| Silver
Threads & Golden Needles |
Dateline: 04/07/98
"...will not mend this heart of mine, and I dare not drown my sorrows in the warm glow of your wine." - Popular Song
Gold buffs have been drowning their sorrows for over a year now, but there may be light at the end of the tunnel. Is gold about to stage a comeback? And what about silver? When gold was plummeting last year, silver was surging. And recently, while gold was strengthening, silver took a dive. What gives here anyway? Let's see if we can make sense of these markets!
Silver has often been referred to as the poor man's gold. Less expensive than its amber cousin, it was and still is a precious metal. It is used as money. It serves as a store of value.
But silver is different than gold, not just because of its price. Silver is different because it is an extremely useful metal in its own right. Extensively used in photography and industry, silver has a market outside its niche as precious metal.
Recognition of this fact led such analysts as Jerome Smith in the seventies to promote silver as being a superior investment to gold. And indeed, Smith proved correct. When gold jumped from around $150 an ounce in August 1977 to a peak of $850 in 1980, a five and a half fold increase, silver climbed from $4.50 to $50, an eleven fold increase. Both soon dropped right back again, but silver took a proportionally greater hit as well.
Last year silver started a steady increase in price. About the same time, the Wizard of Omaha, Warren Buffett, started accumulating the metal . This did not become public knowledge until early February, but it is doubtful Buffett's plays caused the price rise. Given Buffett's careful style and conservative business philosophy, it is more likely that Buffett anticipated the price move.
In October, Scotia McLeod published a research report on silver that noted the following:
The silver shortage, they noted at the time, is running at 148 million ounces a year and growing. That's 22% of supply. There are no substantial government overhangs and private stocks are being depleted at as much as 25% a year. They boldly stated "we estimate that during the year 2000 there will be no commercially available inventories of silver," a situation, they noted, "that cannot in practice happen."
Other interesting facts about silver are that supply from mining is only marginally affected by price. Most silver is produced as a by-product of other mining, notably lead/zinc, gold and copper, so production is more greatly affected by changes in the price of those commodities than in the price of silver itself. Industrial demand is largely inelastic. Price increases do not reduce demand. However, price does affect demand for decorative use. "Every dollar increase in price," reports Scotia McLeod, "appears to reduce demand by 43 million ounces."
Scotia McLeod concludes from their analysis that the equilibrium price for 1998 should be $9.10 an ounce.
When Buffett announced in early February that he had been accumulating silver, the price jumped again to a 9 1/2 year high. More recently, the price of silver dropped again. Why?
The answer came out on March 30 with the news that China has been selling huge quantities of silver on the open market. Up to 150 tonnes were reported to have been exported with more to follow. This brought prices down from their high of $7.59 an ounce to under $6.50 again.
So where does it stand now? The long term fundamentals have not changed and silver has been slowly gaining again after falling throughout March. It has plenty of room to increase to Scotia McLeod's target of $9.10.
Best silver play? The Scotia McLeod report recommended several, but liked Pan American Silver and Prime Resources the best overall. Silver Standard Resources is said to be the best leveraged of the pure silver plays. It's also a favorite of precious metals guru Jim Blanchard.
With gold the situation is somewhat different. The bearish fundamentals, says Canaccord Capital analyst Larry Strauss, are still in place. By bearish fundamentals he means a strong U.S. dollar, continued central bank sales, and uncertainty over the plans of the European Central Bank (ECB) for gold.
Nevertheless, he sees some positive signs for the metal. He argues that all the bearish elements have already been discounted by the market. He supports this argument by noting that the price of gold stayed relatively stable even after Bank of England Governor Eddie George announced a delay until July for an announcement on the ECB's policy on gold. It continued to be stable after Belgium announced the sale of 299 tons of gold bullion. Thus gold is forming a bottom.
Several factors indicate a mildly bullish scenario. Canaccord Capital reported in their Daily Letter of March 24th that:
In their April 5th letter, Canaccord's Strauss said the rally of the last two weeks was "a mostly sentiment driven short-covering rally". They don't believe the current rally will be sustained and recommend that short term traders take profits, but that long term investors hold. As he stated in the March 24th letter, "we do not believe gold is out of the woods."
They're still maintaining their average price estimates for 1998 and 1999 at $325 and $350 respectively, but their buy recommendations are for quality issues like Barrick, Placer Dome, Freeport-McMoran, Euro-Nevada and Franco-Nevada, not for speculative or junior exploration companies.
Another analyst with a different approach to gold is Bill Buckler, aka The Privateer. He has long argued that the huge build-up of debt and continuing expansion of the money supply will spell ruin for the U.S. dollar some day. A hard core gold bug, he has argued that gold will come back as money, that major currencies will have to be tied to gold, almost as a law of nature.
Besides these philosophical points, he also presents a technical analysis of gold on his Gold pages every week. Plotting the price of gold against 100 day and 200 day moving averages, he called gold a "buy" on Feb. 27, with the caveat that if gold dipped below $290, you should bail out. On March 27th he said there were enough technical signals to call a gold bottom and raised the stop loss level to $295.
On April 3rd, gold closed at $308, its highest level since November. Buckler argues that two "potential earthquakes" in the global financial system are looming large and present a good possibility gold will take off. One of these is the Japanese sell-off of U.S. Treasury Bills to the point where Japan is no longer the largest overseas holder of U.S. debt. The other is the long awaited introduction of the Euro, a potential rival reserve currency.
Many are watching the European situation avidly to see how much gold backing the European community will give their new currency. Indeed, there is some speculation that the U.S. may buy up gold to bolster the dollar and meet the competition of the Euro.
If gold becomes regarded once again as the asset to hold as a monetary reserve (instead of the U.S. dollar), or as a valued commodity in itself with the new commorative coin, gold could really take off. It would add significantly to the demand side of the equation, while reducing the supply as central banks become increasingly reluctant to part with it.
As Buckler puts it, "the bottom for Gold is in - now it's really going to get interesting."
Kitco 24 Hour Spot Gold
Chart
Detailed chart of gold price action for the last 24 hours.
Kitco London Precious Metals Prices
Chart lists the daily London Gold and Silver prices going back
three months.
Buffett's Silver Streak
Time magazine's Feb. 16th account of the Buffett silver
play.
Canaccord Capital
Research Services
You can access Canaccord's daily letter and periodic reports
online or get them by email. The service is available on a
permanent basis to clients only, but visitors can get a three
month free trial. Some of the best analysis on the Internet.
The Privateer's
Gold Pages
The Privateer's Gold Pages are my favorite weekly read.
Insightful & interesting.
Investing (Canada) Gold & Mining Links
Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions.
American Readers: Looking for a broker who can sell you Canadian stocks? One of my brokers is licensed to sell securities to Americans in 26 states. She works for Canaccord Capital which is an excellent company with a superb research department. They are particularly knowledgeable on resource issues. Send me a note if you want to get in touch with her.
Investing (Canada) Notes
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