Silver -- the next big thing in the global markets?
Answering A Few Silver Questions
by Douglas Kanarowski

Editor's Note:  The ICFAI Press, an affiliate of the Institute of Chartered Financial Analysts of India, is in the process of publishing Mr. Kanarowski's articles on silver. In the course of communication between the two, a series of further questions arose. Below are Mr. Kanarowski's responses.

You have introduced far too many variables to answer this question as it is written. Therefore, I will only address the future of paper versus hard assets.

In economic issues, it is a good rule of thumb that when a trend has gone as far as it possibly can go in one direction, the only way it can go from there is in the opposite direction. As of 2002, there was not even one precious metals-backed paper currency in the entire world. Therefore, by definition, a move away from paper must begin. Cause and effect economic predictions are comparatively easy to make. What frustrates even the professionals is the TIMING of the expected event.

Enter the Islamic dinar (gold) and dirham (silver) coin. Taken the size of the Islamic world population and their significant financial resources, we now have in place a major force to precipitate the erosion of paper currencies. Also, and of equal importance, is the fact that on 7/8/2003, China opened their silver market to all of its citizens.

A great deal of the information about silver can be classified under two broad headings. One, how is silver LIKE gold? Two, how is silver DIFFERENT than gold? When it comes to a discussion of which metal can be expected to have the greatest percentage increase, it is within this second category where the answer will be found.

There are a great many ways that silver is different from gold and it would behoove the potential silver investor to investigate all of the differences. However, for purposes of this discussion, I will only list some of the most meaningful.

Gold is mined and accumulated. Silver is mined, consumed in micro amounts and then lost. Thus, the above ground stockpile of gold is GROWING, while the above ground stockpile of silver is SHRINKING. Presently there may be ten times more gold than silver in above ground stocks — a ratio that is widening by the day.

Gold has few meaningful industrial uses. Silver is perhaps the most versatile metal on the planet and it usually has no substitutes. As such, it is indispensable to modern civilizations.

Because gold's price has been NEAR or ABOVE its production cost for so long, there are HUNDREDS of gold projects on the books. But, there are only TENS of silver projects due to the lengthy period of prices BELOW production costs.

Gold comes from gold mines, but 70 to 80% of our silver comes from by-product production: copper, lead, zinc and gold mines. Therefore, higher silver prices will not result in a proportional increase in production.

In general geologic terms, the deeper you go in a gold mine, the richer the grade. The deeper you go in a silver mine, the weaker the grade. Therefore, most of the world's silver deposits that are found near surface have already been discovered and have been mined out.

Unlike gold, there are no known large inventories that can be dumped in the event of a run-away silver market.

What does this body of facts imply? That in some respects, silver is very different from gold — almost the opposite. And, silver will VASTLY outperform gold on a percentage basis over the next several years.

There is indisputable evidence that both metals are being powerfully manipulated which has distorted and contained the price of both. Therefore, any technical analysis is UNRELIABLE and VERY DANGEROUS at this stage. Silver, by far, has the greatest manipulation both in "time" and "amount." In the late 1800s, the U.S. government began buying up all the excess to support the silver miners. Around 1945, the U.S. government was sitting on the largest silver hoard in the history of the world and began selling until they effectively ran out in late 2002. Pick either date and you will begin to see HOW LONG it has been since we have had a free-market, world silver price. This is very, very important. This MASSIVE, free market intervention has gone on for SO LONG that most of the world's silver experts DON'T EVEN SEE IT ANYMORE! It's like an elephant trying to hide in your house! Most experts expect $6-$12 silver because IF you ignore the elephant, that's what it LOOKS LIKE it's worth.

They're wrong.

Silver leasing and trading of paper (commodity) silver entered the manipulation picture around 1990. Currently, on the NY COMEX, traders have sold short FAR MORE silver than is KNOWN TO EXIST in world stockpiles — by MULTIPLES!

Presently, the paper markets are much larger and more powerful than physical silver availability and they have neutralized the normal laws of supply and demand. It is my view that this paper market is the most significant, remaining force currently containing the price of silver. The game could end any minute, but MUST END when actual physical shortages and delivery problems manifest and large premiums are attached to physical.

Novice investors think of the phenomenon of supply and demand as a simple mathematical equation. It is not. I have done my own study and have so far identified 85 different supply and demand scenario possibilities. The good news is that there are presently no scenarios on the horizon that can derail the oncoming silver bull market. The only thing that I could dream up would be for someone to develop an economical process to extract silver from seawater.

In my two essays, "70 Approaching Forces for Higher Silver Prices" and "What Impact Will Digital Photography Have on Silver," I have outlined 73 approaching forces that haven't yet happened, but are expected to significantly add to future silver demand. A thinking person might disagree with a few. But even if you only agree with 60 of the 73, you still end up with a GIANT number! The only example in history that comes to mind and approximates this phenomenon would be an argument put forth in about 1900 that after hundreds of years of world domination, the United States was going to soon displace England as THE world superpower. A long list of "approaching forces" could have been put forth to support the argument, but FEW would have believe and ALMOST NO ONE would have acted on something so remarkably easy to see in hindsight. Before this bull market fully runs its course, everyone will know why silver is a PRECIOUS metal.

I think I have already covered the first two questions. As to the last question, all reliable inventory reports imply that known silver inventories will run out in days or months, but not years. You may find the word DAYS somewhat surprising. In this age of high finance, a relatively small amount of money could buy up all of the remaining supply with no advance warning.

This is important.

The key to this market will not be INDUSTRIAL demand as it is fairly constant. It will be INVESTOR DEMAND that theoretically has NO LIMITS. If you don't think that investor demand will kick-in in a big way, you should lower your expectations for silver's highest attained price.

I think that it is an incorrect perception to think of gold and silver as inflation hedges. A true inflation hedge would go up in value by approximately the same percentage as inflation. And then it would HOLD AT THAT LEVEL when inflation went to zero (because prices are holding at that level). A study of metal prices shows FALLING metal prices when the rate of inflation decreases.

A more correct view would be to think of precious metals as an ANXIETY hedge. Inflation produces anxiety, but so does war, stock market crashes, bond defaults, civil unrest and a whole host of other possibilities. Clearly, the world seems to be moving into a period of greater and greater anxiety, which should help fuel a rise in all metals (gold, silver and platinum).

To be successful at warfare, you usually need to adopt a different strategy for different enemies. Likewise, in the economic realm, each new investment "contest" is unique and a strategy for success should be worked out beforehand (along with an exit plan in case you are wrong). According to my work and the work of others, I think that once silver finally breaks lose from the grasp of the paper market, the price will move like nothing we have grown accustomed to seeing. In this scenario, most traditional investment strategies will utterly fail.

If the strategy of the silver investor is to wait for the BIG PRICE BREAKOUT, I think it will already be too late to buy a meaningful, sizeable physical investment position when the big move becomes visible. Those who are waiting to buy, but haven't yet done so, are playing a game of standing as close as they possibly can to the railroad tracks without being hit by the passing train.

Silver mining stocks will always be available... at some price. But, if they are already charging ahead at 25% per day for days on end, will your current investment strategy get you into the market and get you the number of shares that you want to own? Probably not.

If it is not already obvious, I think that the winning strategy for this market is to buy your tickets now, take your seat and wait for the inevitable train ride of your life.

© 2003 Douglas Kanarowski. All rights reserved.

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Douglas Kanarowski
Mariposa, California USA
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