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New York Times: As Greenspan Chases Inflation, Critics Shout, ''Faster!''
By Doug Casey
for The Daily Reckoning
Wednesday, June 30, 2004
I have said it many times: Mining is an innately risky
business. Worse, it's an impossible business if metals'
prices are too low. In the case of silver, during the long
bear market from 1980 to 2003, when silver traded mostly in
the $3.50-$5 per ounce range, there were no major, public,
pure silver mining companies that generated free cash flow.
The end result was that very few pure silver producers
remained in business. With the exception of a smattering of
mines in Mexico, Peru and very few other locations, it has
simply been uneconomic to produce silver (other than as a
That is not to say that there haven't been profitable
silver mines, but very large mining companies, such as BHP
Billiton, generally own these. These are not stocks you
would buy strictly for the silver exposure, however,
because silver is a minute portion of the overall value of
Which points to one of the fundamental caveats about
silver: namely that around 80% of new production is a
byproduct of gold, copper, lead and zinc. So silver is
produced almost regardless of its price. That makes primary
production of silver even more volatile and risky than
mining in general.
Of the primary silver producers (defined as companies in
which at least 50% of their revenue is silver), the value
of the silver they produce represents only about 3% of
total supply brought to market. It's a tiny sub-sector of
But, understanding the risks, I think silver stocks could
provide some of the best, if not the very best, contrarian
returns in the years ahead. There are several reasons I say
that, but the main one is the ongoing silver supply/demand
At first glance, one of the more remarkable aspects about
the silver bear market was that, beginning in 1990, it
occurred against the backdrop of a supply deficit. In those
years when the global economy could be considered in a
positive light, annual silver deficits ran as high as 200
million ounces. When the economy was in recession, the
silver shortfall still came in at 40-50 million ounces.
More recently, in 2002, a down year for the U.S. economy,
mine production totaled 585.9 million ounces, while total
demand hit 863 million ounces. So production has not kept
up with demand for a very long time.
For a brief period back in 1997-98, it looked as if the
supply/demand imbalance had finally caught the attention
of the market when Warren Buffet purchased 129.7 million
ounces. Prices moved all the way to the $7.50 level before
institutional short sellers and forward selling by base
metals producers beat the price back to the $4 range.
Once again, silver could get no respect.
Despite the supply deficits, and overlooking the relatively
short-lived rally that took it to $8.29 in early April, the
price of silver has been remarkably stable in the $4 to $6
per ounce range. Why no sustained recovery?
Ignoring the conspiracy theories making the rounds, the
primary reason for silver's doldrums has to do with the
drawdown of accumulated stockpiles. These stockpiles
include old scrap and coin melt, as well as those held by
various governments who used to think that backing a
currency with something other than cheap talk was the right
thing to do.
Speaking of cheap talk, in 1959, the U.S. Treasury held
2.06 billion ounces, the majority of which was sold in the
1960s in a futile attempt to keep the price at $1.29, where
they'd arbitrarily fixed it. The balance was used in the
minting of Silver Eagles coins from 1986 through 2002. As a
consequence, except for a few bars forgotten in some dark
corner, the U.S. stockpile is gone. As the government uses
12.5 million ounces a year in coinage, it is (or soon will
be) a net buyer.
The largest remaining known government silver inventories
are in India, which was reported to be holding around 87
million ounces as recently as 2002.
The largest unknown government inventory is likely held by
China, whose currency was the last in the world to be
backed by silver. In its usual inscrutable way, the Chinese
government has not revealed the extent of its holdings, but
we know that it has been a big seller over the past few
years, almost certainly helping to keep a lid on the price.
Last year, of a total of 82.6 million net ounces of silver
that came onto the market through government sales, 35
million ounces came from China. That on top of over 50
million ounces they sold into the market the year prior.
Some of the most credible silver observers believe that
these sales cannot continue for long at the same pace
before the Chinese stockpile, too, is depleted...which the
fall-off in year-over-year sales may already be indicating.
I would add that the Chinese may very well decide it is
better to hang on to what they have left in their
stockpile, rather than continue to trade it for
increasingly worthless dollars. We should have additional
clarity on the Chinese stockpiles later this year once The
Silver Institute releases its new comprehensive study on
the topic. Regardless, the odds are good that we are
nearing the end of the period where government silver sales
are much of a factor.
Institutionally held inventories (Comex, CBT, etc), have
likewise fallen dramatically. After reaching 245.8 million
ounces in 1996, these inventories have dropped by 41.3% to
144.4 million in 2002.
All told, according to the CPM Group, global non-coin
inventory is now in the area of 419 million ounces, with an
additional estimated coin inventory of about 487.5 million
ounces, but one shouldn't put too much stock in these
figures because much of the world's silver is now stashed
in the lock boxes, drawers, and closets of individual
Speaking of individuals, as is often the case after a long
bear market, sellers begin to dry up. Case in point, sales
of silver by individual holders fell to 43.5 million ounces
on a net basis in 2003, down from 81 million ounces in
2002...and well off the peak hit in 1997 when individuals
dumped 221 million ounces back onto the market.
Jewelry demand, silver's second largest use, was higher at
276.7 million ounces in 2003, compared to 265.9 million
ounces in 2002, a rise of 4.06%. Driving growth is demand
from Asia, including a 22% increase in jewelry demand from
China and a 13% increase in Thailand. The fact remains
that, while silver's fundamentals are very much affected by
industrial demand, it is still viewed as poor man's gold by
much of the world an alternative to the colored toilet
paper governments pass off as currency.
For some years now, silver bears have warned that the move
to digital photography will dry up that important use of
silver. In the long run, that may be true. Yet, the
correlation with sales of digital cameras and available
silver supplies is not a 1:1 ratio because photographic
demand also influences silver supply. As much of the
secondary scrap supply is refined from photographic film
and chemicals, a decline in photographic demand also
impacts secondary scrap supply.
According to the GFMS World Silver Survey 2004,
photography, which accounts for the third-largest silver
off-take, was down to 196.1 million ounces compared to
205.7 million ounces the year before. But even that
relatively modest decline may not accurately reflect the
trend because the Iraq war, fear of terrorism, and the SARS
hysteria dramatically curtailed tourism and hence picture
That same survey shows that a 2-year decline in global
fabrication demand for silver ended in 2003, with demand
increasing to 859.2 million ounces, 13.3 million ounces
over 2002's level.
Industrial usage, which is reflected in the fabrication
figures, is the largest source of silver demand. It was up
2.87% to 351.2 million ounces. It is always worth noting
that unlike gold, where virtually all the metal ever mined
still exists, in the case of silver, most of that used in
industry is consumed. I'm quite optimistic about silver
industrial demand outpacing overall economic growth for the
indefinite future simply because, of the 92 naturally
occurring elements, it's the best conductor of both heat
and electricity, as well as the most reflective and the
second-most ductile and malleable.
As a result, there are new industrial uses for silver
consistently being developed, some with the potential to
add significantly to demand, including uses as divergent as
a catalyst in fuel cells for electric motor cars, high-
temperature superconductor wires, and as an anti-microbial
Unless the reported numbers are wildly askew, there's no
question silver is going much higher in price. And that's
not counting the possibility of a monetary, crisis-driven
mania, like the mania that took silver to $50 in 1980. I
have no reason to believe the numbers aren't more or less
accurate and plenty of reason to expect a mania.
Doug Casey is editor of International Speculator,
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