Silver’s “poor fundamentals” refuted!

(Buy silver while it’s on sale, now!)

Silver Stock Report

by Jason Hommel, April 29, 2008

The Guardian just wrote a hatchet job on silver, to try to kill the market.  Somebody must be very desperate.  I will refute this article point by point.  My rebuttal will be in italics.

Spotlight falls on silver’s poor fundamentals

  • Reuters, Monday April 28 2008

By Pratima DesaiLONDON, April 28 (Reuters) – Investment money flooding into silver has overwhelmed poor fundamentals and helped it to outperform gold, but the tide could be turning for precious metals and the probability of large losses is rising.

Silver has outstanding fundamentals, and silver’s downside is minimal, and, in fact, it probably just bottomed, as I will show.  

Silver’s price falls in percentage terms are likely to dwarf those seen in gold, which some fund managers say has stronger supply/demand fundamentals.

Again, the opposite is true, silver’s supply/demand fundamentals are much better than for gold, as all the smart money knows, and as I will show.

“History shows that when you get a substantial correction in precious metals, silver falls more than gold … It’s a more volatile market and smaller in value terms,” said Stephen Briggs, analyst at Societe Generale.

That’s true, silver is more volatile, and in a bull market for silver, which we are in, silver will clearly outperform gold, as it has outperformed gold, as the silver to gold ratio is narrowing, from 80:1 to 50:1, and we have a long way to go to get to the historic 15:1 ratio, or we will likely exceed it, with silver moving even higher.

One big reason behind surging prices has been the tumbling dollar, making commodities priced in dollars cheaper for holders of other currencies. The weak dollar also prompts producers to raise prices to protect profit margins.

Silver producers do not have the luxury of raising prices.  No commodity producer does.  All commodities in the world are either sold at the spot price, or under long term contracts that have already been agreed upon, which, in this bull market, are usually at lower prices than today.

Last week the dollar fell to record lows against the Euro, to beyond $1.60, an event which has caused many to question whether further losses can be sustained and whether it has bottomed.

While the excess creation of paper money is one of the best factors for higher silver prices, the dollar’s relation to the yen and Euro has almost nothing to do with it’s relation to silver and gold prices.  All paper money, the yen, Euro, and the dollar, are all falling against silver and gold, generally, since 2001 and that trend will continue.

“The dollar is not going to keep on depreciating forever,” Briggs said. He expects gold prices to average around $900 an ounce next year from $1,025 this year and silver to average $15.50 compared with $19.20.

Well, actually, the dollar could keep on depreciating forever, as all paper currencies in all of human history have eventually done just that.  It’s silver and gold that cannot depreciate forever.  Furthermore, these spokesmen from the large banks and brokers are always revising upwards their estimates of silver’s future prices, and it’s always behind where silver ends up going; I’ve seen this pattern for the last eight years now.  Since when have the large banks or brokers called silver right?  When did they advise you to ever get into this market to make several hundred percent since 2001?  They never did.  And now they want you to sell?  They always want you to sell.

Financial uncertainty, which has underpinned precious metals since last August is to some extent becoming less important to investors seeking the higher returns stocks and bonds offer.

Stocks and bonds offering higher returns?  Since when?  Only if you go back 30 years, but not the last 8.  The Dow/Gold ratio topped out in 2001 at about 56 and has narrowed down to about 14 now that gold has hit about $900.

With a weakened case for holding precious metals, prices have started to slip. Spot gold is now around $893 an ounce compared with a record high of $1,030.80 on March 17 and silver at $17 from a 27-year high of $21.24.

Weakened case for holding precious metals?  What weakened case?  They made no case.  They didn’t even get the facts right.  The current dip in silver is probably the bottom, and now is probably the best time to buy!

Goldman Sachs recently said it expects to see gold prices at $835 an ounce in 12 months and silver at around $15.50.

Here’s another investment bank revising their estimates upwards again, but making bearish calls.  Hilarious.  Pathetic.  Bullish!  

RECYCLINGFrom the end of last year to March 17, silver prices surged by more than 40 percent, while gold was up more than 20 percent. Silver’s heftier gains were built on investor flows.

Absolutely.  Investment demand for silver surged from 5% of annual mine supply to maybe about 8-10% of annual mine supply, we’ll see soon.

Barclays iShares silver trust, the biggest silver exchange traded fund listed in the United States, now holds more than 5,770 tonnes of silver, a rise of about 10 percent since the end of last year.Gold holdings by New York-listed StreetTracks Gold Shares, the world’s biggest gold ETF, stand at 591 tonnes, down about 5 percent since end-December.

I agree with those stats, but look at what they mean.  With gold trading at about 50 times the price of silver, and the gold ETF holding more than 1/10th of the tonnes of the silver ETF, it means that about 5 times as many investment dollars went into the gold ETF.

“Silver is probably going to fall more than gold in percentage terms,” said Wolfgang Wrzesniok-Rossbach, head of sales at German metals trading group Heraeus.”From an industrial and jewellery point of view, there has clearly been a decline in demand. There has been a lot of additional material coming to the market in the form of scrap.”

This “German metals trading group Heraeus” is not said to be either long or short.  They could very well have short positions, and just inventing things.  They appear to be a silver user, at first glance here:

More than 20,000 tonnes of silver were produced globally last year compared with around 2,500 tonnes of gold.

I agree with those stats.  What is not said is that 160% of gold mine supply is purchased by investors each year or about 4000 tonnes of gold.  In stark contrast, about .07% of silver mine supply is purchased by investors each year, about 1555 tonnes, or about 50 million ounces.  

The surplus in the physical silver market is expected by some analysts to rise to around 2,500 tonnes from a surplus of around 900 tonnes in 2007. The physical gold market could see a surplus this year of 600 tonnes from 500 tonnes last year.

There is no such thing as a “surplus” of precious metal.  This is an accounting term, used to designate demand by investors.  

“Fundamentals come into play when prices are coming down,” said John Reade, analyst at UBS. “Silver doesn’t have gold’s fundamentals.”

Exactly.  Silver does not have gold’s fundamentals, silver’s are much better.  With industry consuming more silver than is mined each year, any slight increase in investor demand for silver will continue to drive silver’s prices upwards, and make a mockery of all of wall street and all they do and all they have to offer.   This is why they must band together, to write lying foolishness against silver as they do.  This can only be an indication of them feeling pain in the silver market, not being able to coax out any supply from investors after having bombed the price in the last few weeks.  The silver shortage is continuing with many coin shops still very low on silver supplies, as investor selling by the public, which was a large part of recycling supply, has changed since gold hit $1000/oz., and now must be putting the squeeze on all of wall street, who are probably carrying a collective short position in silver.

ONE SOURCE OF DEMANDSilver is often a byproduct of other metals such as lead, zinc and copper, where miners are trying to ramp up production with some success. 

Funny theory.  True, about 70% of silver production is as a by-product of the base metals.  I just read that Chile, who produces 40% of the world’s copper, is ramping down copper production due to a power crisis.  And several more trusted analysts in our industry have finally turned bullish on copper recently.

That means more silver on the market and together with scrap recycling, supplies are set to jump this year, while overall demand, including that from ETFs is expected to fall.

Why would they project demand from silver ETFs to fall?  That would be quite a change.  It’s rather hard to predict such changes; it’s usually more likely that things will stay the same, with ever increased demand from the silver ETFs.

“Silver is very dependent on one source of demand — ETFs.

That’s not true.  Silver prices will go up even without new investor demand, due to the overwhelming fundamentals that there is so little investment demand at all.

 You can’t get excited about silver in the same way as gold. Silver doesn’t really have the same cachet,” Briggs said.

Now that’s true.  Silver has absolutely no cachet.  As I wrote above:160% of gold mine supply is purchased by investors each year or about 4000 tonnes of gold.  In stark contrast, about .07% of silver mine supply is purchased by investors each year, about 1555 tonnes, or about 50 million ounces.  So, how much money is spent on gold vs. silver each year?  

Silver: 50 million oz. x $17/oz. = $850 million.
Gold: 4000 tonnes x 32,151oz/tonne = 128.6 million oz. x $900/oz. = $115,743 million, or $115 billion.

Thus, 136 times as much money is spent on gold, than silver, by investors each year.  Silver has absolutely no cachet, true, so true.  And yet, the fundamentals are so much better, precisely due to that lower investor demand.  When investors get educated about silver, they buy hand over fist, and create shortages at major coin shops around the world.

“Demand from the photographic sector has been falling fast … It’s no longer an important source of demand.” For gold, the picture is somewhat different. Mine production is expected to hold steady this year, but analysts expect output in South Africa, a major producer, to fall over coming years because the ore that remains is deep and expensive to access.

Wow.  What a totally biased statement, telling half truths that are totally irrelevant to silver vs. gold.  These guys must either know nothing, or be intentionally trying to hammer silver prices.  Silver’s declining photography demand is being offset by rising industrial demand and the tiny increase in the tiny investor demand.

Fabrication demand — jewellery and coins — is expected to continue unabated as rising incomes in emerging market countries such as China and India allow people to choose gold over silver. 

More hatchet jobs against silver are expected, while they continue to say that silver prices will be expected to fall, while silver prices actually rise.  The reason that the establishment will not tell you to buy silver is because they don’t have any.  The investment demand is so tiny, they hardly have any silver at all, and have never been able to enter the market in any size.  How can wall street establishments, who receive bail outs by the Fed, to the tune of $20 billion dollars at a time, buy any silver when the silver market is swamped by less than $1 billion of investor demand annually?  

Be fruitful and multiply and you can see through the lies.  Buy silver.  They lie.


Jason Hommel