on silver - michael berry

  1. dub
    30,497 Posts.
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    February 14, 2005

    1. Silver

    I promised to write about silver in yesterday’s MN. I thought I might wait to see what happens intervening 24 hours. Sure enough, spot silver exploded (+$.35, 5.31%) out of the box (along with gold) at about 9:30 AM yesterday. It was the largest one-day advance in the past 6 months. The gold / silver ratio fell to 60.38. As Ted Butler suggested to me, silver broke through its 200 and 50 day moving averages in one fell swoop. If silver can continue through to show strength through $7.15 it is quite likely to break out. I remain to be convinced.

    A natural questions for silver afficianadoes is: what causes these wide swings? A cursory examination of the graph shown above indicates that the volatility of silver is significant. Yet there are few new fundamentals current impacting the "other white metal." It is true we are exhausting above ground supplies, in my opinion, but that is well known by the market. It is true that demand is increasing (4% in 2004 according to GFMS) and mine production is stagnant, but that fact is well known by the market. It is true that very few new silver (primary or polymetallic) discoveries have been announced, but that fact is quite well known. As Dr. Tom Patton, President of WTZ, often remarks,

    "Significant new silver mines are very difficult to find."

    That fact is also well understood by the market. So the natural question is; why all the volatility? One explanation that might hold sway is that the "paper" silver markets impact the physical silver markets. We also know, for example, that the futures markets are paper markets in which settlement accomplished in cash. These markets are many times larger than the physical silver market. Hedge funds can "play" the silver market and never take possession of a single ounce of silver. The CFTC opines that this adds liquidity. But in a small market like silver, with limited visibility, it also adds volatility, lots of it.

    Liquidity is good. It means you can buy and sell without affecting the price much. Volatility is bad because it often whipsaws investor behavior. You’ve all heard about the human tendency to buy at the top and sell at the bottom. That is the silver market we live in today. You must believe in the fundamentals of silver and the nascent commodity boom. This boom is now evident in other metals such as iron ore, copper, zinc, uranium, nickel, coal, etc. It is not yet evident in silver because silver, is unique. It is the cheapest quality of life metal in world. It kills bacteria and generates heat from thermoelectric devices. It carries electricity in superconductors (coats the cable) and captures x-rays on film. China has not reached that part of the quality of life (QOL) cycle that will ramp up global demand for silver.

    If you all agree that it seems likely that oil prices will appreciate due to Asian QOL demand, you must also give serious credence to the notion that silver demand could increase dramatically in the 5 to 10 years to provide a higher Asian QOL.

    The per capita use of silver in China one gram per year. The per capita use in t US and Canada is 70 grams per year. If the QOL of China improves to 1/10th that of the US and Canada, China will require an additional 300 million ounces of silver for autos, cell phones, electronic devices, air conditioners, solder, silver biotics, clothes, pillows …….. .. At this rate it would require 10 new mines similar to the world class Fresnillo deposit (30 million ounces per year production) in Mexico or BHP’s Cannington mine in Australia. Current world demand is approximately 900 million ounces per year. Current mine supply is approximately 550 million ounces per year. Where will an additional 100, 200 or 300 million ounces of silver come from? Not recycling film!

    Perhaps, just perhaps, the tech funds who inject volatility in the paper market (as Ted Butler believes) are starting to learn about the fundamentals of silver. Hang on, the ride could be quite interesting. Silver could be $10 to $12 per ounce by year-end. Do you know where you silver investments are?


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