RE: my two bitsThe waiting game - some reading material
Silver versus Gold, with silver updates
by John Lee, CFA
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03/27/2008
In August of 2004, when Silver was $6 and Gold was $380 I wrote the 4 reasons for liking silver more than gold.
- Supply and demand -
Mineproduction could not satisfy physical demands of either gold or silver.However, I like silver better because most official sectors, such asthe US government, have run out of silver. Only governments do nuttythings like selling a valuable asset to suppress its price. I trust theprivate enterprises holding silver stockpiles to be logical (i.e.profit-seeking) participants in the silver market. If Mr. David Morganwere right that China provided most of the silver to fulfill the demandfor the last few years, then the silver picture would just get morebullish. I expect China in a year or two will be a net silver importer(if it has not already), just like soybeans, copper, steel, and anyother commodity you can think of.
- Commercial position -
Everyshort position has to be covered. The silver commercials at times arenet short an entire year of silver mine production. The situation forgold is much less severe. If any COMEX market has a chance of blowingup, silver is it.
- Consumed vs Stored -
Thereis a lot of gold above ground to go around. But for silver, once itgoes into that laptop or fridge, it is gone. Silver has a chance torepeat what palladium did in 2000 (when it raced from $350/oz to over$1,000/oz in 12 months).
- Speculative/public interests -
Thanksto Ted Butler, David Morgan, and Gata, I think a number of people with$billions are watching silver. Tech funds are not all that stupid. Nowthat they have been burned a few times, they will figure out a way tobeat the commercial shorts. And the way to do it is quite easy asBuffet did it in 1997: accumulate the physical and make it known afterthe fact.
Back in 2004, silver bears pointed to three things:
- Unknown quantity of existing stockpiles -
Theysay there is a lot of Indian silver to go around. Well, obviously notat $5/oz or the US government will not have run out of silver lastyear. The least we can say is that existing silver owners expect torelease their inventories at a price above $5/oz.
- Silver is bulky -
That has to be the lamest excuse. Storage fee amounts to no more than2% a year. In 1998, I did not hear mutual fund investors complain aboutthe 5% front sales load when they received double-digit returns.
- Silver is an industrial metal and not an investment-
Wellfor me, anything that goes up in price is a good investment. In thepast month, silver handily outperformed gold, platinum, and palladium.That sounds like a good investment to me.
Icontinue to hear arguments on gold vs silver. Most of them are personalopinions. Some analysts pointed to how much more silver is producedover gold (600 million oz vs 80 million oz). Well by that logic.palladium with 4-million-oz of annual production, should be trading atwell over USD $1000/oz+.
Other analysts pointedout some historic data and concluded that gold will outperform silver.I let the market do the talking. Both silver and silver shares haveperformed better than gold and gold shares this year. There is a goldequivalent of SSRI and it is called VGZ and it sells at 1/10 of SSRI’smarket capitalization. This shows how much premium silver sharescommand in the market over their gold counterparts. In today’s world,where paper money far out-supplied any metal at current prices,fundamental physical supply and demand of the metal itself is reallyirrelevant. Simply put, people will be voting with their papers.
Thescenario will go like this - a $1 billion hedge fund makes $200 millionfrom gold futures, reads about silver, decides to put $100million insilver and instantly bumps the silver price by $2/oz. Others read thetapes and follow - the bull becomes a self-fulfilling prophecy. Coupledwith that, apparently no-one can go to the physical market and dump 100million oz of silver to cool the fire makes silver a no-risk bet.
Update: Today
- Stated government sale has not decreased-
Official Government sales according to the world silver survey have not decreased since 2004.
In2004, silver’s established firm bottom around the same time the USTreasury ran out of silver may be a pure coincidence. Or maybe:
1.Other governments demanded a better price for their silver than the USgovernment causing the silver price to rise despite persistencegovernment sales.
2. The well advertised fact ofthe depleting US treasury silver inventory might have triggered morenet implied investment demand, up from 15 million oz in 2003 to over 70million oz in 2005.
- Commercials short position is bigger than ever
Commercialspiled on 100,000+ short contracts in 2004, now it is at 140,000+. Thatis 500 million oz before vs 700 million now. How does one explain moreshorts with a rising silver price? Perhaps the day of reckoning ofmassive short covering is to come? Or perhaps there is no realcorrelation between silver shorts and the silver price?
- Implied Net Investment Demand Grew
Whilenet investment demand grew in 2005 and 2006, it still accounted forless than 10% of total physical demand. One should take such figurefrom World Silver Survey with a grain of salt. As no one truly knowshow much physical silver changed hand privately.
Conclusion
In today’s world, where paper money far out-supplies of any metal atcurrent prices, fundamental physical supply and demand of the metalitself is really irrelevant. Simply put, people will be voting with their papers.
Thecase applies to silver, gold, grain, oil, and any commodity. After all,how can one blame the tripling of wheat prices in the past 12 months onChina? Did all of 1.3 billion Chinese changed their diet habit andswitched to bread overnight?
People vote with theirpapers. The Commitment of Traders Report shows today’s positions havegrown by 20%+ for silver (200 million oz) since 2004. There was astrong investment demand to counter the dealer shorts. 200 million ozis merely $4 billion with present invest-able dollars, measured at tensof $trillion (if not over $100 trillion). Any micro-analysis based ontoday’s silver stats does not carry much significance.
SinceAugust of 2004, Gold has gone up 250% from $380/oz to $950/oz, whilesilver has gone up 300% from $6 to $18.5. As the 4 pro-silver reasons Ioutlined in the article begin to further manifest themselves, thepercentage of performance difference to date will be seen as negligiblecompared to what’s to come
John Lee, CFA
johnlee@goldmau.com