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I am
looking for the USP of silver, it's Unique Selling Proposition. Does
it exist and do we even need one?
In
silver, you have the technicals and you have the fundamentals. Admittedly,
during my lengthening experience with silver I have paid more attention to
the technical analysis of the element rather than the fundamental analysis.
However, over the years I have read various articles on why certain events
are bullish for silver and lo and behold silver has risen by almost five fold
in that time. But has silver risen since 2003 because of certain given silver
fundamentals?
For
me, the truth of the matter is that no uniquely silver fundamental has driven
silver from $4.50 to $21.30. In fact, I would venture to suggest that nothing
you ever read about silver's natural or economic properties is the main
reason for driving silver higher and higher. We shall look for that unique
silver fundamental but what about the fundamentals of this decade?
There
is one main fundamental that has driven silver higher but it has nothing
uniquely to do with silver and it is the US Dollar. Back in 1999 the dollar
was riding high on low inflation, economic growth and a general optimism
about the future. That was about as good as it got for the dollar and then
the fundamental event that proved decisive for the dollar happened and that
was 9/11.
The dollar
was overbought anyway by that time but when the Twin Towers fell the USA
entered into war and war as we know is inflationary. Dollar holders and
traders increasingly began to see what Iraq and Afghanistan added up to and
that was increasing budget deficits and national debt. As a result,
investment flowed out of and past the dollar to other major currencies,
precious metals and commodities as hedges against a possible dollar collapse.
Silver
benefitted but so did gold, platinum, palladium, the Euro, Pound and oil and
so on. Good for silver but not a silver bull market based on pure silver
fundamentals. Nevertheless, silver enjoyed the "benefits" of a
dropping dollar and readers have no doubt profited from that to varying
degrees. However, in terms of riding this bull, technicals have proven almost
as important as fundamentals.
It
was back at the beginning of that bull that I bought my first silver bars but
it was also when I wrote my first silver article entitled "The End of
the Silver Bear Market". The date was 13th March 2003 and silver was
at a bargain $4.54. My conclusion at the end of the article proved to be
true:
"My
only reservation with that is that this is not the lowest price of the
22-year bear market. However, if this interpretation is true, then a move
beyond $5.00 will be a confirmation and you should waste no time getting on
board. So, good luck and good investing in this watershed year for
silver!"
Four
months later silver closed above $5 and another nine months after that silver
was spiking to $8.50. The bull market was underway but I was not concerned
about any silver USP at that point.
Fast
forward five years to March 31st 2008 and I was issuing a warning to
subscribers that I was exiting all my stock positions as I believed silver was
about to undergo a major period of correction (I remained out the rest of
that year). The US dollar fundamental kicked in and the USD was about to
rally and that meant silver was going down. If I had kept my silver mining
stock positions I would have taken an 80% haircut. Remember half the battle
of investing is to preserve as well as grow capital.
Finding
the bottom to silver in the ensuing credit crunch was a trickier matter.
Standard technical analysis at first suggested around the 200 day moving average
at $15 but this was no standard correction and silver sliced through that
line (though the 200 day line had proven more reliable in the past and does
so today). You may be familiar with the "Catch a falling knife"
phrase but after some analysis I suggested in my newsletter that silver would
either bottom at $6.60 or $8.15. It hit a bottom at $8.47 a few weeks later
in October.
While
I am on the technicals of price projection, it is a theoretical possibility
these prices may be hit again but I am more inclined towards a price of
$13.20 (I will explain this in my newsletter). So watch out for that price in
the months ahead! Coincidentally, silver is now about $2.50 above the 200 day
moving average ($13.50) and this chimes nicely with the $13.20 price.
But if
we go back to that silver USP - what would one class as a unique fundamental?
Let me give some real life examples of a commodity with unique fundamentals.
The palladium bull of the late 1990s was unique to palladium due to
constrictions in the Russian stockpile supply. As a result palladium
dectupled in price in three years. Another is uranium and its nuclear fuel
properties which have seen it rocket in price this decade.
But
what unique properties does silver have? Naturally silver is the best
conductor, reflector and biocide. You could almost class these as unique by
degree but I do not think any of these are big enough to drive a real bull
market.
What
about silver's almost unique monetary property? Now I believe silver is
money. Whether the market believes that and has driven silver based on that
proposition is another matter. In fact, it is pretty hard to tell whether
silver has been bought in recent years primarily as a "hard asset"
or as "money". Both these modes are perceived as stores of value
but an asset can be bought as a store of value without it being perceived as
money. Platinum and palladium were bought as hard assets but not as money.
Gold I am sure was bought mainly as money but I am not sure what the mix was
for silver - money or hard asset? I think the jury is out on that one.
One
other possible USP is silver's leverage over gold. Silver often leverages
gold but this is not a unique feature of silver. Over the 2001-2008 gold
bull, silver leveraged gold by 1.5 to 1 but platinum did 1.66 to 1 (palladium
did only 1.1 but was still suffering from its late 1990s bull bubble).
So
where is that unique fundamental we seek in silver? Perhaps we don't need
one, just ride the bull and make your profits! But there is one silver
property that may be classed as unique and that is a geological property. To
whit, there were various comments and articles going about on the Internet
that silver would be the first geological resource to be "exhausted".
Now
at The Silver Analyst we don't swallow every bullish argument for silver
unquestioningly. In fact, we take a "Berean" attitude to these
things. To be precise, one of our previous newsletters addressed the
statement that silver would "run out" in 13 years. What we found
out was that the United States Geological Survey (USGS) was stating a global
economically mineable reserves base of 270,000 tonnes for silver and a 2007
global production of 20,500 tonnes. Divide these two and you get the RP ratio
of 13.17 years.
Done
deal then - silver will be gone by 2020 and silver holders will all become
millionaires? Not quite as we "dug deeper". The astonishing fact
was that on examining previous USGS publications since 1993, they were all
saying the same thing. Global silver resources since 1994 were stated at
either 270,000 or 280,000 tonnes! In other words, it appears that the USGS
are not proactive in updating their numbers and can we place any trust in
them? One thing we can do is to calculate said RP ratio for the various USGS
reports from 1993-2007 and you get the graph below.
Note
that the silver "lifetime" has been dropping since 1993. If we
project this line towards the zero base line then the RP hits it at about
2023 or 2040. Now you have to realize that silver won't just keep producing
20,000 tonnes per annum until 2023-2040 when suddenly it drops to zero
tonnes. Something will happen before then and silver output will begin to
diminish. I can't say when that will be and since silver is a byproduct metal
this confuses the picture even more. All we can say is that within our
lifetimes silver production may irreversibly decline first in a "Peak
Silver" event.
Is
this our silver USP? If that happens then it won't matter what the dollar or
gold is doing, it will be the equivalent or greater of palladium in the
1990s. But there are objections to this USP proposition.
Firstly,
won't the price of silver just go up to make uneconomical silver deposits
accessible? Yes it will and that is what we are depending on as silver
investors! An increased price will bring more silver out of the mines but it
won't change the thesis that silver will begin to deplete first and only
delay the inevitable when silver will become so depleted it will come under
government control.
Secondly,
won't other metals experience this kind of event in a "Peak
Everything" scenario? Not quite, using the USGS reports for gold we get
an RP of 20 years, 175 years for Platinum Group Metals, 43 years for nickel,
35 years for copper and 20 years for lead. Also note that some of these
metals have higher recycling efficiency than silver which pushes their "day"
out further.
Thirdly,
can we even trust these USGS numbers? Perhaps we can't, it may even be
possible that the USGS is overstating reserves. But I read an excellent
article by Bryant Blake which looked at the reserve base of the 20 largest
undeveloped silver mines. Based on their numbers, the total reserve base of
these mines was 2.52 billion ounces or 78,473 tonnes. He further projected
that these mines would only hold back a problem for silver production until
the next decade which would accelerate into the 2020s.
I
also found another good site (www.goldminerpulse.com) which lists the reserves of the top TSX listed
silver companies at about 6.8 billion ounces or 212,000 tonnes. But note that
this total includes uneconomical resource base as well as the mineable
reserve base. Once we factor in other non-Canadian listed companies such as
mighty Fresnillo we get closer to that USGS number of 270,000 tonnes but it
doesn't look like an agreement yet to me - further study is required.
World
production of silver isn't going to drop yet but we await the day when the
USGS will begin to drop that reserves number. When that happens, the world
will perhaps begin to believe in silver's Unique Selling Proposition.
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