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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'Neall.
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.
By : Sean
Rakhimov
Editor, www.silverstrategies.com/
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