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Silverinstitute
1980 to 2013: From bear
to bull
In 1980, the price of
one ounce of silver reached $ 50. Today, the purchasing power of the US
dollar is substantially less than in 1980.
The price of one ounce
of silver would have to rise to $ 150 to reflect the value of the US dollar
thirty years ago, assuming an average annual inflation of 3.5%.
During the financial
crisis of 2008, the silver price corrected 57% from the high of $ 20.79 down
to $ 8.95. This correction was followed by a spectacular rise of more than
400% to $ 48.42. A correction was inevitable and a drop of 42% followed that
phenomenal rise. So far, the silver price has recovered 14%. The present
up-leg started in May of last year and should lead the silver price to a new
all-time high.
The long-term picture of
the silver price
The bull market of the
silver price started towards the end of 2002. On the way from $ 4.02 to the
recent high of $ 48.42 (an increase of 1,100%), several significant
corrections took place, the most severe one in 2008 when the silver price
sank by 56% only to jump 440% to a new high since the bull market started.
“The bull market is not over. However, at present, a correction seems
to be overdue.” we wrote in March 2011.
During the past ten
years, whenever the PMO Indicator shown above exceeded 10 points, we would
have been well advised in taking profit. On the other hand, whenever it fell
to or below the 0 point line, it would have been opportune to buy. 2008 was
of course an aberration or a one-time opportunity – or the opportunity
of a life-time as we wrote at that time.
The present correction
differs from the previous ones as those were relatively short-lived while
this one has lasted for almost two years. When it will end, no chart can tell
and some famous investors do not believe that charts offer a reliable
guidance. For example, Peter
Lynch once commented, "Charts are great
for predicting the past." Warren
Buffett has said, "I realized technical
analysis didn't work when I turned the charts upside down and didn't get a
different answer" and "If past
history was all there was to the game, the richest people would be
librarians."
Fundamental
Considerations: THE RISING SILVER
DEMAND
Silver is unique. Its
natural beauty is legendary. Its range of applications is exceptionally
broad. As a precious metal, it has been a source of human adornment since the
beginning of time, such as a component of fine tableware, appropriately
called silverware. As a light-sensitive element, it has revolutionized
preservation of memories in the form of photographic images. More recently,
its unique properties comprising of anti-bacterial qualities, corrosion
resistance, malleability, ductility, reflectivity and conductivity have
opened new possibilities for a myriad of other industrial applications.
The demand that pushes the silver price higher
World Silver Demand in millions of
ounces (Source: World Silver Survey 2011)
Implied Net Investment
demand, industrial demand and demand for coins cause
the silver price to increase. Without it, the silver price would never have
performed as it did. Industrial demand and demand for coins and medals are
expected to grow further.
The Gold / Silver-Ratio
In times of a crisis, as
in 2008, gold tends to perform better than silver. In times of confidence or
hope, as at the end of 2010, silver fares better. At present, the gold/silver
ratio is in neutral territory as investors feel uncertain as to which way the
major economies will evolve.
As the major European
countries struggle to control the debt bubble, some confidence may creep back
into investors’ sentiments which could then cause the gold/silver
ration to fall back towards the 40 point level. This would cause the silver
price to rise toward the $ 40/ounce level with the gold price remaining at
the present level of $ 1,650. Should gold rise to $ 2,000 (not an unrealistic
scenario), the silver price could move back to the $ 50 level.
Silver in Industry
From non-corroding electrical switches to
chemical-producing catalysts, silver is an essential component in nearly
every industry. Its unique elemental properties make it impossible to substitute
and its uses span almost every sector of industrial application.
The distribution of electric power depends
upon silver contacts in switches and circuit breakers. Silver contacts in
membrane switch panels are now standard in control panels for machinery,
chemical industry processes, railway traffic controls and elevator buttons.
Silver oxide and zinc batteries have twice
the capacity of lead-acid batteries, making them the power source of choice
for television and film crews, aircraft and submersibles. Unlike other
substances, silver performs well at high temperatures. For example, silver
batteries are the only kind that can function at the high temperatures found
deep in oil wells.
Another important use is in radiography,
the use of photo film to evaluate the internal condition of materials. This
technique is key for the discovery of structural
flaws.
Silver can be bought
with little margin ($ 1,000 per units of 5,000 ounces):
If somebody buys silver
for USD 150,000 (5,000 ounces) and risks USD 15,000, he could make a profit
of USD 100,000 if the price rises to $ 50 and lose his investment of USD
15,000 if the silver price drops to $ 27.
After the silver price
rose to $ 49 in April of last year, it corrected down $ 27.07 by December of
the same year. It has since recovered to $ 32.
Earlier this month it
was published, that the demand for both gold and silver coins has been
record-breaking as 2013 began. So much so, that now after selling over 6
million silver coins in 2013 so far, the US Mint has run out of silver eagles
and has suspended sales. Furthermore, the Mint is saying that it will not
restart sales until January 28th!
Silver is again our
preferred precious metal!
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