Recently, an article was
posted on ResourceInvestor.com By Craig Stanley Titled: "Silver's Near-Term
Outlook" see www.resourceinvestor.com/pebble.asp?relid=11923
The article was a good summation of the work done by
GFMS on their recent annual silver survey that has been commented upon by
many including myself in The Morgan Report and Franklin Sander's of The
The basic premise is that all we need to do to
analyze the silver market correctly is to look at the supply. If we focus on
the supply of silver and realize that the supply is increasing primarily
because the 200 million ounces of silver that used to come back into the
market as photo recycling may be as low as 185 million ounces due to digital
photography. Secondly base metals mining is up significantly and therefore
byproduct silver is up as well. The increase of silver produced in 2004 was
estimated to be 23 million ounces greater than 2003.
These statistics can be taken at face value, but as
Franklin Sanders pointed out in his article it is amazing how these figures
get re-worked without any explanation whatsoever. Regardless, the point is
supply is what we need to place our attention.
The Resource Investor article states "silver
has been in a continuous primary deficit since at least 1996 according to
Canaccord, with the deficits made up mostly by net government sales."
And then it goes on to state;
The Canadian brokerage believes that if the new applications
for silver become popular, the annual deficit could widen to as much 250
million ounces. But although this could "result in some interesting
price dynamics for silver given current inventories of 600 million
ounces," they "do not see a pinch point in the near term."
Again, we have this overhang of 600 million ounces
of silver bullion which is simply a number produced by GFMS without much
detail at all. In fact there are large discrepancies in this study and the
one produced by CPM group in New York
that will be out shortly. Not only do the two studies differ in the total
amount of silver bullion available, but they also differ in the amount used
However, I wish to bring up the point that demand is
far more important than supply. It is a fact that approximately 1.5 BILLION
more ounces of silver bullion existed in 1980 when the price temporarily went
to $50.00 per ounce. Why? DEMAND my friends, yes demand for silver, call it
investment demand, monetary demand, or I am scare to death of what this piece
of paper might be worth tomorrow demand, but demand is what took the price
Gold for example has a rather healthy demand and the
amount of gold bullion supply is far in excess of the silver bullion supply.
The Money Metals - gold and silver - have been recognized as stores of
value for thousands of years of human history. Gold has certainly done its
job; it has preserved wealth for those that have invested assets in this
metal. Gold has appreciated in U.S. Dollar terms roughly the amount the
Dollar has declined. In other words, gold has maintained purchasing power.
Things are not all that well in the financial system
these days to even mainstream publications. I read most of the periodicals
that North Americans read, and many such as Forbes, Forutne, Business Week,
and others state plainly that there are problems with the Social Security
system and many pension plans are in dire straights.
In fact not only are America's Social Security
finances strained, but look around the world: a major demographic tide of
declining birthrates is pushing nations further and further away from the
promises that they've made to seniors. As nations age, they have fewer and
fewer workers to support more and more retirees.
Nations around the world are "grappling with
the long-term affordability" of their pension systems, according to a
World Bank report. China
faces a demographic crunch. By mid-century, its population will be older, on
average, than America's,
thanks to its one-child policy. Starting about 10 years ago, China
responded by broadening a social security system and enlarging a private
pension system of "enterprise annuities," states Richard Hinz,
coauthor of the World Bank report.
India, also with more
than one billion people, has been trying to enlarge its pension system beyond
that for civil servants and employees of sizable corporations to those
occupied in the "informal" and small-business economy.
However what people should really be concerned about
is what the Mises Institute recently pointed out in an article about Social
Security. The article pointed out that there is a popular misconception that
there is some kind of "full faith and credit" obligation on the
part of Congress to honor these Social Security "bonds." The plain
and harsh truth is most have been led to believe that the current system is a
retirement program funded with segregated entrusted assets, the integrity of
which is guaranteed and backed by the U.S. government.
The debate about whether there is a Social Security
cash flow crisis in 2017 or 2042 also turns on whether those
"bonds" have any value. The basic assumption is that the
"bonds" in the fictitious trust fund somehow have value either for
or for workers and their families.
As the Mises website article states: A bond is just
a contract. A contract is an agreement between two or more parties that
creates an obligation to do or not do a particular thing, such as pay out
interest at a certain rate. Thus, one may not enter into an enforceable
contract with oneself, which is exactly what the U.S. is pretending to do with
those social security "bonds."
For a bond to be a real bond, there needs to be at
least two parties; for example, the U.S.
and a citizen who owns a U.S.
treasury bond; or the U.S.,
as owner of a German bond, and Germany. The U.S. cannot
issue "bonds" to itself and have their terms bind future
Bottom line: These Social Security "bonds"
are neither assets of the U.S.
nor property of workers and their families. In the not too distant future, you
will have to ask yourself if the Social Security system will perform its
function of providing any real security. You may decide to take action for
yourself and depend on your own abilities. The ability of any government to
be all things to all people is an illusion that will become a harsh reality
to the general population over the next several years.
The $75,000 Social Security Solution
We know that we have many readers outside of the United States,
and our discussion about Social Security may not affect them directly, but it
could indirectly. Because so much of the world's economic activity depends
upon the spending power of the U.S., it should be factored into
your thinking about the ramifications of the current situation.
Long-term studies of commodity prices have shown
that over time, commodities return to their mean. This "average"
price, however, can remain outside of this range for a very long time. Silver
has certainly remained outside of its purchasing power range for the past 25
years, and remains so today. Therefore we fully admit that having this
knowledge for the past quarter-century was of little practical value.
However, things are changing rapidly in the world's financial landscape, and
the new silver age is rapidly approaching, first from a technological
standpoint and later from a monetary and wealth building/preservation
After Warren Buffett announced his silver purchase
in 1998, Forbes magazine ran a brief article on silver and included a very
interesting graph. ( visit web site http://goldinfo.net/silver600.html ) This graph
provided 600 years of silver prices in 1998 dollars. So, all the inflation is
taken out of the equation, and the prices reflect silver's true value. In constant
dollars, silver's purchasing power averaged $150 per ounce in 1998 dollars
for 600 years. This is the average purchasing power for 600 years; obviously,
silver has nothing close to that "value" today, which provides one
unbelievable investment opportunity.
The question becomes whether silver will ever reach
either the $150 nominal value or, better yet, the purchasing equivalent of
the 600-year average? According to long-term historical standards it must,
but will we all live long enough to benefit from this? The Silver Investor is
on record as stating that silver could trade as high as US$100 per ounce in
nominal terms and perhaps higher. It is our belief that this will most likely
occur on a price spike and the price will quickly adjust downward but
establish a new range, perhaps in the US$20.00 area. We are looking at
2007-2008 as the area for a large price spike, but not the final spike. We
will need to study the market activity to make our best call at the time.
Coming back to the Social Security discussion, what
this system is supposed to do is provide a sufficient income stream to keep
the contributors in a comfortable retirement for the rest of their days. The
amount of $150 per day equals $4500 per month in purchasing power, or $54,000
per year-certainly not a huge income but sufficient in purchasing power for
most Americans to retire upon. To obtain this level of income from
"safe" T-bills would require over $3 million at 1.87% yield.
Compared to 10,000
ounces of silver bullion that would cost roughly
$75,000, it certainly is a risk profile that demands serious consideration.
Very few of our readers will have three million in cash equivalents saved by
the time they retire. However, in this hypothetical study, if you did have
that amount saved, a mere 2.3% weighting would be the $75,000, or about ten
thousand ounces in silver bullion today.
Before you think the Silver Investor has completely
lost it, consider the fact that for centuries silver was used as money and
the average worker earned roughly an ounce per day. One ounce of purchasing
($150) could be considered valid, using the 600-year average we are
discussing. Ten thousand ounces is equivalent to 10,000 days, or, roughly, 27
years. This amount of silver would provide a safe retirement in days gone
by-and perhaps a safe retirement in the future?
What makes this exercise so interesting is the
amount of people that could actually secure their future in silver. With 110
million ounces on the Comex, only 11,000 people could own enough silver in historic
terms (10,000 ounces).
This theoretical demand is all it would take to buy the COMEX inventory! In
monetary terms 110 million times $7.00 USD would be $770 million.
Compare this to what Social Security holds, the $1.7
trillion in "bonds". The amount of paper promises outstanding
versus the amount of real money in the world is staggering, and at some point
the two will start to close in on each other as a very small percentage of
people wake up to the economic reality that has been pointed out recently by
Paul Volcker and even the World Bank. Simply, the world faces energy,
monetary, and cultural problems ahead.
Silver: Precious Metal, But Precious Little
One of the most incredible truths about silver is
that demand has outstripped supply for fifteen straight years. This trend is
projected to continue for at least the next several years. Annual silver
supply deficits have run as high as 200 million ounces in boom years, and as
low as 40-70 million ounces in recent years. It is important to realize that
even in years of decreased silver demand, the mining supply on an annual
basis did NOT meet demand. As Ted Butler is fond on stating "There is
nothing more bullish for a commodity than such a deficit condition."
Another fact that is extremely bullish, but
generally unknown, is that there is actually less silver bullion available
for investment than gold! This one fact alone should alert any intelligent
investor into thinking that some silver must be held as part of one's
precious metals allocation.
According to the CPM Group's Silver Survey 2003,
there are approximately 400 million ounces of silver bullion and 2 billion
ounces of gold bullion.
Before moving on, it is important to qualify this
fact. First, this comparison is between gold bullion and silver bullion. In
both cases, we are not talking about jewelry or art forms of the metals.
However, to clarify the point, if silver coinage was added to the silver
bullion, the total would still be approximately one billion ounces. This is
less than one-third of the gold supply, if we count both gold coin and gold
The reason most of my analysis is on silver bullion
is because the price for silver (and for gold) is set in the Futures Market
for .999 fine bullion. This means this subset of silver is the most critical
not only for price-setting purposes but also for industry. Certainly, silver
coinage does matter and the amount, although small, will play a role it
determining the price of silver in the years ahead.
Many people demand proof that the silver situation
is as bullish as is being presented. Many investors perhaps overlook this
exercise. Gold is still held by many governments . . . silver is held by
virtually none. China and India do have
some silver inventory, but it is considered to be minimal, at best. One
easily verifiable fact is that the United States government is now
totally out of silver at this point in time and now must go to the open
market to purchase silver to continue its Silver American Eagle coin program.
Think about this for a moment: The U.S. once held 2 billion ounces of
silver . . . and now has none!
The silver market is not only much smaller than the
gold market physically, but it is also true monetarily. The total amount of
silver, in price terms, might equal eight billion dollars (factoring in
bullion and coins). Whereas gold bullion and coins would be worth well over a
trillion dollars, this fact displays itself in the price action of the two
metals. Silver is far more volatile than gold and, thus, investors should
bear this in mind. However, as the precious metals markets continue to gather
strength throughout this decade, just a small increase in new silver purchases
could have a far greater impact on silver prices than the same amount of
money invested in gold.
In studying the silver market for nearly my entire
life, I have reached the conclusion there will not be a sustained or
substantial increase in the price of silver until the physical supply is so
small that the commercial users sense a coming shortage. At that point,
silver will show price strength that few believe possible at this point. Why?
Because, at that point, silver users in the defense, automobile and
electronics industries will all be competing for silver at the same time that
investors will sense the profit potential. It is with this understanding that
I build my case that silver offers one of the single best long-term
By: David Morgan
Mr. Morgan is a
contributor to Mining Industry Review an e-TV program, available at FreeMarketNews.com He also hosts a weekly Metals Wrap up each week on the Financial
Sense Hour see www.netcastdaily.com/fsnexwshour.htm
Mr. Morgan and has written numerous articles, his e-mail newsletter, The
Morgan Report is issued on a monthly basis and includes economic news,
overall financial health of the global economy, currency problems ahead and
the reason why people need to be invested in the precious metals. His website
is www.silver-investor.com. His
book “Get the Skinny on Silver Investing” should be available