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This year silver
rose over 40% yet is only starting to draw attention from the investment
crowd. A lot of effort is being made to keep the wheels from falling off the
increasingly sickly world fiat currencies. These efforts include
inconceivably inaccurate government statistics as well as frequent
smack-downs in gold and silver, the long-term proven superior forms of money.
Recent action suggests the marketplace is learning quite well how to deal
with these smack-downs……wait for them patiently and then buy as
much physical gold and silver as possible. The gold and silver
ETF’s have added tremendous amounts of gold and silver while the price
got clobbered recently. In November alone the gold ETF added 52 tons of
gold and the current total held now exceeds 452 tons. The silver ETF
has had an even more stunning accumulation. While silver fell almost $2
an ounce silver tonnage increased almost 10% to well over 3700 tons and on
December 21 st alone, almost 280 tons were added which was more in one day
than in the four prior full-month additions. When we look at these recent
purchases we are astounded by the implications and the dramatic potential for
the upside in the silver price if this kind of investment demand were to
continue.
For the full year of
2005 silver demand was estimated at over 900 million ounces by a leading
industry source while production was only a little over 640 million ounces. One
thing we have noticed over the past several decades is the steady growth in
the demand for silver despite the discontinuation of using silver in coinage
around the mid-1960s. More recently, photography demand has taken a hit as
the move to digital cameras accelerated. A multitude of alternative uses for
silver has helped to stem declines in these two huge areas. The
anti-bacterial qualities of silver are being rediscovered in both biomedical
uses and consumer products. Many have long forgotten one of the key
reasons silver was used for eating utensils, (still generally referred to as
silverware even if it’s plastic), was its anti-bacterial effects on
food from simply touching it. Tupperware has just started using silver
to line containers resulting in killing bacteria and extending shelf life of
leftovers. Clothing manufacturers have starting using silver in specialty
applications to control odor, heat, and cold. Silver is the best
conductor of heat and of electricity even surpassing gold and copper. It is
also the most reflective which is why it is used in photography and in
mirrors. In fact, there have been more recent patents issued involving silver
uses than all other metals combined. With so many new growth areas perhaps
now you can see why there is little room for investment demand, particularly
now that stockpiles which once totaled a 60-year backlog are essentially
gone. With this advantage of so many growth areas for silver compared with
gold which is largely jewelry and investment demand, one can easily see why
we expect the gold price to silver price ratio to continue to gravitate to
the long-term average of 16 to 1 from the current 49 to 1.
One of the
interesting facts about silver production is that over 70% is produced as a
byproduct of mainly copper, zinc, lead, or gold. This provides an interesting
opportunity for pure producers or producers that get the bulk of their
production from silver. As silver moves up in price capital should flow to
those producers with heavier concentrations in silver. This should allow
those producers to bring on enough production to keep the price from getting
too high which would otherwise kill off some demand thereby extending the
cycle. In 2005, Peru leapt ahead of Mexico as the leading producer of
silver. Mexico’s superior political safety will help money to flow to
that area which could well help them regain the lead.
Looking at the
long-term chart of silver spanning hundreds of years, if you update the chart
to the present you can see the dramatic move that silver has made off the
bottom. In light of the fundamentals mentioned above it is highly likely that
silver is in the very early stages of being recognized as an ever-enhancing
and value-holding asset just as fiat money is in the early recognition phase
of being totally discredited…….AGAIN!
Richard J. Greene
Managing Partner, Portfolio
Manager
Thunder Capital Management
More articles by the author can be accessed by the
"Research Articles" choice at: www.thundercapital.com
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