Silver to Soar?

Posted on May 1, 2007 , filed under Stocks | Print This Post

I caught an interesting Money Week article that echoes many of my own sentiments toward the price of silver rising. I found a few interesting points in the article that I would like to quote.

Taken from the article:

the US consumer is more indebted now since 1933 with little or no savings whatsoever. The Comptroller Auditor General of the US, David Walker stated “last year (2006) was the first year since 1933 that Americans spent more money than they took home and, as you probably recall, 1933 was not a good year for the United States.”

The US’ national gross debt is $8,883,212,488,519 trillion ($8.8 trillion) and growing. When George Bush came to power US’ national gross debt was $5.7 trillion. Even the most sanguine, tunnel-visioned bull would have to admit that the fundamentals of the US economy are bad and deteriorating.

The above quote certainly doesn’t bode well for the dollar. The declining value of the dollar is probably the current largest impetus behind the rising price of gold and silver.

Taken from farther down in the article:

In 1900 there were 12 billion oz of silver in the world. By 1990, the internationally respected commodities-research firm CPM Group say that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to about 300 million ounces in above ground refined silver. It is estimated that 95% of the silver ever mined has been consumed by the global photography, technology, medical, defence and electronic industries. This silver is gone forever.

CBS Marketwatch published an article in March 2007 entitled ‘Silver may shine brightest among metals’, in which Kevin Kerr wrote that “Due to current supply/demand trends, the amount of silver above ground is projected to shrink to a critically low level in 2010. As supply shrinks, prices will keep rising steadily to new highs. Many in the investment world are unaware of this part of silver’s story. Industrial demand has been outstripping mining supply for the past 15 years, driving above ground supply to historically low levels.”

Assuming the figures in the article behind declining supply are correct, any combination of events to trigger investors seeking silver as an alternative currency will lead toward massive gains in the price of the metal.

At the moment there is a cesspool of potential reasons behind a rise in gold and silver:

Declining value of the U.S. dollar

Impending problems with sub-prime mortgage markets

Implosion of the property bubble

Implosion of global stock markets

Japanese yen carry trade

War in Iraq

Terrorism

Avian flu

Natural disasters

The institutions simply need a reason, any reason really, to begin accumulating and strongly recommending the metals as an alternative currency. It’s difficult to go against the trend when you work for any major investment fund. Job security, bonuses and commissions are the major concerns behind any investment recommendation. When buying or profit taking starts it triggers a wave from multiple institutions. There is an overwhelming herd mentality in the gold and silver market. The fear from investment managers getting left behind and looking doe-eyed as other investors pile in, pile out or short positions, compromises the fundamental reasoning behind seeking gold and silver as a medium to long-term alternative currency.

I’ve written multiple times now that given the overall small size of the gold and silver markets, that major investment fund influence is evident from the increasing volatility and daily price swings in the metals. Investors should consider that a few large hedge funds exceed the entire size of the gold and silver market combined.

I suggest that if any of the events in the above list are of concern to you as an investor to build a physical position in silver or silver equities as a hedge. I am suggesting silver over gold due to the larger upside potential I see in silver.

A few silver miners on my watchlist include:

Coeur d’Alene Mines Corporation (CDE), Silver Wheaton Corp. (SLW), Hecla Mining Company (HL) and Pan American Silver Corp. (PAAS). I believe the first half of 2007 to be an ideal time as prices are stagnant for silver miners to being acquiring a stake in a few of your own favorite companies.

*Disclaimer: I currently own 15,000 shares of CDE purchased at an average price of $4.24

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