SILVER-Some Questions and Answers Part One - Shine On Silver!

March 29, 2005

We have received many inquires as to our thoughts on some recently published information on the Internet. Although we cannot and will not address every article pro or con on silver or gold, we chose to address a few recently.

The first article we will examine is by esteemed analyst Robert Prechter, who is a disciple of the Elliot Wave Theory named after, "Ralph Elliot - who contended that the stock market tends to move in discernible and predictable patterns reflecting the basic harmony of nature." A definition (according to government brochures): "In technical analysis, [it is] a charting method based on the belief that all prices act as waves rising and falling rhythmically."

The second article we will analyze is from Reuters and entitled "Silver Losing Its Shine," - about silver's lacking pricing power because it is no longer used so much in photographic development.

First let us summarize Robert Prechter's observations on silver and the silver market, written (for the record), with Steve Hochberg and Pete Kendall and published this mid-February. Prechter begins with the following: "The silver fever of the past year prompts the observation that silver's cash price of $6.30 on January 4, 2005 is exactly where it was trading in 1974, over thirty years ago. …" All right, but readers will also want to note that the purchasing power of the U.S. dollar is far less than what is was thirty years prior. Thus, in the real world the price of silver at $6.30 is far undervalued to where it was 30 years previous.

Prechter goes on; "We are far from perfect in calling markets, but we almost never get caught owning hot markets at the top, such as silver futures above $8.20 last year." He then seems to reverse course, adding: "The last time The Elliott Wave Theorist bought silver was in 1993, just off its low at $3.50. For two consecutive months that year, EWT recommended buying bags of silver coins as a long-term hedge against a failure of the banking system. I still have mine, with no plans to sell them. … If we're right, it will be the buying opportunity of a lifetime before gold and silver really take off. That's the plan, anyway. Of course, we might be wrong, and we will address a change of opinion if the metals fool us and take off."

Prechter is right about picking the bottom in true inflation adjusted terms, of course, but he just as right to state that now is the "buying opportunity of a lifetime," for silver and gold. And not so much to rebut Prechter as to make a point about silver - and silver investing - I would add that making money on precious metals has less to do with where a commodity is at a given moment and almost everything with where the market is headed. In other words, the short-term swings are exciting but it is the major long-term trend that you must use to base your decisions. Recall that the price of silver went up to over $50 an ounce (in 1980 dollars) and might have gone higher still. If the Commodity Futures Trading Commission did not enforce their rules! You could have sold on the way up or the way down and made a boatload of profit, assuming you got in toward the bottom. If you have been reading my articles and my newsletter, you have hopefully begun purchasing silver long before today - and we have much more upside in the precious metals left.

As a foremost Elliot Wave theorist, Prechter is a fairly vociferous deflationist, arguing that historical cycles affect inflation and deflation of money stock as much or more than central banking manipulations. Prechter has been calling for a deflationary depression for a long time, and while I won't get it into the details, I am not averse to his analysis. I admit that all great inflations end in deflation, I wrote about my present analysis on this in the March Silver Investor. Even though Prechter anticipates a fairly controversial deflationary depression, he still believes that buying precious metals might constitute "the buy of a lifetime."

If readers were not apt to be positive about silver before, perhaps that last statement will provide an encouragement. Here is one of the foremost deflationists arguing that silver is a great buy. And meanwhile, I don't think you can find a single hard-money inflationist who will not argue in a similar vein. Talk about a "no lose" approach. I can't think of another investment that could bring the deflation/inflation debate together on the same page as effectively as precious metals here and now.

What's the inflationist take? The more common view is that the West's monetary position will continue as "stagflation," which is what we had in the 1970s when precious metals did so well the last time. During a stagflation, Western economies see continued inflation with little or no job growth. The value of money erodes even as people find it hard to find jobs or gain wages. Europe is certainly facing the dilemma and increasingly the United States is as well. Central bankers face a difficult predicament in a stagflation since they need to raise rates and cut the money supply but too much of that will choke off what little growth there is. The usual attack in such a scenario is gradualism, which is Alan Greenspan's approach. But gradualism can last a long time - and with quarterly rate increases of only a quarter point, you would need another five years to get into the mid-teens as regard interest rates in the United States - and even then you might not see much of an effect, depending on how much money the Fed is printing.


Now let's take a look at another article on silver from Reuters in Singapore, written on March 4, 2005. The article begins with a quote from John Reade, precious metals analyst with UBS Investment Bank in London, as follows: "'We believe that the rally in silver is getting rather long in the tooth. We forecast that silver will average $5.80 in 2005 and $5.60 in 2006." It continues in this negative vein: "Buying silver may no longer be a sterling idea these days. Despite recent lofty prices, the outlook for the precious metal that was once widely used in photographic film is dimming due to oversupply and a switch to digital pictures. … The overall supply for silver is quite large. … Analysts said the metal's rise to an eight-month high of $8.15 an ounce in December was solely driven by speculators inspired by gains in gold and copper and not by fundamentals."

A few other points the article makes: (1) "Sales of rolls of old-fashioned film are projected to fall 17 percent to 2.9 billion rolls in 2008, from 3.5 billion rolls in 2000, photography industry figures show. … (2) Jewelry and silverware account for around 30 percent of the market, but analysts said this demand would be stagnant as owners of silverware and old jewelry cash in on the high price and recycle rather than buy new silver items. … (3) While the metal may still challenge and break $7.0/7.50 an ounce once more on speculative buying, [a] move lower in other commodity prices [may] drag silver lower later this year."

Points for silver

Let's take the last points first.

(1) Sales of film are projected to fall 17 percent over the next two years. This sounds excessive as the best analysts at the recent Silver Institute conference and the Silver Institute itself looks for maybe a 5 percent decline over several years. Regardless, what is never mentioned is that photo silver comes back into the marketplace anyway because it is recycled and there are other areas that require silver besides photography.

(2) Jewelry and silverware account for around 30 percent of the market, but analysts said this demand would be stagnant as owners of silverware and old jewelry cash in on the high price and recycle rather than buy new silver items. I tend to get a bit crazy when confronted with statements like this; I think about analysts shouting "buy, buy, buy" as stocks goes up. How about this from Wall Street stock analysts? - "Demand for stocks will stagnate as owners cash in on the high price and recycle rather buy new items." Sound silly. Yes, it is. You'll never hear that statement I guarantee it. Higher prices of any commodity may depress the USE of a commodity, but not the fervor for INVESTMENT. Higher prices inevitably DRIVE investing. That's just how human nature operates.

Oh, yes, one more thing: to lump all buyers of silver jewelry into one category is loony! The buying cultures of India and Asia when it comes to precious metals are alien to those of the United States with its impoverished (and even middle-class children) buying "blings and things" from the neighborhood jewelry shops. In India and Asia, the purchase of silver jewelry is not for show but as investment. A woman may well wear her family's fortune on her body in times of great celebration. During times of impoverishment, the "jewelry" may be sold to provide family resources. This pattern is one of investment - and therefore consumption of silver jewelry - at least in India and Asia where much of the world's purchases take place - will probably be driven up, not down, by higher silver prices. …

(3) "While the metal may still challenge and break $7.0/7.50 an ounce once more on speculative buying, we expect the move lower in other commodity prices to drag silver lower later this year." I will dispose of this point by mentioning that as I write, silver has once again crossed over the $7.50 making such "speculative buying" an immediate reality. This is a very buoyant silver market. To make a blanket statement that silver will move lower this year (and buy logical extension stay lower) is ludicrous as lumping the silver-buying habits of middle-class Indians and Americans together. Simple-minded doesn't begin to describe it. We've got immense U.S. inflation with the Iraq war as a driver, the euro taking over from the dollar worldwide as a core currency, the dollar on shaky ground anyway due to its immense sales by the Treasury and the vast dollar holdings of Japan and China, doubts about the stability of the world situation causing trepidation and fear in the hearts of many investors at home and abroad - folks, if this is not the kind of climate which drives precious metals purchases, I don't know what is!

If pressed, I think it would be appropriate to use Jim Puplava's description of the economy as a "Perfect Storm." Various economic factors conspiring to further the purchase of silver worldwide, in Mexico, 31 governors have just voted to establish a silver-backed Mexican currency. This struggle is not over and could play significantly into silver demand and price in the future, but is not even considered by the main analysts.

India, China and, in fact, all of East Asia have been purchasing additional gold and silver for several years now, and the trend will continue. And let's recall the China factor, the Chinese economy is growing at an astounding rate of almost 10%. And while much of this growth is certainly boosted by the government 's monetary policy (loose money) another great chunk of it has to do with the Chinese poverty driver as a nation of 1 billion-plus gradually take advantage of an increasingly free-market to build wealth while producing an enormous quantity of goods for domestic and worldwide production. I expect a downturn at some point in the Chinese economy but I am not one who predicts it is coming anytime soon. The domestic market, in my opinion, is just too big and will act as a giant sponge, cushioning any relaxation in world demand for Chinese goods and services. Thus, I expect Chinese demand for silver and silver products supporting its technology will continue and make up for any fall off in demand for silver from the film industry.

I took the last points first, but I can't resist commenting on the first point the Reuters article makes, as follows: Analysts said the metal's rise to an eight-month high of $8.15 an ounce in December was solely driven by speculators inspired by gains in gold and copper and not by fundamentals.

What kind of thinking is this? The fundamental fact is there is 1.5 billion ounces less silver today than in 1990. The U.S. government is out of silver and had to pass a bill to purchase silver in the open market to continue the Liberty (Silver Eagle) coin program. New uses for silver are discovered continuously and the price did not move on fundamentals?

Should gold go to US$500 or US$600, silver shall travel far higher too. It may reach US$10 or US$20 per ounce. At that point shall the business wires write a story explaining that the gains are speculative? Maybe they will. And who will care with gold and silver at those prices. The statement is a good example of "talking silver down." Claim prices are "driven by speculators" as if that is a bad thing and imply, while you are trotting out your explanation, that prices are about to collapse as speculative interest fails and silver reverts to a pricing pattern based solely on its worth as an industrial metal.

Well, wire services I have news for your, silver has never been priced SOLEY as an industrial metal. It is a precious metal as well. Its industrial uses merely increase its overall value and often give silver the opportunity to exceed the gains in gold given that it is a commodity that needs to be re-supplied every year. Silver is far more volatile than gold, possibly giving investors more opportunity on the buy side.

In summary: The drop-off in film demand for silver will be filled by increasing demand for silver in various high-tech endeavors, especially from China. Silver jewelry is looked on as an investment not an ornament around the world and thus price rises in silver act as an investment incentive, stimulating silver purchases worldwide, not decreasing them. Finally, U.S. monetary policy, a combination of administration wrong-headedness and the culmination decades of financial policy fumbles are going to continue to encourage economic instability and exacerbate the flight to precious metals. As U.S. Treasuries - once perceived as the most solid investment in the world - come under increasing attack along with the dollar this up trend in precious metals will only acquire strength.

David Morgan ( is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here

The Fourth Coinage Act of 1873 embraced the gold standard and demonetized silver, known as the “Crime of 73”