Silver Stock Report
by Jason Hommel, Nov 16, 2004
Government confiscation fears were one of the biggest concerns that investors asked me about while I was speaking recently in Toronto and Chicago.
But the silver market is several orders of magnitude too small for the government to even be concerned about! It is impossible that they could confiscate enough silver bullion to even make a difference to the annual budget! The total silver bullion available in the entire world is down to about 60 to 600 million ounces. At $7.50/oz., that’s worth $450 million to $4.5 billion, yet government budgets are around $2300 billion, and the deficit alone is about $500 billion. How could .5 billion dollars even help in the slightest to help fund a budget deficit of 500 billion, nearly 1000 times as large???
Thus, there is no need to be remotely concerned about confiscation until well after silver bullion rises in price by at least a factor of 1000! And even then, the silver in the U.S., about 100 million ounces, at the COMEX, would be worth $7500/oz., for a total of a mere $750 billion, which is, again, a mere drop in the bucket when considering the dollar amount of government expenditures, which are over $2300 billion!
Confiscation fears are understandable. Although silver that you own is default free, and cannot go to zero value… there is only one remaining problem: it can be stolen by thieves, or government. This is the age-old problem of being wealthy, you have to protect your wealth.
Realistically, government confiscation is impractical given the relative values.
The real confiscation takes place through inflation! The dollar has lost 30% of its value in the last 2-3 years, and is about to lose another 20-30% in the next 6-12 months!
Those who scorn bullion often fear theft of the physical bullion. The “selling point” of the so-called cashless society that the Fed is trying to foist upon us is that it would eliminate theft. Except it would not eliminate the theft of the inflation of the currency!
By the time the entire world returns to using only silver and gold bullion coins for all of commerce, it would be inconceivable that 30% of all the bullion would be stolen within one year or two. At most, I could hardly conceive that 1% or less would be stolen, physically, in a year! And yet, the near equivalent of 15% per year has been stolen in the last two years given the devaluation of the paper and electronic currency of the dollar–that only exists, ostensibly, to prevent theft! Yet where is the outcry about the theft of 30% of the value of the dollar???
Could you imagine the societal uproar that would happen if 100% of the assets of 1 person in 7 were totally stolen each year by thieves? And yet, that is the societal equivalent of a 15% currency devaluation for two years in a row!!!
If you are going to fear confiscation, then fear inflation, for that is the real confiscation.
In fact, fear paper money, for paper money was created to deceive the holders of the physical gold and silver in the first place. And also, fear the entire concept of banks, for banks are also a mechanism of confiscation! Fear also, insurance, social security, annuities, inflation-indexed bonds, futures contracts, and options. All are merely “promises to pay”, and are all paper instruments designed to confiscate your real gold and silver.
This last week I was presented with an investment opportunity that I could not realistically turn down. Unfortunately, I had to sell silver bullion to raise the money to participate in this private placement. In the process of needing to sell silver quickly, I learned even more about the silver bullion market.
The silver market is extremely tiny. The world of dealers is small. Silver investors are currently motivated by both greed and fear. To participate in the private placement, I had to raise money within one week. To sell silver for this, it was too slow to wait a week for my bullion to be shipped, wait another week for a check to arrive, and wait a third week for the check to clear my bank. So, I had to use a new bullion dealer that I had not used before who was able to wire funds on the day I delivered the bullion. I drove a hard bargain on the price–I talked up the price 3 times! Yet I still received a mere $7.48/oz. on Friday at 3PM pacific time for my 100 oz. bars, even though the price of bullion closed at $7.59 on Friday afternoon. I thought I would at least receive the spot price! The dealer’s excuse was that he only received 4 cents on the deal, as he had to “lock” in the price that same day–with a larger dealer–one that I know–but is slower in making pay!
It’s funny. This dealer is a well-known bullion advocate, yet was “afraid” to hold bullion! Thus, he was motivated by fear. And yet, there is a world of silver buyers, who buy only paper, the futures contracts or options, who buy at spot or higher in the futures, and who buy not physical, to whom I could not sell my silver, because they are motivated by greed!! Both greed and fear operating at once!
I wished I could have sold my silver to my readers, but the speed at which I needed the funds prevented such. I wish I could have given this bullion dealer free advertising regarding the silver I sold him, to sell it to you, my readers, at spot, or at 5 cents over spot or something, but he re-sold the silver within hours!
Last week, I presented my case for why I expect silver to rise in value by about 300 times or more by the time the world returns to using silver and gold as money, and the fraud of paper dollars is destroyed. For the new readers, my argument was as follows:
Here’s the reasoning in a nutshell: Paper money is fraud. All frauds fail. All paper money has failed. Silver, when it was plentiful, and used as money, was valued as a silver dime for a day’s wage. Today, given that silver is scarce (consumed by industrial use), and the supply and demand fundamentals are what they are: 900 mil oz. consumed annually, 600 mil oz. produced annually, then when paper money fails completely as it must, then silver will rise higher in value than the historic value. Today, a day’s wage is about $150/day. Today, that will buy silver at 5.4 times face value.
$150 / 5.4 – 27.77 face value of silver dimes.
That’s 278 silver dimes for a day’s wage today!!! That proves silver is undervalued by a factor of 278 OR MORE!!!
I received only one intellectual rebuttal to my argument, which follows in the next 7 paragraphs:
You have made the provocative claim that silver is undervalued by a factor of “at least” 278, because “silver, when it was plentiful, was a silver dime for a day’s wage.” You claim that this is “CONSERVATIVE, and RATIONAL, and IRREFUTABLE.” You implore Jim Sinclair to “give a rational response!” I don’t know whether he will, but I will.
When labor was compensated at a silver dime for each day, that was because a laborer at that time, working all day, might come up with enough silver to make one dime. Standard mining tools were a pickaxe, a shovel, and a shotgun (so that you could keep what you found). Compare that to the sophisticated equipment and technology used today, starting with 55-ton trucks. A mine producing a million ounces of gold each year, plus byproducts, might employ a couple of hundred people. Each of those laborers is producing about $10,000 of minerals each day. How could they possibly be compensated by a dime?
It is true that the Government’s printing press has created many, many dollars since a silver dime was worth a dime. It is also true, however, that advances in technology, productivity and organization have radically reduced the amount of labor needed dig a dime’s worth of silver out of the ground. Therefore, in “real” terms like the price of a day’s labor, the price of silver has dropped through the floor — as has the price of every other commodity, including oil. Today, your laborer working for $150 a day makes enough to buy three barrels of oil. When he was making a silver dime, could he have bought three barrels of oil with that dime? No.
Over the long term, with competition, the price of anything is what it costs to make it. For instance, the price of gold is around $425 an ounce now because it costs “swing” producers in South Africa, like Durban Deep, around $425 an ounce (in rand) to pull it out of the ground. The same thing is true of silver. If gold goes to $1000 an ounce, there will be a ***flood*** of higher production from existing and new mines three or four years later, which will push the price back down to marginal cost. (Just as has happened with oil several times since the embargo.) The only way that gold can go to $1000 an ounce, and stay there, is if the real cost of getting gold out of the ground goes to $1000 an ounce, and stays there. We’re nowhere close to that. Temporary imbalances in supply and demand can drive prices higher or lower for a couple of years, but that’s it.
The only way that silver is going to $3000 an ounce is if dollars become worth less than toilet paper. That kind of quick destruction of a currency has happened basically once — in Weimar Germany. There is no reason to think that it will happen here and now. Even the obliteration of the Argentine economy in 2002 led to only a four-fold increase in the local price of silver, in peso terms.
So — silver is not undervalued by a factor of 278. It costs no more than $7 to pull an ounce of silver from the ground. If you look at actual production costs for the producers that you cover, you will have to agree. Unless their costs increase by a factor of 278, neither will the price of silver.
Your company coverage is very thorough, and often insightful. Your model of silver prices is just wrong.
The center of this man’s argument is the following: “Over the long term, with competition, the price of anything is what it costs to make it.” And that is absolutely an untrue assumption. The price of everything must EXCEED the cost to make it, otherwise it will NOT be produced. The excess is the profit incentive, which, if it did not exist, there would be no production. This man’s assumption is the assumption of a pure communistic state, where nobody made any profit from anything, which is utterly absurd!
Furthermore, why does this man not apply his assumption to the production of paper money??? If the man were consistent with his argument, then paper money must also return to its cost of production, which is 3 cents per piece of paper!!! And this would have an enormous impact on silver prices–as silver would be demanded as money!
Also, it is ridiculous to suggest that there should be no profits from mining gold and silver, especially given the numerous expenses and risks inherent to the industry! In fact, if history is any guide, and it surely is a guide, then gold and silver mining ought to be among the most profitable of all industries that exist, since they are in the business of producing money, or “making money”, that must compensate for costly and risky exploration, drilling, feasibility studies, tunneling, mining, milling, refining, minting, and so on. History shows that silver mining should be among the most profitable industry known to mankind, as the following quote shows:
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 Charles Savoie
Furthermore, it is ridiculous to suggest that there should be no profits for mining silver given the fact that the profits of silver mining vary so wildly! For example, when silver is produced as a by-product of profitable copper mining, then the cost to produce the silver is ZERO! Does that mean silver should be valued at zero? Of course not!
If only 10 million ounces of silver are produced at a cost of zero each year, and if society demands 900 million ounces of silver each year for industry, then the price will far exceed zero value! That should be self-evident!
I have excess trees on my property. I could cut one down for free. But does this mean that all forms of wood in the entire world should be free, or close to the cost of my production costs? The notion is utterly preposterous.
Therefore, the value of silver is dependent upon supply and demand, like every other commodity. Today, monetary demand and investment demand are near zero, despite the incredibly favorable supply and demand fundamentals–that very few market participants seem to be aware of.
Thus, when investor demand returns to the silver market, as it must, and when monetary demand returns, as it must, then the price will rise, in proportion to that demand.
The man also assumes that mankind’s progress which has created increased production capacity should drive down only the price of silver, and not also every other commodity. In actual fact, and according to history, under a gold and silver standard, gold and silver will buy more things and be valued even more as societal production capacity increases! If man can produce 10 times as much silver through technological advances in productive capacity, and if he can also produce ten times as much oil, textiles, cars, computers, and so on–then that will keep the value of silver the same!
History has shown that the amount of gold in the world has remained remarkably constant at 7/10ths of an ounce of gold, per person. New gold production is about 2500 tonnes per year, which is about a 2% increase, given the 135,000 tonnes of gold that exists, and population growth is about the same, 2% per year!
In fact, mankind’s advances in productive capacity have masked the terrible effects of the twin confiscations of inflation and taxation that come with paper money. Modern man is better off today, even with the evil of paper money. Therefore, imagine how much more mankind would have prospered, and will prosper, if not afflicted by these thefts!
On another topic, did you know that if you buy a vehicle or car that weighs over 6000 pounds, you can deduct the entire cost from your taxes, if it is used “by the business, for business reasons”??? I just learned that this weekend, and it astounded me. I remember a Fed governor announcing that we should all just go out and buy an SUV and the economy would all be ok… but this is ridiculous! Did you also know that this tax incentive has existed for the past five years??? Unreal! By January 1, 2005, the tax exemption drops to $30,000! Better buy that Hummer or Suburban soon! This is an indirect subsidy of Ford and GM! Did you know that the auto makers make the most money on their largest and most expensive cars like SUVs? Did you know that Ford has $180 billion of debt? Did you know that GM has $280 billion of debt?
Think about it. Without this tax subsidy, Ford and GM may have already gone bankrupt! If that happened, it would crush the bond market, as $280 billion and/or $180 billion worth of bonds would be defaulted on, and become nearly worthless. And yet, the U.S. government now has $500 billion of bonds to sell, given the annual budget deficit, and yet, the last two bond auctions in the last 3-4 months showed that they could not even sell $10 billion in bonds!!! Thus, a default or bankruptcy by GM or Ford could cause a cascade of declining bond values, and higher interest rates. It is unbelievable the extent to which the government has gone to prop up this economy. I believe Ford and GM are doomed, even with this economic subsidy. I don’t think these auto makers can avoid bankruptcy even if the government paid them to make cars! For if that happened, surely their workers would go on strike to be paid some of the subsidy!!!
My point is that the government, through the tax incentive for buying SUVs, is propping up the bond market by helping to delay the bankruptcy of Ford and GM! How desperate must they be?!
I honestly believe that a $30,000 SUV will be a horrible investment. Within 10 years or less, China will probably be able to produce and sell comparable or better cars for the equivalent of $5000 or less!
Let’s think about China for a moment. Workers in China recieve about 1/100th of our wage. There is no way we can compete. And yet, the dollar is about 80 times overvalued, if you divide M3, which is the money in the banks, by the official U.S. gold hoard.
$9.3 trillion / 261 million oz. gold = $35,632/oz. That, divided by $439/oz. = 81.
Thus, the dollar is 81 times overvalued. That number used to be about 100 times overvalued when the gold price was about $250-300/oz.
Although we cannot compete with China at current currency values, it is not the fault of free trade. Free trade is the truth that is poking holes in, and exposing the fraud of, the overvalued dollar. If Americans were paid in gold and silver and if silver were valued about 300 times more than it is, then we would be working for lower wages than the Chinese, and we would be quite competitive. Honest money, and honest weights and measures, is the only economic salvation.
In the meantime, however, Americans greatly benefit from the trade situation. It could not be better than if we conquered the Chinese in war, and made them all our slaves. For if the Chinese were our slaves, they would surely receive much more in wages than they do today (at least $5.00 per hour instead of $.50/day), and the cost of an occupation would surely exceed the trade advantage that we now have.
Yes, we have the trade advantage, not them. We send them worthless paper that costs us nearly nothing to print, and they send us goods that we buy with that paper. It’s quite a scam we have going.
If you want a good deal, then buy silver, or buy “made in China”. Both are good deals, and neither will last.
It is said that the Chinese are a proud people, and that they would rather die than be shamed. Perhaps we gold and silver advocates should shame the Chinese into buying gold and silver?
How stupid can the Chinese be to both send us goods, and ship us silver as well? It’s like sending us goods and sending us money at the same time! Ridiculous and stupid in the extreme!
Note, I’m encouraging both the Chinese, and us, to buy gold and silver, and to use honest weights and measures, as doing so will be better for both of our nations!
I read that the new saying among the Chinese is that “To get rich is glorious”. Well, sending your trade partner (the U.S.) both goods and money (silver) is no way to get rich. Idiots.
China, I read, holds over $300 billion in U.S. bonds. Idiots. At $440/oz. for gold, that’s $300,000,000,000/$440/oz. = 682 million ounces / 32152 oz/tonne = 21,206 tonnes.
Chinese idiots! The annual gold demand is a mere 4000 to 5000 tonnes! By the time they try to convert their worthless paper money into real gold, they will lose perhaps 75% of the value of their paper money, as gold prices rise by more than a factor of 4 to well over $2000/oz.!
Speaking of idiots, the real idiots are the American people, who still yet do not recognize the enormous value of scarce gold and even more scarce silver bullion.
Also idiots are most economists and gold market commentators. They speak as if they FEAR that the Chinese will sell their bonds for gold. No way! I would applaud it! Please, I beg the Chinese, please sell your U.S. bonds! Save us from our tyranical and evil government that is foisting these evil and fraudulent dollars upon both us and you. Please refuse to be our slaves and please refuse to work for less than nothing as you continue to send us both real goods and real silver. Shame on China. Shame on U.S. bondholders.
This explains why the Chinese have allowed their people to own gold. Perhaps they recognize that it is impossible to trade their $300 billion in bonds for gold, and perhaps they recognize that it will be best to let their people buy gold on the world markets.
Imagine the benefits to you, who recognize the truth. If you invest in silver now, and it rises in value by 10 times in the next few years, and if the things you buy are increasingly made in China, you will soon be living like a King. I pity the fools who sell their silver stocks to lock in their gains to buy a $30,000 SUV today. It’s like throwing money away. Put $30,000 into silver or silver stocks, and watch it grow to $300,000, and then buy a Chinese SUV for $5000 years from now, or buy 60 of them, and open your own car dealership!
Confiscation? Confiscate all the silver you can at these prices, and confiscate cheap Chinese goods while you are at it.
The real irony is that banks were created to get you to deposit your gold and silver with them. Today, the banks can only stay in business by selling gold and silver at cheap prices to prop up their fraudulent and failing currencies. Recognize these opportunities as “once in history” opportunities, and take advantage of them in any way you can.
Two last examples of the potential and historical value of silver bullion:
The book of Judges tells stories of the Israelites during a 400 year time period, after they crossed the Red Sea and escaped from the Egyptians, but before the time of the kings such as David and Solomon.
In Judges 9:4, we see that Abimilech used 70 shekels of silver to hire men to kill his 70 brothers, to make sure he would be king instead of any of them. A shekel is about 1/2 of an ounce of silver. This happened after the righteous judge, Gideon, died, because Abimilech and his 70 brothers were all the sons of Gideon. Thus, under righteous rule, fraud must have ended, and the value of silver must have been recognized. Imagine, by the time the value of silver is recognized, if you could hire a hit-man for a mere 1/2 an ounce of silver! That should tell you something of the value of silver.
Later, in Judges 17:10, we see that a priest, a Levite (a Jewish priest) was hired for 10 shekels (about 5 ounces) of silver per year, (plus food and one suit) to be the equivalent of a hired, live-in servant.
Imagine telling a highly skilled lawyer today, “Live with me, and be my personal advisor, always at my beck and call for any legal advice I may need, and I’ll give you all the food you can eat, one suit, plus 5 ounces of silver per year.” That’s the potential value of silver.