Some of us have been following an interesting story that picked up at the start of the millenium: the rise of gold. The older ones among us remember gold spiking up to over 800$ US an ounce in 1981, only to drop back to a low of around 250$ at the turn of the millenium. Of course, gold's history is far richer and ancient than this, but that would be fodder for another post entirely. Most of us who have followed gold recently missed out. It is now trading close to 600$ an ounce and will most certainly finish the year above that level. Why did we miss out? Well, the definition of a good investment is one that no else wants! (buy LOW sell HIGH).
What even less people have been following is the story of silver prices. To pique your interest a little. The largest silver investor in the world now is Warren Buffett who holds I believe 180 million ounces... of course that's likely less than 1% of his portfolio, poor guy... but you might want to take a look at it for yourself. Here are a few charts.. one of the last month outlining a quick rise which I will explain, and the 5 year chart which shows how the price evolved parallel to gold, but actually at a faster pace.
So, what is going on with silver? Like gold, silver has been the target over the last few decades of a world conspiracy to discredit the ancient forms of money, backed by a store of value, to be replaced by fiat money, which is only backed by the full faith of the government (hence, greenback for US dollar.. there is nothing backing it). Silver has not been traditionally stored in government vaults like gold, but has been used for money over a few millenia. An edge of silver over gold is that it actually has quite a few industrial uses which destroys (as much as it can be destroyed... let's say rather makes it go away in an unusable form) whatever silver you use in the process. One of them, which is as we know in decline, is for photography (the old kind, not digital).
One reason silver has been going up over the last few years, is the same as for gold: asset price inflation. We do not see that in CPI numbers, but due to rampant credit expansion asset prices all over the world are going up and will eventually show up in CPI numbers as well. House prices, oil, bullion, metals, agricultural products are all going up in price. In a way, because of this, we can say that our dollar is going down against everything that has value, even if we do not see it in the inflation numbers. Fiat money is going down. That is a second reason for gold and silver to go up as they are a store of value that is not linked to paper money, and can't be printed away.
There are also three more reasons for silver to climb:
Actual stockpiles of the metal are very, very low at about 300 million ounces of existing above ground metal. We have suffered a vast production deficit for years, as due to the low price, many mines cannot operate profitably, so the supply has been lower than demand, and still is. For this reason, current prices will be a floor, a stepping stone. At current rates, we only have a few years of stockpiles left before people start scrambling for any silver they can find.
The actual conspiracy against bullion. Silver short position are currently 150% of annual production. We have already seen on the charts above that prices have gone from about 4$ to 11$ an ounce, so the shorts are getting squeezed badly. We know they do not have a chance to recoup their money... silver is not going back to 4$ anytime soon. At one point they will have to give in and cover their positions, which would wipe out the current stockpile.
Third, but not least, is the explanation for this year's spike. After last year's introduction of two gold ETF's (exchange traded funds) the IAU and GLD, gold has gone up tremendously. There has been a rumor for a few months that someone might want to launch a silver based ETF. This idea has been floated in the past, but been successfully lobbied against by the anti-silver lobby (Silver Users Association) for which a high price would not be good at all. Last week, the SEC has granted Barclays Bank permission to set up such an ETF. The gold ETF's have assets in that number in the billions. Current stockpiles of silver (300m ounces @10$) are worth about 3 billion. Even if interest in a silver ETF is half of that for gold, it would wipe out the current stockpile.
Now all these are great possibilities for silver. We don't even have to get a stockpile disappearing act to see prices rise. At one point the price will be high enough that people will start turning in their silverware to get a few thousand dollars off of it...
My prediction: at least 50$ an ounce of silver by December 2007. How should you get in? Well, I'm not an investment adviser so you are on your own. Buy me a beer and we can chat about it though !
Wow! Great first post PYSO. Great to see you blogging. Hope you find it a valuable experience. I'm sure if all your posts are like this one, readers will get a lot of value out of what you write. Look forward to reading more.
Ciao,
mip
Posted by: mip | March 29, 2006 at 07:34 AM