The Mysticism of Silver
I have fond memories of hanging out with my old man when I was about 12 years old. He was a humble man with a gentle soul, and he had a couple of hobbies - one of which was photography. Many was the night when he and I would chat about nothing in particular for hours in the dark room - that he set up to develop and print the black and white and sepia toned photographs that he took with one of the early Nikon cameras that later became famous. (Sadly, the camera brand, not the photographs).
Years after that, one of the business which I came to own during my career was a mirror framing business, and as part of its operations we installed a hand silvering plant to mirror the surfaces of the smaller, fiddly mirrors that could not be bought as stock items. It was a Canadian system of spray plating - that could also be used to produce shiny surfaces on the framing material and, with dyes, these surfaces could be pigmented to look like copper, brass, or even bronze.
It was just as interesting to me to see the shiny film of silver miraculously appear on surfaces that we sprayed, as it was to see the photographic images miraculously appear on the photographic paper in the developing solution that dissolved and washed away the surplus silver on its surface.
The wheel of life turned, and a lifetime later I started reading about how the silver price was going to collapse because photography was going digital. Uninformed (about photography, or silver's myriad other uses) people would point to the chart of Kodak, and in hushed an ominous tones, predict the implosion of silver's inherent value. (Chart courtesy Bigcharts.com)
What these glass-half-empty people failed to see sufficiently clearly was that the developing liquid that is used to develop the images - by dissolving the silver on the photographic paper's surface - typically lands up as a silver solution containing a large proportion of the silver that was originally placed on the paper's surface.
They also failed to understand that that silver is reclaimable.
When you look at the demand/supply equation of silver you note that there is a large number on the supply side attributable to waste reclamation. Much of that waste (my guess would be most of it) probably emanates from reclamation of silver from photographic developer solutions.
In 2003 (according to the Silver Institute's web site at www.silverinstitute.org/supply/index.php ) 191.6 million ounces of silver "scrap" was reclaimed - which happens to be almost exactly equal to the 196.1 million ounces of silver demanded for photographic purposes.
It came as a surprise to me - when I started asking questions - that a majority proportion of the 196.1 million ounces used actually finds its way back into the 191.6 million ounces supplied. Maybe even as high a proportion as 80% to 90%.
In short, I started to understand that the argument regarding silver's vulnerability to the demise of film based photography was largely a red herring.
In my view, Silver's demand will continue to outstrip supply because of its unique properties, not the least of which is its amazing reflectivity and electrical conductivity capabilities. It is silver that is used in the manufacture of "room temperature superconductors" that will emerge as the next generation of electrical cable because copper cable - whilst efficient - also results in a loss of up to 33% of all energy that is pumped into it at the power generation source.
There are also those of us that are old enough to remember how much effort it took to bring the blackened (oxidised) silverware back to its original shiny surface. That was a real pain, flowing from silvers extraordinary penchant to combine with oxygen by "scavenging" it out of the air. That same scavenging process is what allows silver to be such a powerful bactericide. As the oxygen is scavenged, it is not only the surface of the silver that is oxidised. If there are micro-organisms in the vicinity of the silver, the oxygen that it scavenges will also oxidise (and rupture) the cell walls of the micro-organisms- thereby killing the organism. That is how disinfection works if it relies on "destruction" of the micro-organism, as opposed to "neutralisation" of the organism's reproductive capability by use of (say) Germicidal Ultra Violet light.
But silver has been the subject of price manipulation - by a cartel that is probably operating illegally in the strict sense of the term. These "walnut and pea" price manipulators have been using confetti trails of derivatives for years to prevent the price from rising - even as government stockpiles world-wide have been dwindling to virtually zero.
In the end analysis, though, silver's mysticism remains - as anyone who has ever worked in a mirror silvering plant will attest to. It is truly a unique and magical material.
The "punters" have been buying options and forward contracts for years from the "market makers" who have been playing their games for years; and it stands to reason that - one day - the punters will be on the right side of the trade.
On that day, the market makers will find themselves unable to deliver physical silver in terms of their contractual obligations to do so, AND the market will zig when it was supposed to have zagged - before the contracts have expired. On that day, the market makers will find themselves scrambling to recover, and - provided the derivatives market is not closed for trading by the authorities as a result - there will be blood on the floor as the silver price spikes up (but probably no higher than around $30 - $40 an ounce, in terms of the 600 year chart)
When will that day arrive?
Well, the chart below (courtesy kitco.com) seems to be telling a story - admittedly often told in the past to no avail - that the day may be getting closer.
Let's understand what happened: The silver lease rate (the price the market makers pay to "borrow" silver to deliver into forward contracts) has zigged and a couple of days ago it zagged when it shouldn't have.
If the break up on the silver lease rate chart is a portend of things to come (which, in terms of the price of silver itself - courtesy Decisionpoint.com - could be within the next few days), how far could it realistically rise in the foreseeable future?
Well, let's be conservative here and use the more cautious "horizontal count" price destination estimate on the following Point and Figure Chart (courtesy stockcharts.com)
Should silver break up from the triangle - which might happen within days of the results of the EU referendum to be held on May 29th 2005 on the new Constitution - the horizontal count shows a possible price destination of $9.50 an ounce.
Of course, if it breaks down, it could go as low as $5.50 an ounce, but I have a clear picture in my mind's eye of the spray of silver solution miraculously turning the clear glass surface into a mirror.
No other commodity on earth can replicate this - either naturally or artificially. In that context, I have difficulty in believing that silver will be relegated to oblivion as a commodity - even if as a currency it is relegated to a third class citizen.
And then there is that ascending right angle triangle of the goldollar index - which has been telling me that behind the smoke (and if you will excuse the expression) mirrors, the market is becoming more attracted to gold as a precious metal than the Central Bankers would like.
Which way will it break?
Well, it would be foolish to try and peer into the future with a crystal ball. Let's just say that if silver breaks up next week I will be not in the slightest bit surprised.
Australia, May 24th, 2005