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It's been awhile since we wrote about the silver
market. There are some good reasons for it and then there are ones that can
and should be dealt with. That is what this article about.
We'll start with the bad news. The bad news is that
there are very few people who know much about the silver market on both sides
of the argument: bulls and bears. That is our unequivocal conclusion. It's
also meant to be a warning. There are some very influential people with good
track records and credentials in various aspects of investing and analysis
who have spoken out on silver in the last year or two. Some of them were
bullish, which of course, we tend to like. Then there were a few bearish
ones. Mind you, all these articles and speeches came from people known as
experts in investment business. And here we have to reiterate the above
statement: very few people know much of anything about silver. Trying hard
not to name names and point fingers, but trust me when I tell you, some of
these folks have quite a following among both, retail and institutional
investors. So, reader, beware. Most freshly minted views on silver are...
shall we say, unsubstantiated.
Now the "why's".
In our opinion, most silver bulls out there fall into "believers"
category. Believers usually believe that silver is a good investment because
of all the stories they heard about the old days when silver commanded much
more respect than it does today. If you ask them "why?" they
eventually give up that if all else fails, silver is still money. Not bad,
right? We think so. This by the way applies to both, readers AND writers.
When it comes to silver bears among the
"gurus", of which at any given time there is a handful, main
reasons cited amount to "it's not money, it's an industrial metal"
coupled with an impending recession/depression/economic slowdown, worldwide
or otherwise. Less frequently mentioned are: the declining gold/silver ratio
("it's been dropping, therefore it should reverse"), amount of
silver hoarded in India and, those geologically inclined, venture that there
is plenty of silver in the ground and there will be enough for generations to
come. I say that's not too shabby either. Kind of makes sense, doesn't it? Kind
of.
Unfortunately, many of these people couldn't name a
dozen fundamental facts about silver. We haven't held formal polls but that
is our impression from reading/hearing their views.
Nobody seems to know or remember that presently
worldwide consumption of silver is 1,000,000,000 ounces
per year. True, the ‘official' numbers from GFMS and CPM Group are in the 800 million oz
area (and growing at 3% annually), but we maintain that there is no way every
silver item can be accounted for, especially in areas where folks haven't
heard of accounting. So, in a rather cavalier fashion we like to round it up
to a cool BILLION. A year. Besides, that is an impressive number, easy to
remember for those who don't live and breathe silver.
It also makes the math easier, now that, thanks to
Jeff Foxworthy, we all know that we're no smarter than a 5th grader. Here's
the math. There are 6.5 Billion of us on
this planet, growing at 1.14% per annum. That comes out to
about 75 Million more people added in 2006 alone. It's easy to resolve that
for every 6.5 humanoids we consume 1 ounce of silver per year or, if you prefer,
2 ounces
for every 13 wetbacks.
Here's the rub. In round numbers we need to add 11
million ounces of new production every year just to keep up with population
growth at current rates. It may not sound like much, but do you know how many
companies in the world produce that much silver per year? Of primary silver
producers only two: Pan American Silver (NASDAQ: PAAS) and Coeur d'Alene Mines (NYSE: CDE). The
renowned Silver Valley of North Idaho, USA doesn't cough up that much these days.
And the highflying Mexican junior silver producers combined
hardly measure up to 11 M
ounces a year. That's a fact. So next time you hear some decorated advisor
talk about silver, ask him to name a dozen silver producers first. And if you
really want to have fun, make that a dozen silver mines. See, we have this
strong suspicion that, just because they know how to calculate bond prices
based on interest rates or other such gibberish, doesn't make them silver
experts, but don't tell anyone.
We wish we could show you the chart of per capita
silver consumption growth, but I can't. Yet, we maintain that today we
consume more silver per capita than folks did a hundred years ago, despite
the fact that silver was used as money back then.
Then there is the recycling factor - also largely
lost on would be silver commentator. Common sense suggests that the bulk of
silver used a hundred years ago is still available in some shape or form, be
it a coin, chandelier or your grandmother's dowry. Same uncommon common sense
(see CPM Group's 2006 Silver Book, p. 45) tells us the story has changed
since then. Today, roughly half of all silver used is consumed and, for all
practical purposes, permanently lost. In that regard we've long compared it
to oil: once it's consumed, it's gone.
To make the long story short (we shared our views on
the silver market many times on these pages and elsewhere in the media), if
you're interested at all in silver, you may want to do some homework, read up
on it. That should help you strip opinions from facts next time you read or
hear someone's take on silver. There is plenty of credible (not perfect but
credible) information on silver, including books, research reports and on the
internet.
Now the good news. The good news is that not much
has changed in the case for silver in the last year-two. That is not because
we haven't kept up with the market, we have. Yes, silver has gone up. Yes, it
has much higher to go and likely at an accelerated pace. Yes, we still
believe that there will be a 50% correction somewhere ahead in this
commodities bull market. But these are general comments for which most
readers have no immediate practical use. Lets get to
that.
First, the overall precious metals space and silver
sector in particular are getting crowded. We know of several silver hedge
funds operating today, up from one a year ago. There are numerous other funds
that include silver in their asset mix. The Toronto PDAC conference set yet
another record by blowing all prior records out of the water. 18,000 people
came to discover that next 10-bagger junior that will pay for their
retirement. This type of attendance should perhaps rival the unveiling of iPhone by Apple. (May also explain the momentarily lackluster action in the spot price.) CPM Group's annual
silver bash at Royal York Hotel was also immensely popular. Merrill Lynch
hosted its 2nd Annual Silver Conference on Bay Street. Traffic was relatively
light, but after 3 days of PDAC we wouldn't read much into it. But don't let
it fly over your head. "Second Annual" - you dig that? Not
that it has anything to do with us, but their Retailing Leaders Conference is in
its 30th year, if you catch our drift…
That settles it: we're officially in the second
institutional phase of this resource bull market. Also known as the
"wall of worry" stage. It's when they dig up and throw a zillion
reasons why silver price won't go up, so don't worry, buy bullion.
Another way this market is crowded is the number of
companies. The number of silver (centric) companies on our list increased by
about 50% in the last year.
Let me explain. The early birds, such as Silver
Standard and few others took a chance by betting on silver. They had to
compete for their survival with gold companies and sell the silver story
before they could make a decent pitch. Not anymore. Today, silver companies
are no longer an investment nuisance. They are embraced as legitimate investment
choices in their own right. This is especially evident from the stock chart
of Silver Standard (NASDAQ: SSRI, TSX: SSO). In June, 2006 its shares traded
for US$16.00. As of close of business on April 5, 2007 they sell for
US$37.35, a stunning 133% gain in 9 months, all the while with silver price
doing absolutely nothing. It's not a penny stock and no news released by the
company warranted such performance. This is a qualitative change in investor
sentiment. It stems from institutional investors finally (five years into
this bull market) figuring out that: SILVER IS A GOOD INVESTMENT. Wait to see
what happens when Joe-sixpack deduces same, likely
a few years away.
Getting back to the crowdedness of the sector,
silver companies are springing up like mushrooms after rain. Abundance of
investment capital attracts more people and lowers entry requirements into
the sector.
That leads us into the next topic: consolidation. What
a dreaded word for investors. To them it means a correction and tedious
sideways market action wearing their patience thin. To industry professionals
it means entirely something else: Mergers and Acquisitions (M & A). We
have been anticipating for the last year or so that the time may have come
for silver companies. Now we are certain it won't be long. It is already
taking place in the uranium, gold and base metal sectors. Silver is next. In
our opinion the sector is overdue for consolidation. Pan American is planning
to double production in the next few years, while Silver Standard is aiming
to become a producer yet the main interest for us is in juniors. Mind you,
some of these juniors are maturing rapidly. But few will emerge as
consolidators and grow into mid-tier players. Examples of such companies in
the gold sector - Yamana, in uranium - Energy
Metals. You may agree that it's important to spot companies with such
potential when you learn that some of the "consolidators" that
survived the last cycle are Newmont and Coeur
d'Alene Mines. They will likely make the finish
line, whatever that may be, and thus offer substantial upside even from
current levels.
Going out on a limb (won't be the first time) we'll
venture to extrapolate same onto the silver space. In our unsophisticated
opinion, for now the front runner is First Majestic (TSX.V: FR) with
Endeavour Silver (AMEX: EXK, TSX: EDR) being the close second. It is a pure
speculation on our part, but we don't see anyone else at this point who might
have the ambition, resources and wherewithal to take on the consolidator
role. Time shall tell.
There are a number of other stories that we would
have liked to get into in, but they will have to wait till next time. For
now, check out:
- Sterling Mining (OTCBB: SRLM) scheduled to go into
production by year end
- Minefinders (AMEX: MFN, TSX: MFL) also to be in
production this year
- Excellon (TSX.V: EXN) should soon be done with
its silver debenture and truly shine
- Garibaldi Resources (TSX.V: GGI) with some of the best silver (and gold)
assets in Mexico, not counting Peter Megaw
- Aura Silver (TSX.V: AUU), bet on the management that brought you Ur-Energy
- Revett Minerals (TSX: RVM), very undervalued
Montana story (more on Montana in the future).
If you decide to follow up on these companies, do
your own due diligence, we own shares in most of them.
We would also like to pat ourselves on the back as we're among the first to
bring you companies like Mag Silver, Esperanza
Silver, Minera Andes, Genco
Resources, Sabina Silver - all huge winners - and congratulate those who
followed us into them.
In case you're wondering, we're still very bullish
on silver. The best is yet to come.
By : Sean Rakhimov
Editor, www.silverstrategies.com/
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