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Poor Man's Gold

Paul Erdman writes financial thrillers. Some of his books are so good they have been uncannily predictive. One of them "The Silver Bears" was a story about several speculators who try to corner the silver market. The attempt of course ends in disaster. The book, which was translated into a movie starring Michael Caine, came out in 1974 with the movie following in 1978.

In real life a couple of wealthy Texan oil barons, Nelson Bunker and William Herbert Hunt (The Hunt Brothers) decided, after accumulating silver for years, to form a silver pool in 1979 along with some wealthy Arabs. Silver soared from US$1.95/oz in 1973 to a peak US$5 in early 1979 while the Hunt Brothers accumulated the equivalent of about half the world's deliverable supply. By early 1980 silver had soared to of US$54/oz. In March 1980 with assistance from changes in COMEX trading rules and the intervention of the Federal Reserve the silver market collapsed including an infamous 50% decline alone on March 27, 1980. The Hunt Brothers became one of the biggest bankruptcies in US history and were also convicted of conspiring to manipulate the market. Life imitates art.

So why the fascination with silver, poor man's gold? We didn't hear of anyone trying to corner the gold market an element that has always fascinated man far more than silver. After the Hunt Brothers debacle silver went into a multi year snooze falling to lows of the US$3.50 area in the early 1990's. With the exception of a spike in 1998 to the US$7.50 zone when it was learned that Warren Buffet was taking delivery of a large quantity of silver, silver has remained in its decade's long snooze. That is until recently.

Since bottoming at $4.06 in November 2001 silver has soared some 63% to the $6.60 range. Gold is also up about 60% from lows in February 2001. But silver unlike gold is not viewed as currency nor does it have the interrelationship with the US$. While silver has lacked a monetary profile we should all be reminded that silver has a long history of being money. Canada has been off the gold and silver money standard since the mid 1960's but for centuries dating back to Roman and Greek times silver coins were the monetary standard especially for day to day transactions.

If there is any key reason, however, to hold silver it is the severe supply/demand imbalance that has been built up over years of low prices. There has consistently for the last 15 years or so that user demand has exceeded supply. User demand comes primarily from three sources. Ornamental primarily silverware and jewellery; Investor, primarily coins and bars; and, Industrial primarily photographic film and papers but increasing usage in computers, electrical and electronic components, brazing alloys and solder, pharmaceutical, and fuel cells and other energy applications. Industrial use of silver makes up the largest demand and is growing while investor demand has the smallest share of demand.

Supply comes primarily from mine production and scrap. Trouble is silver is growing scarce. US government supplies are long gone and they now need to purchase silver just to meet demand for coin and bar programs. COMEX supplies have been falling for years as it has been used to make up supply shortages due to the low prices that prevailed. The same is said for Central Banks who have sold out most of their supply of silver.

Prices have been low for years due to long dipping into above ground supplies that are now as we noted dwindling or gone. As well producers were major forward sellers to make delivery at prearranged prices. Barrick Gold (ABX-TSX, NYSE) was a major forward seller just as he was with gold. Leasing has also played a role in suppressing silver prices. And as with gold the commercials have major short positions in silver on the futures exchanges. There are of course numerous analysts who believe these short positions will eventually be squeezed as silver prices rise. The same of course has been said for the gold shorts. Just because it has not as yet happened doesn't of course mean it won't or can't.

But investor demand is growing and years of shortages and no new mines coming on stream are putting upwards pressure on silver prices. Large wealthy investors such as Warren Buffet, George Soros (through Apex Silver) and Bill Gates (through Pan American Silver) have taken on significant silver positions. No one has suggested that any of these well known investors might be the next Hunt Brothers but it is significant that investors of their stature do have major positions in silver.

There are some exclusive web sites devoted to silver such as the Silver Institute (www.silverinsitute.org) and others who devote considerable space to silver such as Kitco Bullion Dealers (www.kitco.com). There are also a number of analysts devoted to silver of which one of the best is David Morgan of the Silver Investor (www.silver-investor.com).

On our monthly chart of silver we have shown the fan speed resistance lines joining the all time high in early 1980 with the lows of early 1991. Note how when a speed line is broken the price moves through to the next level and that once broken it never goes back. Silver appears poised to be making its move to the next fan speed line resistance above $10. That of course may take several months. As well silver appears to be coming off of a bottom bowl formed from 1998 through to 2003. The 1998 highs were in the $7.50 area so we would expect some resistance at that level. If silver were to break through the next speed line then a return to the 1980 highs is possible.

The second chart below shows the Gold/Silver Ratio. This important ratio shows that since the 1970's gold has been highly favoured over silver. The ratio reached a peak in 1991 at nearly 100:1. Today the ratio has fallen to around 60:1 but this is still very high by long term historical standards where it was traditionally about 16:1 and only began to rise after gold was set free to trade freely in the 1970's. The recent breakdown suggests that silver is once again favoured over gold and should fall to the long term support under 50:1. A clear breakdown under that level would suggest that silver could once again regain its stature along side gold in terms of price.

Investors can best hold silver by purchasing bags of silver coins (old silver dollars, quarters etc) that would be available through coin dealers. Silver bars and investor grade coins are also available through coin dealers and banks. Silver certificates available through banks are another way of owning silver. Serious speculators can trade futures or options on futures.

There are two funds that hold significant silver. Central Fund of Canada (905-648-7878, www.centralfund.com) is a closed end fund that invests 50% in silver (the other 50% in gold) while the Millennium BullionFund (416-777-6691, www.bullionfund.com) is an open ended mutual fund trust that invests 33% of its funds in silver (the remainder also split 33% gold and 33% platinum). (Note: I am a director of the Millennium BullionFund) Owning physical silver in a sharply rising market is better than owning the stocks/resource companies because they can not respond quickly enough to take advantage of a fast rising price or may be located in politically sensitive countries.

We are listing a number of silver producers, plus other silver companies with substantial interests in silver plus a few exploration companies. It is impossible to obviously list all of them but we have listed ones we are following more closely or may have holdings in ourselves. Numerous other companies have silver as well because silver is by-product not only of gold but as well zinc and lead and others.

On closing we should note that Mr. Erdman's predictive abilities were not limited to "The Silver Bears". Mr. Erdman presaged the gold boom in the 1970's with in 1973 "The Billion Dollar Sure Thing", the 1990's deep recession with in 1986 "The Panic of '89", recovery of Holocaust funds in 1992 with "The Swiss Account" the corporate scandals (Enron etc.) with in 1997 "The Set Up" and the coming international currency crisis with in 1997 "Tug of War".

Company Symbol/Exch Phone/Web
Hecla Mining HL-NYSE 208-769-4100, www.hecla-mining.com
Coeur D'Alene Mines CDE-NYSE 208-667-3511, www.coeur.com
Apex Silver Mines SIL-NYSE 345-949-0050, www.apexsilver.com
Pan American Silver PAA-TSX 604-684-1175, www.panamericansilver.com
First Silver Reserve FSR-TSX 604-602-9973, www.firstsilver.com
Gammon Lake GAM-TSX 902-468-0614, www.gammonlake.com
Others of Interest
Metallica Resources MR-TSX 303-796-0029, www.metal-res.com
Western Silver Corp. WTC-TSX 604-684-9497, www.westerncopper.com
Silver Standard Resources SSO-TSXV 604-689-3846, www.silver-standard.com
Canadian Zinc Corp. CZN-TSX 604-688-2001, www.canadianzinc.com
Farallon Resources FAN-TSX 604-684-6365, www.hdgold.com
Sterling Mining SRLM-PK 208-666-4070, www.sterlingmining.com
IMA Exploration IMR-TSXV 604-687-1828, www.imaexploration.com
Quaterra Resources QTA-TSXV 604-681-9059, www.quatteraresources.com
Cardero Resources CDU-TSXV 604-408-7488, www.cardero.com
Golden Goliath Resources GNG-TSXV 604-682-2950, www.goldengoliath.com

Note: In our last article on cycles we neglected to acknowledge that Kitchin cycles are named after Joseph Kitchin a Harvard University economist who first published his theory in 1923. Wall cycles are from P.Q. Wall of P.Q. Wall Forecast Inc. (www.pqwall.com). Others may have different opinions as to the nature of cycles in stock markets.

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