Bush rejects taxes for hurricane recovery; deficit may rise $200 billion or more

Section:

By Myra P. Saefong
CBSMarketWatch.com
Friday, September 16, 2005

http://www.marketwatch.com/news/story.asp?guid=%7B327FFE0F-C053-4B3D-
A87C-61FABA1D1E32%7D&siteid=mkwt

SAN FRANCISCO -- After suffering from a huge supply deficit for more
than a decade, silver may be primed for a big rally.

The financial market has simply put too small a price on the much
sought-after white metal that's often seen as a sidekick to gold.

Silver, which is used in a wide variety of applications in several
industries, including the electronic, jewelry, and photographic
sectors, currently trades around $7 an ounce on the New York
Mercantile Exchange.

That's a far cry from the peak level around $50 in the 1980s, but
that may change soon enough.

"No other commodity exists in such short supply as silver," said Ned
Schmidt, editor of the Value View Gold Report, and "silver demand
has exceeded production for 15 years now."

Indeed, the physical silver market operated in a deficit for the
fifteenth-consecutive year in 2004, according to the CPM Group, a
commodity research and consulting-services provider based in New
York.

In its Silver Survey report released in late August, the group
estimated that newly refined supplies of 750 million ounces fell
short of industrial demand by 44.5 million in 2004. And the deficit,
though not quite as high, will likely reach 31.4 million this year,
with total supply estimated at 774.3 million.

The supply deficit could spell more gains for silver on the futures
market, which posted a climb of around 40%, or $2 an ounce, over the
past two years.

"As you analyze silver's potential, the fundamentals become
powerfully bullish," said Paul Mladjenovic, a New Jersey-based
certified financial planner at PM Financial Services.

The "chronic silver shortage ... is becoming more acute," he said.

Overall demand is growing as silver is used in cell phones, military
technology, and a range of new applications in the healthcare sector
and alternative energy technology, said Mladjenovic.

But John Person, president of National Futures Advisory Service,
argued that while production costs are rising, demand is actually
flat.

The market saw total demand in 2004 at 794.5 million ounces,
according to the CPM Group. For 2005, it's estimated to be 805.7
million.

Person doesn't believe the lows are in for the year, but December
silver prices should find their support level close to $7 to $6.95
and that "should be the next buying opportunity investors can take
advantage of," he said. December silver closed at near $7.08 an
ounce on Thursday

Silver has been riding off the back of gold futures, which recently
traded at their highest level since March.

And with gold expected to climb, don't expect silver to stay behind.

Peter Grandich, editor of the Grandich Letter, believes that the
poor man's gold will continue to "play second fiddle to its
namesake, and while it can have its own moments in the sun, it will
continue to need a higher gold price to help lift it up."

Gold's move into the $450s will be an "important signal to investors
that the metals are still alive and ready to march upward," said
Schmidt.

Indeed, Philip Klapwijk, executive chairman at precious metals
consultancy GFMS Ltd., expects gold to climb toward the $480 mark
before the year is over because of rising investor demand for the
metal.

"A similar phenomenon is likely in silver, a metal that historically
tends to follow gold," he said.

It's true that silver is an industrial metal and is affected by
economic demand, but even during the depression of the
1970s, "silver tracked gold because the Fed was creating 'money' --
actually, banking system credit -- out of thin air," said John
Stafford, editor of Stafford's Investment Strategy Letter.

"More 'money' and credit was created 'out of thin air' by the Fed
and world central banks in the single decade of the 1970s than the
entire cumulative total in all the world's previous history," he
said, citing an academic study done in the early 1980s.

So it's no wonder that silver went to $50 from $1.29 an ounce, and
gold to $850 from $35 in early 1980.

And in the framework of a rising gold price, silver is actually
the "coiled spring," Schmidt said.

Traders "will move to silver for the unrealized opportunity it
represents," he said, noting that the silver market simply "cannot
take incremental demand without its price being moved materially
higher."

"The developments with gold's price will spill over into this
market," he said.

Remember also that "silver is a much smaller market than gold, and
speculators can usually get a bigger bang for their buck in more
volatile silver than in the larger and deeper gold market," said
Klapwijk.

Against this backdrop, there's no denying that silver will end the
year, in the very least, above the $7 mark.

The key levels for silver to watch are $7.25 and $7.50, Schmidt
said. "As they are taken out, silver will move on to $9 this fall."

Klapwijk would only go as far to say that "another spike above the
$7.50 mark is very likely before year-end."

Stafford sees prices reaching $8 or more this year and maybe even
trading in the $12 to $15 range in five years.

Given silver's growing uses, Mladjenovic expects prices to see
a "very strong upward movement" during 2006 to 2008, with silver
having a "great" chance to top its recent April 2004 high of $8.50
by the end of 2005 or early 2006.

In fact, it should be trading in the $8 to $10 range in the fourth
quarter of this year, or no later than the first quarter of 2006, he
said.

And "realistically, I expect silver it to hit $50 in 2-5 years,"
Mladjenovic said.

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