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It's been a long time since I've actually written
anything on silver. I make my usual comments in my Daily Reports but
that's been the extent of it for almost two years. I rode the first silver
rocket up from 4.75 to 8.50 only to watch most of my profits disappear as the
rocket came tumbling back to earth. Admittedly, I
was somewhat wiser for the experience. I then took a seat on the bench for
more months than I care to remember and just watched. Well, actually I did a
lot more than watch; I studied. There were a lot of fits and false starts but
nothing of any consequence. Just a long period of sideways movement that,
with 20/20 hindsight, one can easily classify as "accumulation". Of
course, you don't actually know its accumulation until the market turns to
the
 
upside. Take a good
look at the Weekly Chart of silver above and you'll see that the price hung
around the 7.25 area for more than a year. That's a long time for a
speculator to have his hands tied, but sometimes it's necessary in order to
'catch the trend' at the right moment. I finally decided to take the plunge
back in early September of last year when silver dipped below 7.00 for the
umpteenth time. After that, I bought into the three minor corrections that
occurred as the price approached 8.00, 9.00, and 10.00 respectively. Once the
10.00 mark was breached, I again sat on my hands and watched. I've seen
silver trade as high as 14.69 last week and it closed at 12.96 on Friday
April 21st. Now I am looking to buy some more as I am certain that this
particular leg up will go higher and run longer than most anticipate. As far
as the long run is concerned, I see a long Bull Market for silver that
stretches well beyond the year 2010 and will eventually produce prices that
we can't even imagine today.
After reaching a Bull Market high of US $48.70/ounce
in 1980, silver began a long decline that eventually led to a Bear Market low
of $3.52 in 1993. That was a full six years before gold managed to bottom! It
then began a long period of consolidation, trading in a range that extended
from $4.15 on the low side to $6.30 on the high side. That accumulation will
now serve as a very powerful base for a rally well into the double-digits. During
that time there were a lot of false starts and dashed hopes as rally after
rally fizzled, but nothing of substance. Most of the speculative world gave
up on silver and even went so far as to "downgrade" it from a
precious metal to an industrial metal. I suppose you could say that it was
punishment for its poor performance. In any event, we began to see signs of
life in late 2003 and then the first wave of speculative buying hit in early
2004, driving the price up close to $8.50/ounce. Like gold's first advance
that began in mid-2002, the silver rally failed and we fell all the way back
down to +/- $5.50. Discouraging to say the least! So much so that most
investors lost sight of the true market forces that would eventually propel
silver through the $10.00 barrier. I'll go so far as to say that the Bear
Market in precious metals devastated silver much more than gold, platinum, or
palladium. Peru,
which produces 15% of the world's silver, saw a drastic decline in silver
production as mines closed down throughout the decade of the 90's. With very
few exceptions, you just can't mine silver for a profit with prices below
$5.00/ounce, and a good percentage of mines actually need to see $7.00 an
ounce.
Currently, demand outpaces supply by 3% per year and
I've seen estimates that put the deficit beyond 6% per year. Everyone talks
about the decline in silver usage in photography, but I maintain that that
has been more than offset by the development of new uses for silver in
medicine, mobile phones, solar power, and computer technology. Then there is
the increased demand in the jewelry industry as
well as the silver ETF that the SEC is trying to keep on the back burner. If
the gold-backed ETF is any indication, a silver ETF
will be very well received. So we have new requirements surfacing regularly
leading to increased demand, the inability to increase (or even maintain)
current supply, and a dwindling stock of silver. If the laws of supply and
demand still work, then the price of silver must head up. How high? Lets take a look.
I would like to say that silver is, in my opinion,
the cheapest thing out there. It's even cheaper than gold, and that's saying
something. To date, gold has retraced +/- 60% of its Bear Market decline
(875.00 to 252.00) while silver has managed a mere 20% recovery of that same
decline (from 48.70 to 3.52). Simply put, it is well behind the curve but it
will catch up. Then you could compare it to the price increases of copper,
lead, and platinum and you'll see that the silver rally is still in the
cradle stage. That's why I can sit on my hands when silver drops 1.99 in a day like it did
last week. I know what's coming down the road.
For further clarity, let's take a look at the
Silver/Gold ratio, i.e., how many ounces of silver does it take
to buy an ounce of gold. Traditionally, the average has been around 30:1.
When both were at their respective Bear Market lows, that average was close
to 70:1. When silver and gold hit their highs in 1980, that average dropped
to 18:1! Currently, this ration stands at 50:1. Most of my clients know that
I have projected a Bull Market high of US $3,000 for an ounce of gold in the
year 2011. Using that same 18:1 ratio we saw in 1980, that equates to a
silver price of US $166.00/ounce. History often repeats itself because
human emotions are the same under similar circumstances over time; therefore
my projection for a Bull Market high in silver is US $166.00/ounce. And that
could be on the low side given coming problems with the dollar and the U.S. economy.
Please note there are no outrageous assumptions here, only the premise that
history will repeat itself. If you want some perspective, take the 1980 Bull
Market highs and adjust them for inflation using government statistics, and
you would probably exceed my projections!
It's even more amazing when you stop to think that
silver is still regarded as a commodity and a pretender to the "real
money" throne that gold holds. Gold used to be a commodity, but not any
more. It became money when it entered the second phase of its generational
Bull Market. Silver has made some progress though as it moved up in status
from an industrial metal to a precious metal. Eventually silver will take
that inevitable next step to being regarded as money. I believe that will
happen when silver is able to close above the spot price of $20.73. That
represents a .381 retracement from our Bear Market
low back up to the Bull Market high of 1980. It is my belief that you will
see a 20.73 print sometime this year and it will coincide with gold's first
attack on 728.00. There will be the inevitable "minor" corrections
along the way, and volatility will be off the charts, but the trend will
continue to be up. But the real test for silver will come when it attacks the
$26.11 spot price. That's the halfway point between the Bear Market low and
the Bull Market high. Once that falls, silver should really and truly be off
to the races.
In conclusion, market forces dictate higher silver
prices over time. There will be the occasional bear raids, and they will have
some minor successes, but over the long run we'll see much higher prices. How
should the average investor play the silver bull? In my opinion, I would focus my attention on two stocks: Coeur
D'Alene Mines Corp. (CDE) and Silver Wheaton Corp.
(SLW). I have included a Daily Chart of CDE below, and as you can see, it has
done very well
from just over US
$4.00 in early January, we closed at $7.06 on Friday, April 21st. In case if
you're wondering, SLW did even better. These are the
two premium silver producers as far as I am concerned and should be
accumulated, in small amounts, on a monthly basis by the average investor.
Additionally, the average investor should accumulate silver coins on a
regular basis, with no attempt to catch the dips. Some day you'll need them
when silver takes its place along side gold as the only real money. No one
except the most sophisticated investors with the deepest pockets should try
to play the futures market. Why? Here is a case in point. On April 20th we
saw a one-day decline that represented a US $10,000 loss per contract.
Margin and human nature being what they are, I have no doubt that a large
number of small investors were wiped right off the board with that move. The
simple approach outlined above will be more than sufficient to give a small
investor a significant profit. And that doesn't take into consideration the
cash dividends these companies will pay out as silver soars. My best advice
is to avoid the trading game altogether and just accumulate,
little by little, silver coins and quality stocks with no attempt to buy
bottoms or sell tops. That's a fool's game. Just buy and
sit tight!
Enrico Orlandini
Dow Theory Analysis
Ignacio Merino 636, Santa Cruz,
Miaflores,
Peru
Phone: 001-51-56-973-5599 - Fax
: 001-51-19-280-8796
Email: ebo@dowtheoryanalysis.com
Website: www.dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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