.
Lead from $.20 to $.90/lb or nearly 5 fold.
Nickel from $3 to $22/lb or more than 7 fold.
Indium, Molybdenum, Selenium, Cobalt are all up 1000% or
10 fold and more.
Uranium is up a phenomenal 1300% or 13 fold.
Many commodities are up between 5 and 13 fold. Silver is
not even up 3 fold. If silver were to catch up with these
other less rare and less precious metals, it would have
to increase in value by some 500%. From the bottom at
some $5/oz in 2001, that would result in silver being
valued $25.
Silver reached $50 briefly in 1980 when just one
billionaire Bunker Hunt (one of a handful of billionaires
in the 1970's) attempted to corner the silver market
causing the price to surge (in conjunction with many
investors seeking to hedge themselves from the
stagflationary 1970's). A lot of technical orientated
analysts, investors and hedge funds are looking at
this figure and as nearly all the other asset classes
and commodities are all at near all time records there
is every reason that silver will do likewise in the
coming years.
Silver is priced at some $14/oz today. The average price
of silver in 1979 and 1980 was $21.80/oz and $16.39/oz
respectively. In today's dollars and adjusted for
inflation that would equate to an inflation adjusted
average price of some $60 and $44. It is for this reason
that we believe silver will be valued at over $50 in the
next 3 to 5 years.
Finally, it is important to put today's total value of
all above ground refined silver in the world - $4.2
billion in context.
$4 billion worth of Boeing planes was bought by Ryanair
in 2005. $4 billion was the cost of stamp duty tax on
Irish property in 2006. 8 billion worth of overseas
commercial property was bought by Irish investors in
2006. Scottish Ministers are in charge of £2 billion
(some $4 billion) of tax revenues. Macquarie, the
Australian bank, recently acquired the O2 Airwave police
radio business for £2 billion. The 2006 Sunday Times Rich
List UK estimated that there were 20 people with a
minimum wealth of £2 billion (some $4 billion) residing
in the UK.
Further context is provided in the fact that the actor
Will Smith has had a worldwide career box office of $4.4
billion. Microsoft is growing revenues at over $4 billion
a year. In March and April of 2007, just two months, one
man's wealth increased by $4 billion. Since Forbes
calculated its 2007 wealth rankings, they recalculated
that in two months the Mexican tycoon Carlos Slim's
fortune rose $4 billion to $53.1 billion.
Rarely are there 'no brainers' in life and very rarely
are there 'no brainer' investment opportunities.
Invariably,' too good to be true' investments turn out to
be just that. However, this is not the case with silver.
It remains the investment opportunity of a life time.
Silver is unique in terms of being both a monetary and an
industrial metal and having the highest optical
reflectivity and the highest thermal and electrical
conductivity amongst all metals. Silver industrial and
investment demand is increasing very significantly and
meanwhile supply is falling. The fact that the huge
majority of the investment public and financial services
industry remains ignorant of the fundamentals in silver
means that the bull market in silver remains in it's
early stages. Silver remains probably the most
undervalued asset class.
