Whither Thou Silver

Silver the metal – has been cheap for many years; in fact, we have not seen silver above $12.00 per ounce since 1983. The last big blow off was in June 1979-January 1980 when the price of cash silver roared to $50/ounce, due in part to Bunker Hunt controlling a significant percent of the available “free” supplies. Unlike gold, silver is not a true monetary metal, but an industrial metal, so usage depends upon the economy and how active it is. Gold is a monetary metal and has different cycles, but both are going to be making a move of major proportions. Let’s take a good look at a commodity that could see another price explosion – and possibly quite soon For this research, several main sources were used – including two different college chemistry books, and many industrial sources, The Wall Street Journal, and Comex Metal Exchange in new York City. The graphs on page 3 are courtesy of both the Comex and CPM Group of New York, a consulting group and three silver-mining companies – Barrick, American Eagle and MIM of Australia – the biggest mining combine in Australia. We even have two medical companies included – Smith, Kline-Beecham and Johnson and Johnson. The Internet has also been helpful. Here we go.

Chemically, silver has unique properties that can’t be easily or cheaply substituted. It can be formed or stretched. Only gold is a better conductor of electricity. It is corrosion resistant, malleable, wear resistant, fatigue resistant (good for switches), withstands temperature extremes, conducts heat, reflects light, is a very good catalyst in chemical reactions, is bactericidal and is also effective against viruses and fungi, makes alloys and has chemical stability. It has been the main ingredient in photography since it is light sensitive. This metal has a stunning array of uses; let’s look a little closer into the uses that keep modern industry humming.

In the high-performance battery market, nothing beats silver. Silver-oxide batteries power just about everything – with different sized batteries powering cameras, watches, hearing aids, cordless tools and portable TVs. Heavy duty silver – zinc batteries power rockets and missiles, satellites, the space shuttles and weapons systems such as torpedoes and “smart” bombs. The silver photovoltaic cell is the most common cell for converting solar energy into electricity.

Silver is an excellent catalyst for a whole host of unique uses. A catalyst is a metal or compound that can dramatically speed up a chemical reaction without itself changing form. Silver catalysts are very important in the production of plywood, particle board, paper, paint, finishes and varnishes, toys, buttons, dinnerware, adhesives, auto parts, packing material, insulation materials and chemical resins. It is essential to make formaldehyde and ethylene oxide – the base feedstock for making plastics. These resins and feed stocks are used to make clothing and other specialty fabrics, and also can make plastic molded pieces such as computer key tops, appliance components – such as handles and plastic gears – to say nothing of VCR tapes and mylar recording tapes. Even solvents such as hexane (used in dry cleaning) and ethylene glycol (antifreeze) use silver as a catalyst when being manufactured.

Silver production is rather static, because there are virtually no silver mines working today. Low prices have driven them out of production. Over ¾ths of the silver produced in the world comes as a by-product of copper, gold and zinc mining. Prices of these base metals and products determine how much silver will come onto the market. Nearly all of the remainder of silver production comes from recycling such forms as silver bars and coins, silverware and scrap. Most of this is already used up and silver bullion inventories are only 210 million sources – with about 100 million ounces held by Comex in New York and a nearly equal amount in London. The remaining 10 million ounces are held by private companies such as Eastman Kodak. Remember, this is what is currently available for use; this is much less than the 1,850 million ounces in inventory as recently as 1988. Since the world now uses about 900 million ounces per year, it is very obvious consumption is above production. This will not last forever.

There are a few other reasons why silver may soon be rising (we’ll say when it should rise later). These are listed in no particular order of importance and, I am sure, there are other reasons not mentioned here.

  1. Available supply is shrinking fast. This is discussed above.
  2. It is crucial to modern technology. Also discussed above.
  3. It’s cheap (historically). Nothing cures low prices like low prices.
  4. Nobody is paying any attention to silver. This is when big bull markets begin to move – because it is ignored.
  5. There is limited downside risk due to cheap prices, but upside potential may be substantial.
  6. It is out of favor as an investment and/or speculation. This is related to No. 4 above.
  7. It has not varied much in price over the last few years – creating more demand and less supply due to lower prices.
  8. Mine-production has been falling; if the economy is slowing, production will slip further.
  9. It is basically immune to currency speculation and upheavals.
  10. Silver metal has liquidity, and always has a liquidation value.
  11. Bulk metal requires virtually no maintenance.
  12. Industrial uses are continually expanding.
  13. It has universal appeal around the world.
  14. Demand will increase further as modern technology spreads to underdeveloped nations all around the world.
  15. Finally, there is a huge short position in silver that has to be covered eventually. This could cause an explosion. Read on.

Since 1950 the world’s industry has used up over 10 billion ounces. This includes silver used in coinage originally and melted down for different uses. This amount of silver is almost equal to all the silver mined since the Romans built the Appian Way. Nearly all the silver is gone as we have earlier mentioned, and recycling of appliances and other uses is usually not very practical – especially with today’s prices. A higher price would help bring supply and demand back into focus. This is the traditional way the markets bring everything back into equilibrium.

The next (and last) big question is: When? For this, let’s go back to the computer and see what cycle analysis tells us. The first thing it says is that if you are looking for this to start in January 2001, forget it. The bottom should be in by January 8-9, 2001, but this market is slow to turn around. If the price of $4.55 per ounce is the recent bottom (or close to 8t) this could be the last time in a long time that we will see this low a price. No one will be panicking if prices stay below 5.25.

However, if prices for silver close above $5.25, there will be a few people becoming nervous and by $6.00 silver nearly everybody will be on margin call. There is nowhere near enough silver to give most people a chance to get out, so the bidding could become fierce. With such a lopsided demand vs. supply, there is no way of knowing just how high it will go. There is nothing more feared in commodity trading than a short squeeze, and silver could present a first-class short squeeze situation.

That’s fine, but when could a situation like this develop, if it develops? First of all, the real question is when – not if – this happening takes place. Technically, the longer a commodity ignores the fundamentals of supply and demand, the bigger the move. In referring to the charts on page 3, one will notice that the price of silver spends most of its time in the $5.00-$6.00 range. But also notice that silver also spent over 300 days in the last 25 years above $15 per ounce. We notice too that the price of silver has been quite stable overall during the last 10 years or so when the range has been between $11 and $3.52 – the modern-day low in 1993. Such price “inactivity” is a major reason why no one is looking at silver.

For the near term, if silver does bottom on Jan. 8-9, 2001, we should see a rally from that point into the end of March. I do not know how big a rally will take place, but a 60 cent rally from the low would not be surprising. This size rally into the end of March would scare very few shorts – although some may have to meet a margin call. If the rally is more – such as a dollar – this would get a lot of people’s attention, because most shorts could be getting into trouble, and a few may have to start liquidating or pony up a lot of money. While this big rally is possible, the odds of this happening are not very high. After the late March-early April high is in, the market should settle down and work lower into June. It is very doubtful that prices will retreat to the January low, but prices should retreat some during this two month period.

Then things start to change fast. According to cycles, something is going to happen to wake up the silver market between June 21 and July 14, 2001. June 21 is not only the first day of summer, but it also is the date of a solar eclipse. At this time, I have no idea just what will happen to stir up this sleeping giant, but it will be something that may make the CBS Evening News. Watch the news during this period for some definite news about company actions, government changes – either in the U.S. or abroad – or some speculator, such as Warren Buffet adding to his position. Whatever it is, will turn out to be quite significant.

Excerpts Reprinted from January 2001.
Full article available upon request.