Does silver demand need slaking?By: Tim Wood
Posted: 2004/02/24 Tue 19:00 EST | © Mineweb 1997-2004
NEW YORK (Mineweb.com) -- Silver and zinc aficionados are congregated in Phoenix at the moment for the Zinc and Silver Institute annual shindig. Andy Smith, red rag to gold bulls, was there with deft parries on poor man’s gold.
Warning: if you flush, fluster and curse when reading anything that is not unrestrained cheerleading for gold and silver, turn back now.
Smith’s presentation, delivered on Tuesday, reminded the audience that Warren Buffet lost his silver battle with the Indians back in 1998. The Sage of Omaha bought a year’s worth of Indian silver demand, driving up the price, which prompted Indians to swiftly dishoard.
“An epic encounter: 1 billion Indians versus Warren Buffett as Custer. Who won? Look at the price,” says the ever-irreverent Smith.
What’s more, mine output has paid no attention to prices, which is why cumulative production now totals 43 years of demand, far more even than gold at 32 years.
And it gets more dreary. Poor demand is compounded by long-run under performance relative to inflation. “In today’s money silver’s annual peak in 1980 at just over $40 was only half its summit in the mid 1400s, as many of us remember. Columbus should have gone short, for about 600 years,” Smith fires.
Those who long for silver to re-establish its “rightful” ratio with gold also have nothing empirical to lean on – unless you track world shark attacks, in which case the correlation is 0.62. Soybeans are also a reasonable predictor.
There is also some good news though. Central banks long ago quit their official silver holdings. “Silver decoupled from gold, and has hovered around ‘commodity purchasing power parity’ ever since. . . Silver inventory has largely been dispersed, privatised already. So coralling lenders is harder, lease rates are less predictable and backwardations more frequent than in gold, writes Smith.
Likewise, silver gets consumed more than gold precisely because it is cheap. “Cheap and tiny - enjoy the ride. A $6/oz tag also gives silver ‘casino appeal’ - its price volatility is higher, almost twice gold’s. Which gets to the essence of commodity ‘investment’ - timing.”
Also, when you consider hedging, gold and silver are too different stories. “Again, silver has taken its biggest hit. Interest rates are now at their lows, gold de-hedging nearer an end; when rates rise re-hedging by gold miners should see silver outride gold.”
Wait, it gets better. Everyone is chasing the China commodities boom, but what happens if there’s a bust? Not much to silver which has the least exposure to Chinese demand among leading metals.
The upside is that silver still has room to increase 8 times to its last major peak (1980); gold only twice.