The comprehensive case for silver, by Jim Puplava

Section:

The Silver Lining:
Silver in Early Stages of Bull Run

By Elliott H. Gue
Wall Street Winners
CBS.MarketWatch.com
March 24, 2004

http://cbs.marketwatch.com/news/story.asp?guid=9792BE76-4E5E-4B80-
A5B1-B1A8C489425E&siteid=mktw&dist=nbs

MCLEAN, Va. -- Part precious metal and part industrial
commodity, silver never seems to get the attention it
deserves from investors. But powered by a combination
of rising industrial demand from Asia and a weak dollar,
silver prices will move a lot higher in coming years.

By now most investors are aware that 2003 was the best
year for commodity stocks in decades. The reason for that
dramatic run-up is simple: Demand from Asia is growing
rapidly while production capacity for most commodities,
decimated by a decade of low prices and cutbacks, can
rise only slowly. Add to that a weaker U.S. dollar and
you have a recipe for explosive growth in prices.

The positive fundamentals for commodities aren't likely
to disappear any time soon, in fact, the supply/demand
crunch is only going to get worse. China's manufacturing
base is rapidly expanding and the consumer sector remains
in its infancy. To build all those factories and supply an
ever-richer Chinese consumer, basic materials will remain
in high demand through at least the end of the decade.

Silver enjoys some of the advantages of both precious and
base metals. Like gold, it's traditionally been viewed as a
store of wealth -- a weaker U.S. dollar generally supports
higher silver prices. But the metal's biggest market is in
industrial applications including electrical connectors and
pollution control devices for cars -- these uses sit at the
heart of the Asia demand story.

The biggest fundamental negative I hear about silver is that
it's used in photographic films and film development. If film
is largely replaced by digital photography, surely that'll
cause a drop in demand for the metal.

But that's only one application for silver and it's not even the
primary source of demand. According to the D.C.-based
Silver Institute, silver's largest market is industrial
applications and, in particular, as an electrical connector.

Silver offers better conductive properties than copper and is
already widely used in automobile and airplane manufacturing.
And high-tech products like telecom equipment need to be
very power-efficient and use quantities of silver wiring and
connectors.

Last year automobile sales in China came in just over 1.9
million, a fraction of the 5.5 million vehicles sold in the
United States. Meanwhile, China's population tips the scale
at 1.3 billion, nearly five times that of the United States.
The Chinese population is very young and is growing
wealthier -- it's easy to see that demand for cars will grow
rapidly in coming years, as Chinese youths demand the
same sorts of consumer products as their Western
counterparts.

And it's not just cars. Already China has more mobile phone
subscribers than the United States.

And don't forget India. That nation also sports a population
of more than 1 billion with a rising appetite for cars and
consumer electronics. With silver an important part of all
of these devices, industrial applications for the metal are
bound to keep pulling demand.

Jewelry remains the second most important use for silver
and, once again, Asia is the primary driver. India is by far
the world's largest consumer of silver jewelry. Demand
for jewelry is directly related to disposable incomes and
Indian incomes are rising quickly -- demand for silver
jewelry is set to rapidly increase.

The supply side of the equation is no less supportive to
silver prices. Years of low silver prices meant that
production capacity has been shuttered to cut costs. And
it takes years to ramp up production from newer mines
-- the capacity to quickly increase production to meet the
rising tide of demand is limited.

And governments have stopped selling official reserves of
silver. Official sales of the metal topped out in 1999 at
close to 100,000 ounces annually. By 2003 those sales were
closer to 70,000 ounces. The United States no longer has
significant stocks of silver and China, a large holder of
silver reserves, has decreased its sales in recent years.

And these aren't just pie-in-the-sky fundamentals; the
long-term chart of silver and silver mining stocks supports
a bullish view. Silver spot prices recently broke out of a
near-decade-long trading range between $4 and $7 per
ounce. And gold and silver stocks represented by the
Philadelphia Gold and Silver Index bottomed in 2001 and
recently broke higher out of an important inverted head and
shoulders base on the weekly chart. Technically, after a
two-decade long bear market, mining stocks are in the early
stages of a major bull run.

Rising silver prices drop straight to the bottom line of silver
mining companies. Most of the miners were unprofitable a
few years ago when silver was trading under $4 an ounce
because production costs are higher than that. But with silver
topping $7 and production costs relatively fixed, margins have
scope for further improvement.

Peruvian miner Compania de Minas Buenaventura mines for
both silver and gold, giving investors a measure of
diversification. South America boasts some of the most
impressive reserves of both metals and the company is the
largest holder of mining rights in Peru.

In the fourth quarter net income jumped 55 percent for
Buenaventura amid a 15 percent jump in average selling
prices for silver and 21 percent for gold. That's dramatic
leverage to rising prices.

U.S.-based Coeur D'Alene is a purer play on silver prices.
Once a high-cost silver producer, Coeur has been cutting
production costs in recent quarters, dramatically adding
to profit margins. Last year silver production costs totaled
$3.27 per ounce against a sale price closer to $5.20 per
ounce.

Coeur D'Alene is still in the midst of a restructuring. But
that's proceeding well and the company's financial position
is stronger than ever with $250 million in the bank.

-----------------------------
Elliott H. Gue is editor of www.wallstreetwinners.net, which
offers trading strategies for both short- and long term
investing. Gue is also editor of www.tradingfloorpro.com and
associate editor for pfnewsletter.com, where he specializes in
global equity and debt markets and options trading.

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Ted Butler silver commentary archive:
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