Silver Stock Report
by Jason Hommel, June 18, 2004
I just returned from speaking in Vancouver on June 13-14, 2004 at the World Gold, PGM & Diamond Investment Conference. Since I gave several speeches on silver, I’ve become more bullish on silver. Why? Several reasons. Normally, I write once a week, which gives me time to think slower.
But in preparing for my speeches, I was forced to evaluate all the bullish reasons for silver together, all at once. And while speaking, I was forced to think faster.
After speaking, many people had questions on one specific area of the silver market, which I was usually able to answer, because I’ve been reading and writing about silver now for years.
In general, the people who came to me with questions were already bullish on silver, since they went to attend a mining show, and since they came to see me speak on silver. And yet, it seemed to me that they just wanted me to look them in the eye, and really say how bullish on silver I really was. They were looking for confirmation. In other words, they asked very general questions like “How high do you think silver will really go,” and “How soon,” and then they might ask, “Do you really think so?” even after I answered such questions. Each time, I had to re-think everything, and re-present everything, and re-summarize everything.
When writing, I don’t like to repeat myself. When speaking, and answering people’s questions, I was forced to repeat myself, over and over.
Furthermore, the feedback I received from people was instant. When speaking, I have the chance to see the facial expressions change as I present each bullish argument. However, when I write on the web, I present many arguments at once in a single essay, and so I don’t necessarily know which arguments resonate the strongest with the readers, and convince them the most.
So, here are the two most bullish factors affecting silver.
1. The world has nearly run out of silver.
2. The nations of the world have printed up nearly unlimited amounts of unbacked paper money.
Put together, these two factors have never occurred before in the history of mankind.
True, the world was once using silver as money in many nations at once. But back then, in the late 1800’s, the world had 5-10 billion ounces of silver to use as money. Today, we have much, much less, because most of the silver that has ever been mined in the world has been consumed by industry, and we may be down to about only one billion ounces or less.
True, there have been hyper-inflations as paper money has been printed to excess. But at those times, it was usually in one nation at a time, and there was still plenty of silver (and gold) to be used as money.
Today, no nation is using silver as money. And today, the world is almost out of silver. These factors create this once-in-history opportunity.
Silver today may be the best investment opportunity in the history of mankind.
One of the arguments that seemed to resonate the most with listeners was that at one time in history, a day’s wage was a silver dime, or a silver quarter, or up to one or two silver dollars for miners, who were among the highest paid professionals in the world.
This fact alone presents the case: “A day’s wage used to be a silver dime, or quarter.” When I said that, faces lit up in recognition of the bullish case for silver. The reason why this argument is the best is that it shows how undervalued silver is, without putting a dollar amount on the change in value that will take place.
What’s more, I can say with confidence that a day’s wage will probably be less than a silver dime, since today, the world has consumed most of the world’s silver. Thus, a silver dime may become a week’s wage, or even a month, I don’t know!
But let’s value that in terms of dollars. Today, a day’s wage is up to $100 to $200 for skilled labor, let’s say $150. At $6/oz., that’s 25 ounces of silver. A silver dime contains .0715 of an ounce of silver. 25 / .0715 = 350. I’m saying that if the world has a similar amount of silver as it did in the past, silver could rise by a factor of 350 times higher price than at $6/oz. However, since silver is more scarce today than in the past, and since we have many industrial uses that are consuming silver that we did not have in the late 1800’s, then I’m way more bullish than that.
So, How High?
I’m saying I’m way more bullish on silver than saying it can go 350 x $6, or $2100/oz. I believe the price of silver will far exceed that due to the exhausted supplies, and the unrelenting massive industrial demand.
So, How Soon?
Given that the world is almost out of above ground refined silver, a permanant major price rise could happen at any time. The two silver surveys estimate there is about 200 million ounces to 600 million ounces of silver in known verifiable locations. At the COMEX, as of close of business: 06/18/2004, there are 45.8 mil oz. registered for delivery, and 71.9 million oz. Eligible. However, the silver in either category may be held by long term investors, who may be reading this very commentary, and who may not sell until much higher prices. Silver is coming to market, uneconomically, through three main sources: 1. As a byproduct of other mining, and 2. as people inherit silver and then sell it for the quick cash, and 3. as governments and bullion banks dump it. These supplies are meeting current demand. Literally, however, at $6/oz., a billion dollars cannot buy silver anymore. By the time a billionaire tried to buy silver bullion with a billion dollars, the price may be pushed up to about $40/oz. At $6/oz, a billion dollars is 167 million ounces. There is just not that much silver for sale at $6/oz. in the world today. If a billionaire was willing to pay any price to obtain “a billion dollars of silver”, and if he found out that he could only obtain 25 million ounces, he might bid the price up to $40/oz.! Therefore, a major price rise can happen at any time one very wealthy person decides to buy.
The other reason I’m so much more bullish is that nobody presented any arguments to me that refuted what I was saying. If you go out in public, and say something ridiculous, you expect to be corrected rather quickly. But I wasn’t. But two people raised some objections, which I will mention.
The first was “The dollar will never be destroyed, because the U.S. is too big.” I will refute this argument by saying that the U.S. is not bigger than the world, just like the Titanic was not bigger than the ocean. The world is bigger. Furthermore, all frauds in the history of the world, and all fraudulent paper money in the history of mankind, all come to an end at some point.
Some investors said, “The dollar may collapse to zero, but not in my lifetime.” This is a rather sad commentary on the state of mind of many older investors. They have no trouble investing in fraudulent dollars, thereby helping to support fraud. They may be approaching the end of their lives, but they have no thought of the eternal ramifications that their actions here on earth may have on their soul. If anything, the elder investors should be even more concerned that they are doing the right thing in God’s eyes, not only for their own souls, but also for the benefit of those who will come after them. Unfortunately, it seems as if they are only out for the quick buck! The 70 and 80 year olds! Amazing!
Another investor said, “Perhaps people are not investing in silver, because they have heard this silver story for 15 years now, or longer.” However, the silver story is changing significantly. There has been an ongoing deficit, and it has reduced above ground silver supplies at about the same rate as the size of the deficit. So, the silver story is changing. The warning is now more clear and urgent than ever before. So, if these investors who have heard the story have not yet moved into silver to protect themselves, they will have absolutely nobody but themselves to blame.
I would also like to address two other arguments that came up at the show.
The first was that India has plenty of silver that they may export, and may cap the silver price. Actually, India is a large importer of silver. Therefore, India is not capping the price, but supporting the price. There is no need to wonder whether India’s supplies of silver may cap the price until they become sellers.
Second, it was pointed out that mining exploration is extremely risky. The point was made by several authors that only one in 1000 or one in 3000 exploration projects become mines. That may be true during the past 24 year bear market, but will not likely remain true if we have a bull market that drives the price up significantly. Today, there are virtually no silver mines operating at a profit, and most silver is produced as a byproduct of lead, zinc, copper, and gold mining. The fact that silver mining is an unprofitable business goes to show exactly why silver is too cheap!
As the New York Times, January 11, 1859, page 2 said— “It is well known that the most colossal fortunes the world ever saw have been based on silver mines…” –quote found by silver researcher, Charles Savoie.
Paper money fails when paper money is no longer able to buy the things that the holders of the paper money wish to buy. Today, that is happening more and more each day. Supply shortages are evidence of communism, which, it has been proven, does not work. We are seeing supply shortages in uranium, electricity, natural gas, oil, iron, steel, cement, copper, zinc, cobalt, nickel, selenium, and silver. (And I may have left out many other important commodities.) If you have a billion dollars, and you cannot buy a billion dollars of silver or basic commodities, your dollars are no good! Well, actually, a billionaire will always be able to buy a “billion dollars worth” of silver, but just not at today’s prices!
Perhaps the reason that it has taken so long for paper money to fail in the U.S.A. is that the very wealthy people have nothing substantial to buy. The U.S. is already industrialized. We already have plenty of mansions, sky scrapers, highways, bridges, and those expensive things. However, in China, they are still industrializing. They are building everything at a rapid pace, and so, the raw materials for building all those things are finally running out.
Inflation vs. deflation? Low interest rates vs. high interest rates?
I believe whether there is inflation or deflation, the price of gold and silver will go way up from here, and the reason is how much paper money they have created; excessively and fraudulently.
If there is inflation, of course, gold and silver will go up.
If there is deflation, it is usually the result of bankruptcies. If money is being destroyed due to bank failures, it would encourage other depositors to withdraw their money and to buy gold and silver, which do not default.
Richard Russell was recently bullish on silver, and then he backed off. He has written that if there is a deflation, that silver will not perform well, since silver is “demonitized” during a deflation. Richard Russell has said that the high levels of debt are like a short position on the dollar, and that it is dollars (not gold or silver) that will be in strong demand to pay off the debt. Thus, he concludes that people may even sell gold or silver to raise the dollars needed to pay off debt.
Let me refute Richard’s argument. I believe that those who are in debt will be more likely to buy silver to pay off their debts! As an example, look at General Motors, (GM). GM has a market cap of $27 Billion dollars, and a P/E ratio of 10. Thus, they earn about $2.7 billion per year. GM has $28 billion in cash, and $297 billion of debt. Thus, it will take GM over 100 years to pay off their debt! If interest rates rise by more than 1% of what they are today, GM is effectively bankrupt. If not for the debt, GM may look like a good company. I imagine the only thing that will save GM from bankruptcy is a massive inflation. Interestingly, GM can cause such an inflation by buying silver, and pushing the price up to about $50/oz., by spending less than a billion dollars. GM has $27 billion on hand, so why not? But GM is not likely going to be able to sell $297 billion dollars worth of gold or silver to pay off their debt.
What is Richard Russell thinking? There is not enough gold or silver at these prices to pay off the dollar denominated debts, not at all. The debt load on society is perhaps $30 to $40 trillion, and there is less than $2 trillion in gold. If anything, people are more likely to take out a second mortgage on their homes, or borrow on their credit cards (strategies I do not recommend), and use the money to invest in silver bullion, not the other way around!
Historically speaking, allowing silver to be used as money is “inflationary” since silver would add to the money supply that consisted otherwise, only of gold. However, today it is different. Today, neither silver nor gold is used as money. Today, a deflation will be caused by bankruptcies, not by reducing silver’s role as money. You cannot reduce silver’s role as money any further than it already is, since silver it not being used as money anywhere in the world. With no monetary demand for silver, monetary demand can only go up, it cannot go down.
Furthermore, M3 could deflate all the way down to $4.5 trillion from the $ 9 trillion it is today, and the gold price could still skyrocket to $16,000/oz., instead of $35,000/oz. Deflation will not cause the gold price to drop, but rather, it will go up, regardless.
Now, on to interest rates.
If interest rates stay low, such easy money creation by the U.S. Federal reserve will create further inflation, and will cause gold to go up.
If interest rates go up, it will likely be the result of people selling more bonds than the Fed can buy, since the Fed has been buying bonds to keep up the bond market. Thus, if people sell bonds, it will be because they will be looking for another competing asset in which to invest that will provide a return, such as gold and silver.
Therefore, I do not care whether we have more or less inflation from here, I do not care where interest rates go from here.
The point I make is that it is the past inflation and money creation that has already taken place that will eventually catch up to us and will cause gold and silver to go way, way up. This is a much neglected point among market commentators.
How much money is there? How much wealth is there in bonds? These are the two biggest questions, often overlooked.
There is over $9 trillion in M3, money in U.S. banks. If all that money would be backed by the official U.S. gold of 261 million oz., the gold price would be over $35,000/oz.
There is over $20 trillion in bonds. If all that “money” was backed by U.S. gold, the gold price would be over $110,000/oz.
No changes in inflation or deflation, or changes in interest rates, can change those facts.
The death of paper money!
Modern society today uses paper money, it is said, for “convenience” and by “mutual agreement”. This is communism, make no mistake, and it will fail. Some people think that gold and silver have no future, unless everyone were to move to gold and silver all at once, and they do not see that happening, and so they are willing to “follow the crowd” and stay in paper money.
What they do not realize is how much money has been fraudulently created, and how few investors need to buy gold and silver to cause a major change in the prices!
By the time less than 1% of dollar holders sell dollars for gold and silver, the prices will far exceed $1000/oz for gold and $50/oz. for silver! Thus, it will not take a shift of all of society to create major price changes. And by the time silver rises to reach $50/oz. how many more people than 1% of society will want to buy silver? If it’s more than 2%, we will have a positive feedback source of escalating monetary demand. And that’s exactly how paper currencies fail. When they fail, they fail rather quickly, so that people literally have no escape and no warning, except for the warnings that are being issued now by people like me.
People who think they will be able to “follow the crowd” back into paper money will likely never get the chance, or they will move far too late.
The big name newsletter writers.
At the gold show in Vancouver, many newsletter writers were very bullish on silver, moreso than gold. David Morgan, of course, is the recognized “silver guru”, and there was myself, of course. Two other big names are Doug Casey, who is also bullish on silver. Doug Casey’s latest newsletter covers the silver fundamentals. And Bill Murphy is bullish on silver, and has supported Ted Butler’s work. Bill Bonner, at the gold show in New York in June 2-3, did not mention silver, but had just issued a silver informational email. Jim Dines is also bullish on silver.
The warnings are going out. Very well respected newsletter writers have investigated the silver situation, and are putting their reputations, and investment portfolios on the line, and into silver. Are you?
For more information, or to sign up for my free weekly silver stock report, please see silverstockreport.com