Look
for the Silver Lining: Editors note: This article was written 11/18/2000. Market forces combined with the international dynamic have,IMO, only intensified the reality of the author's views. -JSB INTRODUCTION
During Lyndon Johnson's presidency, silver was removed from most U.S. coinage as the federal government began to develop far more inflationary policies (i.e., the days of "guns and butter"). By the early 1970s, silver (which the government said had been "demonetized"), began to rise in price along with gold, platinum, oil, inflation, and U.S. interest rates - ultimately rising 2500% by 1980 (i.e., from about $2 to $52/ounce). Wall Street, the government, and conventional wisdom later attributed the rise to "market manipulation" (or cornering) by Texas oil billionaire Bunker Hunt and his brother Herbert, but this was not true. The Hunts did take very large positions in silver (i.e., at least one hundred million ounces) because the price was cheap and the inflation-induced upside potential was huge. They bought most of their silver under $10 per ounce and all of it under $15. These purchases of an underpriced commodity were not unlike the very large purchases of silver (or silver shares) over the past year or two by Warren Buffett, George Soros and Bill Gates - who, like the Hunts in the '70s, recognize a very undervalued commodity in a sea of very overvalued investments. In the late '70s speculators jumped into the silver market and gave the metal its final run to $52. The ultimate collapse of silver from this overpriced pinnacle was blamed on the Hunt brothers by Washington and Wall Street. But that was as dishonest as the non-stop economic/financial lies that come out of Washington and Wall Street today, and the manipulation by financial officials was as blatant then as it is today in financial markets. The Comex and the CFTC (Commodities Futures Trading Commission) changed the silver trading rules (i.e., they raised the margin requirements to 100%; they refused to let the Hunts take delivery of their silver; and they allowed only futures sell orders, not buy orders). Of course the market could do nothing but collapse. But first (before changing the rules) a number of the board members of the Comex and the CFTC shorted massive quantities of silver. They made billions in the greatest financial manipulation in history - up until that time and blamed the Hunt brothers for the collapse of silver. [ED. NOTE: Today's stock and financial market manipulations are even larger and more blatant.] Over the past 20 years, silver has given up most of its 1970s gains and has retreated to the $5 range (where it has been building a huge base for several years) and where it is trading today (in inflation-adjusted terms) at its lowest level in almost 100 years. It is today (i.e., $4.92 at this writing) the most undervalued investment vehicle in the world, a fact that has not been overlooked by Buffett, Soros, Gates and other large value conscious investors. Today, the fundamental factors in the silver market are very similar to, but even more extreme than in the early 1970s. Industrial, consumer, and jewelry demand for silver are rising all over the world even as production is declining. The greatest supply/demand shortfall in history now exists - even greater than the one the Hunts spotted in the early '70s, which, along with sharply rising inflation, helped to trigger the 25-fold rise during that decade. A similar confluence of factors: rising global inflation and interest rates; rising oil and commodity prices; severe silver shortages; and huge political instability in the Middle East all bode very well today for this long overlooked investment vehicle. And as long-time precious metals investors know, silver is by far the most volatile and potentially profitable of all the precious metals (i.e., when it moves, it can literally double overnight). BULLISH SUPPLY/DEMAND FUNDAMENTALS A historical perspective of silver supplies might be helpful: A half century ago, at the end of World War II, total known (i.e., above-ground) stocks of silver were over ten billion ounces, with the U.S. government holding 4 billion ounces of that total. At that time we were entering an era of unprecedented global economic expansion and prosperity which has lasted to the present. During this era, silver was consumed in a variety of vital modern applications at a phenomenal rate. Today, known global stocks of silver (in private or government hands) have shrunk over 90% to under a billion ounces. This 9 to 9½ billion ounce drawdown was the result of a persistent shortfall between supply and demand which continues to this day. Today, demand for silver is 170% of mine supply, and continues to grow. A severe deficit has existed between demand and supply for over 10 years now. It was bad in the '70s; eased off in the '80s; and was huge throughout the '90s. This deficit has accounted for the drawdown in above-ground supplies. The great majority of the above-ground stocks (or inventories) have been depleted to fill the supply shortfall and avert a price explosion. These supplies are now effectively gone. 1. SILVER DEMAND - Similar to platinum and palladium, the lion's share of demand for silver is for industrial applications, in which the metal is a small part of the finished product. Consequently, if silver goes up 3, 5 or 10-fold (or even 25-fold as it did in the 1970s) it will diminish industrial silver demand very little (i.e., if a $1,000 item has $2 worth of silver, and the price of the silver content of that item rises to $10 or $20, it will not keep the manufacturer from using silver, or the end user from buying the item). Industrial demand for silver has been explosive since 1950 (but especially in the 1990s), using up most all of the 10 billion ounces of global reserves accumulated since the days of the Roman Empire. Prior to the twentieth century, silver was used primarily as a monetary metal - hoarded like gold. However, in the last century, industrial demand kicked in, and became the dominant end use for silver. It is noteworthy that virtually all of the gold ever mined is still with us, whereas most of the silver ever mined has been used up (consumed). a) SILVER'S UNIQUE PROPERTIES - Silver has unique properties which are not replaceable in industry. It is malleable; fatigue resistant; corrosion resistant; it has high tensile strength; it is soft enough to be formed and stretched; it is wear resistant; has a very long functional life; it is very sensitive to and reflects light, conducts heat, and electricity; it provides catalytic action; it renders unique properties when alloyed with other metals; it reduces friction; and is a bactericide which can be used in infection fighting applications. Because of its unique properties, it is virtually impossible to replace silver in most of its tens of thousands of applications. b) SILVER'S INDUSTRIAL APPLICATIONS - Silver is used in the manufacture of high performance batteries, with billions of silver oxide batteries generating power in tools, portable electronic equipment, cameras, watches, etc. Silver zinc batteries have a wide number of high-tech military and space applications (i.e., rockets, torpedoes, satellites, missiles, etc.). Silver coatings are used in bearings in virtually all jet engines, in diesel engines; silver is used in auto manufacture and in virtually all motorized equipment; silver is used in plumbing, soldering; in computers in circuit boards, capacitors and chips; in mobile phones; it is used in the chemical industry in tens of thousands of applications. Silver is used in thousands of electrical applications (i.e., switches, contacts, fuses, household appliances, in over 40 switches in a typical large auto, in computers, etc). Silver has thousands of high-tech applications where reliability, precision and safety are imperative. Since silver kills bacteria, it has hundreds of medical and dental applications. Tens of thousands of industrial and medical applications of silver make up about half of global silver demand. About a third of the world's silver supply goes to jewelry and silverware (with a lot of that being consumed in India), and the remainder (about 20 percent) is used in photography. (In 1999, 280 million ounces of silver were used in jewelry and silverware and 245 million ounces were used in photography.) c) PHOTOGRAPHIC DEMAND FOR SILVER - Since 1980, silver bears have been arguing that silver usage in cameras and photography would cease - to be replaced by digital cameras. Photographic demand for silver has grown every year since then right up through the present (see chart), now totaling almost 250 million ounces per year. Photographic demand in 1999 jumped 3.9% over 1998, and is forecast to grow by 4.5% in 2000 over 1999. Amateur and professional photographers around the world (numbering in the hundreds of millions), rely on silver halide film and paper, used in hundreds of millions of cameras to take tens of billions of photos each year. Even if digital cameras should become popular, traditional camera use and photography will continue to grow because of its convenience, low cost, and better image quality. Nothing else reacts to light like silver salts. It is not likely the $800 digital camera and $2000 computer needed to display the pictures will be a competitive substitute for a $7 disposable camera. Silver is also used widely in x-rays; graphic arts; and film for movies and videos. d) TOTAL GLOBAL SILVER DEMAND - grew in 1999 to 877.4 million ounces (see chart). Asian demand was down in 1997 and '98 due to the Asian financial crisis but is now rising strongly as the region recovers. Overall demand for silver has doubled over the past 14 years (with most of the growth coming from industrial applications and photography), and is likely to continue growing at about a 4 percent annual rate. Demand for silver in coins and medals is the only category that has declined sharply over the past decade (i.e., to 29.5 million ounces in 1999) reflecting a decline in investor demand in the 1990s. 2. SILVER SUPPLY - Mine production of silver only supplies 58% of demand, with the supply/demand deficit growing steadily since 1989. Total supplies of silver from mine production in 1999 shrunk to 546.8 million ounces (versus total demand of 877.4 million ounces). The total "structural deficit" (i.e., total fabricator demand less total supply - ignoring supply from government sales and paper derivatives) jumped to 155.7 million ounces in '99, up from 94.5 million ounces in '98. The cumulative deficits (from 1990-99) total 1,224 billion ounces (see chart). a) ABOVE-GROUND SUPPLIES OF SILVER ARE DISAPPEARING - Clearly, the supply/demand shortfall has been made up over the past decade from sales from government hordes, and from silver bullion bars and coins which have been melted down. In 1999 alone, 335 million ounces were taken out of above-ground supplies. Investor's coins and government (or investor) silver bars have been melted down and turned into industrial or consumer products which have been consumed. That silver is gone forever! The 1999 total supply/demand deficit of 335 million ounces was covered: 208 million ounces from scrap or recycled silver; 30 million ounces from governments (including 6 million from the U.S. government); and 97 million ounces were supplied from melting down bullion, coins, and private inventories and converting them to industrial applications. The important point to note is that most of the above-ground supplies of silver (which in 1950 were a little over 10 billion ounces and are now down to less than a billion ounces - down almost 95 percent - have now been used up to fill the growing industrial appetite for silver. Unlike gold, there are virtually no above-ground silver reserves. And large new silver mine production cannot be geared up since 75% of silver production is a by-product of lead-zinc, copper or gold mining operations. It is improbable that these operations would be expanded due to a silver price rise. The U.S. government used to hold 4 billion ounces of silver in its strategic reserves (i.e., for wartime or other crises). Today, most of that is gone. The Defense Department silver stockpile is down 85 percent from the sale of mint coins alone (i.e., American Eagles). b) WHERE ARE THE ABOVE-GROUND SUPPLIES? Of about 933 million ounces of global above-ground reserves, bullion and coins held worldwide (including market and industrial inventories) were down to 757 million at the end of 1999 (and probably under 700 million at the end of 2000). Most of these coins and bars are held by long-term players who will not turn loose of that silver. Global governments held 153 million ounces at the end of '99 (part of the 757 million ounces), having sold 150 million ounces in the '90s. Berkshire Hathaway (i.e., Warren Buffett) held 130 million of the 933 million ounces. As of 12/31/99, market inventories held by Comex, Tocom, etc. and industrial inventories were at the lowest levels in decades (i.e., 113 million ounces). They are lower at the end of 2000. THE BOTTOM LINE There is a 335 million ounce supply/demand shortfall or deficit, and it is growing each year. The shortfall has been met from above-ground supplies and those are now running out. This will bring about an explosive rise in silver prices in the not-too-distant future ala the 1970s and perhaps even greater - because global silver consumption is far larger today than in the 1970s; global above-ground reserves are down almost 95 percent; and the annual deficit is much larger. B. THE BIG GUYS SEE THE GIANT SILVER SQUEEZE COMING Just as the farsighted billionaire Bunker Hunt saw the incredible silver opportunity in the early 1970s and acquired a huge position at low prices in anticipation of the great silver bull market, so Warren Buffet, George Soros, Bill Gates, and other very wealthy investors (including some Middle East oil sheiks) have been quietly acquiring silver (or silver equities) at the lowest nominal prices in over 25 years and the lowest inflation adjusted prices in almost 100 years. These are very savvy investors as well as entrepreneurs who made their substantial fortunes by being ahead of the crowd, by being mavericks, and by recognizing value when no one else did. As Buffett has said, he does not see value in the present stock market (especially the high-tech sector) but he does see value in silver. In 1997 Buffet quietly accumulated what was then believed to be one-third of the available above-ground supply of silver - using 2% of Berkshire Hathaway's substantial holdings (i.e., he bought 130 million ounces for $650 million). He announced the acquisition in February '98, which prompted a 25% temporary run-up in the silver price. If one considers the tightness of the 933 million ounce global (above-ground) float of silver, much of which is in strong (long-term) hands, which have no intention of parting with it anytime soon, Buffett is in a rather commanding position in the world silver market. What if more large OPEC oil producers begin to convert let's say one or two percent, or five percent of their petro dollars into silver (as they did into gold and silver in the 1990s)? The global squeeze in silver and spike in price would be huge. And like the present price rise in oil, it might last a lot longer and rise a lot farther than it did in the 1970s. C. SILVER LEASING: MANIUPULATION IN THE SILVER MARKET QUESTION - With a 10-year supply/demand shortfall, declining silver production, and evaporating above-ground supplies of silver, what has kept the silver price from rising sharply over the past year or so - along with oil, platinum, palladium, and a large group of other global raw materials? ANSWER - Manipulation via a powerful group of financial institutions and central banks which have leased huge quantities of silver to mining companies and speculators such as hedge funds. Central banks earn interest by leasing their silver (via large bullion banks such as Goldman Sachs and Chase Manhattan, who act as broker/intermediaries) at low interest rates to silver mine producers (or speculators). These entities sell the silver to raise funds for operations (or speculation) putting downward pressure on the price of silver. Their plan is to pay off the loan out of their silver production, or, in the case of the speculators (such as a hedge fund) by repurchasing at what they hope will be a lower price. These lease/sale arrangements (promoted by some of New York's biggest bullion banks) initially put temporary downward pressure on the price of silver, but are in effect creating a huge short position in silver - held by silver producers or the large speculators. Eventually these positions must be covered, creating huge future upward pressure on the silver price. [ED. NOTE: This is almost exactly what the central banks, bullion banks, gold mining producers, and large speculators have been doing in the gold market the past few years to hold the price down. (See the January '98 and June '99 issues of MIA for a detailed explanation of this manipulation technique. If you have not seen these reports, you may call 800-525-9556 and obtain a free copy of same. In both the silver and gold "bear operations," derivatives are utilized. The silver leases, however, are far more dangerous to both the lender (the central bank) and the borrower (the mining company or speculator) because the available supply of silver to repay the loans is so much smaller than that for gold.] The size and scope of these lease/sales of silver are huge compared to production and must be paid back from an inventory which is virtually non-existent. If (or when) the central bank lenders call in their silver (or gold), the silver (or gold) market will explode because the mining companies cannot produce enough silver (or gold) in one year to cover their multiyear "shorts." In effect, there is too much paper and too little silver, and in effect, there is the biggest short position in silver in world history. Eventually this will trigger the biggest price explosion in silver in world history - probably even larger than in the 1970s. It should be remembered that when you are short a stock, a bond, a commodity, etc. you have to purchase (or buy back in) the item to "cover" or close out your short position. If the price is higher than where you shorted it, you purchase at the higher price (i.e., at a loss). One of these days, a Buffett, a Soros, a Bill Gates, an Arab oil producer (or group of same), a Red China, etc. is going to start buying silver, and buying, and buying. As the price begins to rise it will drive the shorts to the wall, they will be forced to buy into a rising market to cover their positions and the silver price will explode. Today, silver mines (and large speculators) have sold over a billion ounces short in leasing deals. There is another 750,000 ounces (or more) short in silver futures. That's about 2 billion ounces of a commodity that is already in short supply that has been shorted. There are about 993 million ounces (less than 1 billion ounces in above-ground supplies) and those are being eaten up by industrial consumption and are held in part by long-term holders. In other words, they are not readily available for covering shorts and even if they were, 993 million ounces couldn't cover almost 2 billion ounces in short positions. It is bizarre for the size of the silver derivative position to be larger than the "real" silver market (i.e., twice as large as all above-ground supplies and four times annual global production). It is worth repeating: There is a bigger short position than all the silver that exists in the world - twice as big! A huge squeeze (perhaps the biggest in world financial history) is in the making! A classic example of a mining producer that has been shorting both gold and silver is Barrick. As of mid-2000, it was short 12 million ounces of gold and 14 million ounces of silver. Putting these gold shorts in perspective, the Bank of England sells 800,000 ounces of gold at their auctions. Barrick's gold short position is 15 times greater. In both gold and silver, demand has been rising, production has been falling, and the price has been dropping. That is impossible in a "free market"! If this lease/sale bear operation were not underway, experts this writer respects believe that gold would be $500 to $600 per ounce today and silver would be $20 to $30 per ounce. However, by artificially suppressing the price of both metals, the upside explosion will be far greater when free market forces finally overwhelm the gold/silver bears (as they did in the 1970s, followed by a 25-fold upmove). Some metals experts believe that the silver squeeze (which will be far more severe for silver than gold - because the above-ground supplies to manage or negate the squeeze are not available in silver) will ultimately propel silver to $50 to $100 per ounce. [ED. NOTE: While that seems preposterous looking at today's $5 silver and recent price inactivity, the idea of $52 silver in 1970 (when silver was trading near $2) seemed even more preposterous. It became a reality by 1980. Similarly, 18 months ago, when oil was trading near $10 per barrel, who would have ever thought that by late 2000 it would have risen to almost $40 per barrel. We live in extreme times, as the meteoric rise and cataclysmic fall of the Internet stocks have recently proven.] ECONOMIC IMPLICATIONS OF A SILVER SQUEEZE - There are severe economic implications of a silver squeeze. Industry is already running short of silver with most industrial users only having a few days of silver inventories on hand. Businesses totally dependent on silver for product production could shut down. Huge users like Eastman Kodak, the auto or aerospace companies will simply have to pay any price and pass it on to their customers. [ED. NOTE: Information in this report was compiled from a number of excellent sources, which we believe to be reliable, including The Silver Institute, Franklin Sanders Money Changer, James R. Cook and Ted Butler. Ted Butler is a contributing writer on www.gold-eagle.com. For further research by Mr. Butler see www.butlerresearch.com] CONCLUSION A supply/demand shortfall of epic proportions has developed in silver - far greater than in the early 1970s just before the 25-fold rise in silver. However, unlike the 1970s, the above-ground supplies of silver are miniscule today and will for all practical purposes evaporate over the next year or so. The silver price, like gold, has been artificially suppressed by central bank/bullion bank/mine producer/big speculator bear operators, via a complex series of leases, silver sales, use of derivatives, etc. - effectively creating a 2 billion ounce global short position. This is in a world with less than 1 billion ounces in silver inventory and only a little over a half billion ounces of annual production - all of which is spoken for by industry (plus another 335 million ounces over and above production). Without these machinations by greedy market manipulators and desperate mine producers, silver would likely be $20 to $30 per ounce today. When the short squeeze eventuates, these prices are likely to be reached or exceeded; Central Banks will lose their positions in silver (in whole or part); the Wall Street bullion banks will lose heavily; and the heavily leveraged silver mine producers and big Wall Street speculators will go to the wall (i.e., many of these mining companies and hedge funds will go under), just as Long Term Capital Management would have, but for a huge Fed-engineered bailout. Silver is truly the world's most undervalued ("straw hat") investment today - as Bernard Baruch would say today. WHAT ARE A FEW POTENTIAL TRIGGERS FOR A SHARP UPTURN IN SILVER PRICES - FOLLOWED BY A MASSIVE SHORT SQUEEZE? 1) A continued upturn in global inflation; 2) An oil price explosion that triggers a public run into inflation hedges; 3) A Middle East war (i.e., Israel versus the united Arab states); 4) An oil embargo by OPEC and/or the diversification of petro-dollars (i.e., one to five percent) into gold and silver (all of which happened in the 1970s); 5) Red China or India (both traditionally heavy silver consuming nations) suddenly become aggressive buyers; 6) A few large investor/speculators (i.e., Buffett, Soros, Gates-types) ala Bunker Hunt in the '70s, begin to take large aggressive silver positions; 7) A severe bear market in U.S. stocks, whereby investors begin to look for a diversification from stocks and a safe haven [ED. NOTE: What if one-tenth of one percent of the $13 trillion in stocks and mutual funds went into silver as a safe haven or diversification - it would be explosive!]; 8) An accident in the derivatives market which takes down several large players, (such as the LTCM debacle in Sept '98, which almost took out the 13 largest banks and brokerage firms in America). The very conservative CPM group has forecast that silver will rise 63 percent to $8.35 an ounce by the end of 2001. Do stocks and mutual funds have that potential in 2001? This writer strongly doubts it! From January 1 to October 18, 2000, the S&P 500 was down 8.65%; the Dow Jones Industrials were down 13.24%; the Nasdaq was down 22.8%; and the NIKKEI 225 was down 21%. It should be remembered that precious metals (for about 2/3 of a total cycle) are contra-cyclical to the stock market. [ED. NOTE: Year to date (through 10/17) AT&T was down 52.8%; AOL was down 30.7%; Microsoft was down 56.9%; Lucent was down 68.3%; Motorola was down 54.5%. The list of eConsumer 50 COMPANIES (I.e., Internet stocks) look like the 1929 crash.] WHAT TO DO: Silver should be aggressively accumulated at present low prices for the biggest potential rise since the 1970s. One-third of a total portfolio should be in precious metals and 30 percent of that should be in silver. That is about 10 percent of your entire investment portfolio. (The remaining two-thirds of that metals position should be in gold semi-numismatic coins and platinum coins.) And at least 50-60 percent of your total portfolio should be in Treasury bills or other conservative interest bearing investments, such as tax deferred annuities. At this writing, there are some excellent buys in junk silver coins (pre-1965 bags of 90 percent silver dimes, quarters, or fifty cent pieces), bags of circulated silver dollars, and Morgan silver dollars. Other silver coins will emerge as good investment vehicles as well over the next few months. A WORD OF WARNING: With silver prices down, and overall investor interest still quite low, there is nevertheless already a severe shortage in silver coins developing. Many have been melted down and used up in industrial applications, photography or jewelry since the '70s; there are still hundreds of thousands of investors who do understand the times and are holding onto their silver for "the big ride" (including the likes of Warren Buffett); and the investors who are buying silver coins now are soaking up much of the available supply. In 6 to 12 months, most silver coins may not be available at any price - or only at much higher prices. This writer strongly believes that early 2001 will bring a severe financial crisis in America and abroad that will be very bad for the stock market but very positive for precious metals. Continued high oil prices (or an oil spike), war in the Middle East, or a precipitous drop in U.S. stocks could be the trigger. A U.S. recession is already standing in the wings and will greet the new president. It is time to reposition your assets in a very conservative configuration. A strong silver position should be part of that equation. Very high silver demand and a severe shortage combined with prices so low that silver mines are shutting down computes to an explosive situation which argues for much higher prices.
[ED. NOTE: If you still have a portion of your assets in the stock market or equity mutual funds (a position this writer feels is very unwise) liquidate a portion of same and place it in silver now! Silver coins can also be used in IRA, Keoghs, SEPS and other retirement funds.] November
18, 2000 |
This
writer first acquired silver dollars in the 1950s and '60s, when,
due to a lack of inflation, they could be acquired for only a little
over a dollar. It was understood by all that these silver dollars
were money - similar to the silver dimes, quarters, and halfs - all
of which were used to buy goods and services just like paper currency.