|
|
“We will drink chicha
from your skull, from your teeth we will make a necklace, from your bones we
will make flutes, from your skin we will make a drum, and then we will
dance.” – Ancient Incan popular
rhyme describing the fate of those who opposed Incan might.
The ancient Incan empire
was the largest and most advanced empire in the Americas before it was
“discovered” by the Europeans. Originally a Peruvian
highland tribe, the Incas spread through campaigns of conquest until the
empire in the fifteenth century almost rivaled the
size of the classical Roman Empire. Unlike the colorful
quote above, the Incans actually typically allowed conquered tribes to live
in peace, and they were usually agreeable masters. The Incans were
incredibly technologically adept, and they developed great urban centers, a road network that stands to this day, amazing
administrative acumen, and achieved remarkable skills in metal mining,
refining, and working. Like most of the cultures of the Americas, the
Incan religion relied on human sacrifice to appease its various
deities. Although not as bathed in blood as their Aztec neighbors to the north, sacrifices were still an
important pillar of Incan faith. It was considered a great privilege to
be sacrificed, as only the physically and mentally best of the people were
allowed the honor of dieing
for their god. The sacrificial victims were laden with silver and gold,
and dispatched to eternity in various creative ways. Beautiful gold and
silver jewelry was carefully created for these
ceremonies with unparalleled craftsmanship. To the Incas, gold was
known as the “Sweat of the Sun” and silver as the “Tears of
the Moon”. When the Spanish conquistadors arrived to loot the
empire for Spain, they were awestruck at the amount of silver and gold the
Incan empire had accumulated. The Spanish appropriated the romantic
name “Tears of the Moon” for silver, which translated into
“Lagrimas de la Luna” in their native
tongue.
Silver was incredibly
important all over the ancient world, not just the Americas. As hefty
amounts of ore must be processed to refine silver in quantity, the majority
of the ancient silver was likely a byproduct of
copper smelting. The ancient Greek empire, however, long before the
Roman and much later Incan civilizations, actually grew to power through
specialized primary silver mining. Around the sixth century BC, silver
was mined in increasing quantities a few dozen miles south of Athens in the Laurion district. Although the mines had been
around since the Bronze Age, the Athenians increased production and used the
silver to finance the city-state’s rise to power. In 580 BC, they
minted their first silver coin, the famous Athenian drachma. Without the
Laurion silver mines, Athens would have lacked the
funds to start an empire. Some historians believe an incredible 160
million ounces of silver were produced from the mines! Even the
citizens of Athens had shares in the silver mining operations, and everyone
had a vested interest in an uninterrupted supply of silver to finance the
civilization. In 512 BC, the Persians invaded northern Greece and
conquered other key Athenian silver mines in the north. In the battle
of Marathon in 490 BC, the Greeks routed the Persians to reclaim part of
their silver supply, but they knew another campaign was inevitable.
After convincing the populace to forgo normal silver dividends, the Athenian
leadership used silver mining proceeds to finance construction of one of the
first large navies, eventually exceeding 130 ships. When the Persians
returned a decade later under the personal command of the brilliant tactician
and conqueror King Xerxes, they destroyed the Greek army at Thermopylae and
marched south to raze Athens. As Athens burned, the Greeks’ new
navy fortunately remained intact and they were able to sink the Persian fleet
at Salamis necessitating another Persian retreat from Greece.
Athens’ fortunes waxed and waned with the fate of its silver
mines. A few decades later, Athens fell in the Peloponnesian wars as
the bountiful silver mines of Laurion were shut
down by a brilliant maneuver by their rival Spartan
army. The playwright Aeschylus had called Laurion
the “treasure house of the country”, and the Spartans, knowing
this, set up military camp between Athens and its mines rather than heading
home for the winter. Thucydides chronicles the resulting chaos, as the
dwindling silver supply and chronic shortage of money led to the Athenians
losing the Peloponnesian wars. Without silver, classical Greek thought,
the basis for much of our modern western civilization,
may never have developed.
Almost two and a half
millennia later, silver is still an important commodity in our modern
world. There are a myriad of contemporary uses for silver, including
general industrial applications, photographic applications, and jewelry and silverware. New silver alloys with aluminum and titanium and lithium are among the strongest
metals known, and are used extensively in demanding aerospace and military
applications. The holy grail of high temperature superconductors will
likely be discovered through creative applications of silver. Silver
has crucial properties necessary for the highly sought after frictionless transmission
of electricity, and is used extensively today as an electrical conductor in
all kinds of high-technology devices. Silver is also an important
industrial catalyst, vital for the production of many widely used products
today, including certain types of plastics. New silver oxide batteries
have twice the electrical energy storage density of comparable lead-acid
batteries. The medical industry uses silver extensively, for everything
from water and air purification to X-ray applications. The fascinating
list of uses for silver goes on and on, and could easily fill a respectable
sized tome.
For the potential
investor the critical question regarding any investment is … is it OVER
or UNDER valued at the moment? If silver is expensive, there is no
sense investing in it. If it is cheap, however, there could be
compelling opportunities for large profits in silver. In this essay we
will attempt to answer this important silver valuation question, as well as
briefly address silver supply and demand fundamentals. As always,
history is the perfect place to launch our exploration. The following
graph outlines the nominal price of silver over the last 30 years…
As an initial indicator of undervaluation, the
monthly average closing price of silver since 1970 has been around $6 per
ounce. Five major rallies in silver have occurred in the last three
decades, concentrated around the great commodities boom of the early
1980s. These silver rallies lasted, on average, 8 months, and produced
stellar 176% average gains. It is quite evident that each of the past
rallies was VERY steep and fast, demonstrating the incredible speculative
potential of the white metal. When silver jumps in price, it tends to
move rapidly and decisively, producing very large gains for speculators.
The second rally is particularly interesting. Although not evident in
this graph, silver reached an intra-day high near $50 an ounce in early
1980. From its monthly low closing price of $1.32 in November 1971, the
lagrimas de la luna saw
an increase in price of over 37x! This kind of historical leverage is
absolutely extraordinary, and even exceeds gold’s incredible run from
$42 to $850 (20x) over the same time period.
Historically, silver has been the most volatile and explosive of all the
major metals. As we live in an age where the fiat money supply
unfortunately multiplies like rabbits, the real modern history of silver
prices remains obscured until we use inflation adjusted dollars for our
analysis…
In inflation adjusted constant year 2000 dollars,
silver reached a monthly closing high of $78 in late 1979. The
intra-day $50 nominal high breached in early 1980 translates into an
INCREDIBLE $110 in today’s weakened dollars! Silver has, from a
real perspective, lost a massive 95% of its value in 20 years. It is
beginning to look like a perfect contrarian play. The monthly average
closing price of silver in real 2000 dollars is over $11. This
indicates silver, currently languishing below $5, is trading at roughly 45%
of where it has averaged over the last 30 years, currently far on the
undervalued side of reality. The chart pattern above is also quite
intriguing. The red lines marking the tops and bottoms create a kind of
funnel, in which silver has spiraled around until
collapsing into its maw. Like light trying to escape from the
gravitational vacuum of a black hole, the silver price has not yet pulled out
of this death spin. From 1991 to 2000, the chart looks kaput! One
wants to pick it up and shake it to see if there are any broken parts
bouncing around inside. From a contrarian perspective, this kind of
multi-year distributive low is a very appealing sign. After an almost
ten year real bottom in silver, the metal appears to have nowhere to run on
the chart but north… As silver and gold have been historically
correlated positively, a look at the white metal in a line up next to the
king of assets is in order…
The above graph is also in constant 2000 dollars, as
inflation has had a devastating affect on general American price levels in 20
years of bloated government largesse and is a crucially important variable to
factor into investment decisions. The gold and silver lines on the
graph further accentuate silver’s incredible volatility and
leverage. In the gold spikes, note the broader flatter base of each
rally. The rallies appear wider, develop more slowly, and take more
time to rise and fall. Silver, on the other hand, tends to take off
like a bullet once it is time to rally, with little or no warning in the form
of gradually rising prices. Silver is the ultimate speculative play of
the metals world, as vast gains accrue over a very short temporal span when
the white metal gallops. The lines also emphasize the fact that silver
in real terms has fallen much further than even the arch-nemesis and
perpetually shorted enemy of global fiat currencies, gold, has stumbled since
1980. Over the whole 30 year event horizon encompassed above, the white
and yellow metals have had a good positive correlation of 0.66. From
1970 to 1985, the metals had a very high correlation of 0.86. In high
inflation environments, both gold and silver shine brilliantly, with silver
providing returns exceeding gold when a major rally occurs. With crude
oil trading above $35 per barrel, the broad commodities indices reaching
multi-year highs, the M3 money supply growing at unfathomable rates as
government discipline (an oxymoron) continues to wane, and Wall Street
knowingly lying through its teeth that all is peachy regarding equity
valuations, there is an incredibly high probability that we are plunging into
a highly inflationary environment in the States. Barring a miracle,
like a new gold standard being established (interestingly, dividing official
US gold reserves by current M3 yields a gold price per ounce of a
jaw-dropping US$25,778! … that’s right, PER OUNCE) higher
inflation is virtually inevitable. From 1986 to 2000 the silver and
gold correlation dropped to a noncommittal 0.47. From 1995 to 2000, the
period when the gold carry trade and gold suppression agenda began in
earnest, the historical correlation has actually turned slightly NEGATIVE, to
–0.08. Yet another indicator of the continued perplexed surreality that consumes the global metals markets
today…
As our quick and dirty
historical perspective on silver yields indications of the metal being
undervalued quite dramatically in historical terms, there is ultimately only
ONE factor that will affect future prices of silver (or any commodity)…
global physical supply and global physical demand. If supply exceeds
demand, prices will drop. If demand exceeds supply, prices will
rise. The academic discipline of economics has done a wonderful job
distilling the infinite number of variables relevant to any market into a
simple and eminently understandable intersection of supply and demand
curves. The graph below outlines the global silver supply since 1990,
and its constituent components…
This may come as a surprise to the many
entities shorting the silver market at the moment, but the ONLY place humans
can get new silver (before we figure out how to mine asteroids, at least!) is
from MINING. The most important component of global silver supply by an
order of magnitude is annual mined production. A CRUCIAL fact to
realize while analyzing silver is there are not a lot of primary silver
producers in the world today. Much of the silver supplied to the market
by mines is simply a by-product of mining other primary metals, including gold
and copper. In the last decade, mined silver supply provided to the
market only grew by 4%! Even if silver leaps dramatically in price, it
will be quite difficult to increase global mined production for many years.
The 500 million ounces of fresh mined silver supplied annually is
likely to remain relatively constant in the foreseeable future, whether
silver languishes or rockets. This is a tremendously bullish factor for
the metal. Scrap silver supplied to the market grew a little faster,
although 29% growth over 10 years is really quite small. Other supplies
of silver increased the fastest, weighing in at a 158% gain over the
decade. These other supplies include official sector sales of
silver and an implied disinvestments number (what accountants call a “plug”).
Without this “other” component of silver supply, the silver spot
price would be MUCH higher than it is today. The second all-important
question for silver speculators rapidly becomes apparent. Can the
official dumping and private selling of silver continue into the foreseeable
future? Before we address that issue, let’s take a gander at the
other half of the supply demand equation, global silver demand…
Although mined supplies
of silver have flatlined over the last ten years,
demand continues to grow in all major areas of silver consumption. The
general industrial demand grew 25%, and, as mentioned above, promises to
continue to grow in the future as new and innovative uses for the amazing
properties of the metal continue to be discovered. This demand is very inelastic, meaning a rise in the price of silver will not
affect this quantity demanded much if at all. The amount of silver used
in a given device is very small, so silver constitutes a trivial cost per
unit. Even a 1000% increase in silver prices will only result in a rise
in price of most devices of mere pennies per unit, so this demand is unlikely
to slacken and it will continue to grow into the foreseeable future.
Definitely very bullish for the white metal! Photography is another very
important use of silver, as the white metal is absolutely critical to
conventional picture producing techniques. Silver halide crystals are
suspended on film, and they react when light strikes them, allowing a picture
to be formed. One ounce of silver can produce about 5000 color photographs, so the cost of silver per unit of film
is also incredibly low. Like the industrial demand, photography demand
for silver is also very inelastic to price changes. Photography demand
grew by 11% over the decade, and will continue to grow into the foreseeable
future. Many have heralded the brave new age of digital photography as
the deathknell of photographic silver demand.
That hypothesis, although it may be proven correct over many decades, is
largely irrelevant to current silver demand. Digital cameras are really
wonderful gizmos that are a lot of fun to use, as all early adaptors
know. Yet they have some drawbacks that make it unlikely they will
replace analog photography anytime soon.
Photographs are a great human invention, and allow us to share priceless
times and emotions with family and friends. There are many environments
where pictures are taken where one would not want to bring their state of the
art digital camera. Imagine taking your family to the waterpark or the
ocean… would you rather have a $1500
camera you constantly have to worry about or a $5 disposable that could get
wet or lost without you shedding a tear. Price is also a drawback to
digital adaptation. Due to the crushing tax load on people in America
and around the globe, many families are living paycheck
to paycheck and simply cannot afford a digital
camera, a computer, and a high-quality printer to print their
photographs. Also, one of the best things of sharing photographs is the
social aspect. Can you imagine everyone gathering to look at wedding or
family pictures crowded around a 2” LCD screen on a camera rather than
passing a book around with physical photographs? Finally, even IF
everyone in the States, Japan, Europe, and Australia would suddenly decide to
buy a digital camera, there are still over a billion people in China, a
billion in India, and billions more in less affluent countries around the
world. All these people living in less technologically advanced nations
will probably love to take photographs of their families and life milestones,
but almost none will be able to afford the technology of digital cameras for
decades to come. Even if analog photography
demand dropped to zero in the first world, global analog
demand will eclipse previous developed country demand as the rest of the
world experiences the awe of cheap and easy analog
photographs. From a medium term speculation perspective (say less than
5 years out), digital photography will not even begin to dent silver demand,
and it is unlikely it will ever gain complete global acceptance.
(Anyone who has lived in or visited a third world country recently
understands perfectly. Even one hundred years after the automobile was
invented, they are still RARE in these environments. Computers are
virtually nonexistent, and subsistence is the struggle of the day, not who
has the better gadget.)
Jewelry and silverware demand are also likely to continue
to rise in the future, for several reasons. Silver has been a
wonderfully beautiful and durable metal loved by humans for six
millennia. It will still be a beautiful and durable metal loved by
humans in the future. People will continue to buy jewelry
indefinitely, and silver consumption globally will increase as the standard
of living begins to rise around the world. As an added bonus, jewelry purchases are typically emotional and irrational
(hold the flames! At least irrational from a cashflow
investing standpoint!). After all, is it financially rational for a
young man deep in debt to borrow thousands of dollars more to buy an
engagement ring? Interestingly, jewelry and
silverware demand grew by 38% over the last decade, far exceeding the other
major uses of silver in growth terms. Silverware is also likely to
grow. In Britain recently, an inventor discovered a new alloy of silver
to use for silverware that does NOT tarnish! It is utterly amazing that
after six thousand years of silver working someone can still discover new
common applications for the metal. The WORST thing about owning
silverware, as all hosts and hostesses know, is polishing the darned stuff
when it tarnishes. If that ugly task has indeed been slain, even
younger non-traditional silverware folks may began buying new
low-maintenance, highly durable, and incredibly beautiful sets of silver.
Not surprisingly,
official coin demand declined 21% over the decade. With silver prices
apparently dead and rotting in the sun, it is not shocking that fewer coins
are demanded. Silver investment demand is also trivial currently, but
it is the potential rocket booster attached to the silver price. Once
the inevitable rise in the silver price based on supply and demand
fundamentals begins, more and more investors will take notice of this phoenix
rising from its grave as it appreciates. Gradually, investment demand
will rise, putting further pressure on inelastic physical supplies and
driving up prices. This investment demand will create further price
rises, which will beget more investment demand, which will spawn more price
increases, which will further increase silver desirability in the investment
world, ad infinitum. Investment demand is the wildcard that could push
silver prices to unbelievable heights over a very short period of time.
With mining supply
stable, and all major areas of silver demand growing, there is a HUGE gap
between silver produced annually in mines and annual silver consumed…
This mined supply deficit, as any freshman economics
major could discern, is exceedingly bullish for the price of silver.
Most industrial and photographic applications of silver are
destructive. It is not cost effective, very difficult, or impossible to
retrieve the silver used in most devices and silver applications. That
silver is effectively gone from the market forever. With deficits
ballooning this rapidly, world inventories are shrinking dramatically to make
up for the shortfall in mined silver the world consumes each year. As
the global metals markets can be an incredibly secretive and incestuous
little world, it can be difficult to get solid numbers on world silver
inventory levels. Some estimates indicate that global stocks of silver
may only be a few hundred million ounces, or less than a single year’s
deficit! If this is the case, we WILL all know about it in the next 12
months, because the moment the physical silver shortfall in mining production
is not augmented by private and public sector silver sales, the price will
leap up, exhibiting all its historical fury and violence at being long
suppressed.
As the motivations, methodology, and desired outcome
of the gold carry trade and gold suppression scheme employed to prop up fiat
currencies and global stock markets have been exposed by many brilliant
analysts, silver ALSO appears to be manipulated over the last five
years. The primary motivation for suppressing silver is probably peripheral
to gold. If silver rose dramatically in price, it would inevitably draw
attention to the gold market and increase gold physical demand. If gold
physical investment demand (not paper derivatives) increases substantially,
it will break the backs of those entities short thousands of tons and many
years total global production of the metal. Although out of the scope
of this essay, the evidence of short side manipulation of the silver market
is quite compelling. Gold Eagle has many excellent essays on the
subject. The lionheart of the silver world, a
man who will no doubt one day be hailed as a prophet, is Ted Butler.
Mr. Butler has conducted much outstanding research on the silver markets and
continues to fearlessly confront the silver shorts. If you are
interested in investigating silver manipulations and chicanery further, I
highly encourage you to search for Ted Butler on Gold Eagle or visit his
website, www.butlerresearch.com.
From a historical valuation perspective,
and from the crucial supply and demand perspective, silver appears to be
dramatically undervalued and set for a massive leap in price. It is a
textbook contrarian play, and the great contrarian Warren Buffet purchased a
VAST amount of silver a few years ago. Being a contrarian requires
great courage, as investment purchases are made when everyone else spurns an
asset and holds it in contempt and derision. It is, however, the
ULTIMATE investment strategy. In silver, there is an anomalous current
opportunity to buy an asset that has withstood the grueling
six millennia test of worth… at its lowest real prices in over thirty
years. Like every other asset valuation in history, silver prices are
cyclical and will inevitably test new historical highs as the next commodity
bull market begins. With the CRB commodity index at multi-year highs,
crude oil eclipsing Gulf War levels, gold ready to
explode, and even some incorrigible equity bulls whispering the naughty
“i” word (inflation), the bright light
of investor sentiment will likely soon settle on silver. When the rest
of the market figures out what a good deal it is (or global inventories run
out) the price will EXPLODE like a fusion bomb. Buy cheap sell
stratospheric!
The lagrimas de la luna WILL once again shine brightly,
and global investors will place silver back on the revered pedestal from
which the ancient Incans practically worshipped the amazing metal.
Adam Hamilton, CPA
September 8, 2000
So how can you profit from
this information? We publish an
acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of
actual stock and options trading based on all the lessons we have learned in
our market research. Please
consider joining us each month for tactical trading details and more in our
premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm
Questions for Adam? I would be more than happy to
address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.
Thoughts, comments, or
flames? Fire away at zelotes@zealllc.com. Due to my staggering and
perpetually increasing e-mail load, I regret that I am not able to respond to
comments personally. I will read
all messages though and really appreciate your feedback!
Copyright 2000 - 2006
Zeal Research (www.ZealLLC.com)
|
|
