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I'm insanely bullish on silver Jason Hommel
June 18, 2004
I just returned from speaking in Vancouver on June 13-14, 2004 at the World Gold, PGM & Diamond Investment Conference.
Since I gave several speeches on silver, I've become more bullish on
silver. Why? Several reasons. Normally, I write once a week, which
gives me time to think slower.
But in preparing for my speeches, I
was forced to evaluate all the bullish reasons for silver together, all
at once. And while speaking, I was forced to think faster.
After speaking, many people had
questions on one specific area of the silver market, which I was
usually able to answer, because I've been reading and writing about
silver now for years.
In general, the people who came to me
with questions were already bullish on silver, since they went to
attend a mining show, and since they came to see me speak on silver.
And yet, it seemed to me that they just wanted me to look them in the
eye, and really say how bullish on silver I really was. They were
looking for confirmation. In other words, they asked very general
questions like "How high do you think silver will really go," and "How
soon," and then they might ask, "Do you really think so?" even after I
answered such questions. Each time, I had to re-think everything, and
re-present everything, and re-summarize everything.
When writing, I don't like to repeat
myself. When speaking, and answering people's questions, I was forced
to repeat myself, over and over.
Furthermore, the feedback I received
from people was instant. When speaking, I have the chance to see the
facial expressions change as I present each bullish argument. However,
when I write on the web, I present many arguments at once in a single
essay, and so I don't necessarily know which arguments resonate the
strongest with the readers, and convince them the most.
So, here are the two most bullish factors affecting silver.
1. The world has nearly run out of silver.
2. The nations of the world have printed up nearly unlimited amounts of unbacked paper money.
Put together, these two factors have never occurred before in the history of mankind.
True, the world was once using silver
as money in many nations at once. But back then, in the late 1800's,
the world had 5-10 billion ounces of silver to use as money. Today, we
have much, much less, because most of the silver that has ever been
mined in the world has been consumed by industry, and we may be down to
about only one billion ounces or less.
True, there have been hyper-inflations
as paper money has been printed to excess. But at those times, it was
usually in one nation at a time, and there was still plenty of silver
(and gold) to be used as money.
Today, no nation is using silver as
money. And today, the world is almost out of silver. These factors
create this once-in-history opportunity.
Silver today may be the best investment opportunity in the history of mankind.
One of the arguments that seemed to
resonate the most with listeners was that at one time in history, a
day's wage was a silver dime, or a silver quarter, or up to one or two
silver dollars for miners, who were among the highest paid
professionals in the world.
This fact alone presents the case: "A
day's wage used to be a silver dime, or quarter." When I said that,
faces lit up in recognition of the bullish case for silver. The reason
why this argument is the best is that it shows how undervalued silver
is, without putting a dollar amount on the change in value that will
take place.
What's more, I can say with confidence
that a day's wage will probably be less than a silver dime, since
today, the world has consumed most of the world's silver. Thus, a
silver dime may become a week's wage, or even a month, I don't know!
But let's value that in terms of
dollars. Today, a day's wage is up to $100 to $200 for skilled labor,
let's say $150. At $6/oz., that's 25 ounces of silver. A silver dime
contains .0715 of an ounce of silver. 25 / .0715 = 350. I'm saying
that if the world has a similar amount of silver as it did in the past,
silver could rise by a factor of 350 times higher price than at $6/oz.
However, since silver is more scarce today than in the past, and since
we have many industrial uses that are consuming silver that we did not
have in the late 1800's, then I'm way more bullish than that.
So, How High?
I'm saying I'm way more bullish on
silver than saying it can go 350 x $6, or $2100/oz. I believe the
price of silver will far exceed that due to the exhausted supplies, and
the unrelenting massive industrial demand.
So, How Soon?
Given that the world is almost out of
above ground refined silver, a permanant major price rise could happen
at any time. The two silver surveys estimate there is about 200
million ounces to 600 million ounces of silver in known verifiable
locations. At the COMEX,
as of close of business: 06/18/2004, there are 45.8 mil oz. registered
for delivery, and 71.9 million oz. Eligible. However, the silver in
either category may be held by long term investors, who may be reading
this very commentary, and who may not sell until much higher prices.
Silver is coming to market, uneconomically, through three main
sources: 1. As a byproduct of other mining, and 2. as people inherit
silver and then sell it for the quick cash, and 3. as governments and
bullion banks dump it. These supplies are meeting current demand.
Literally, however, at $6/oz., a billion dollars cannot buy silver
anymore. By the time a billionaire tried to buy silver bullion with a
billion dollars, the price may be pushed up to about $40/oz. At $6/oz,
a billion dollars is 167 million ounces. There is just not that much
silver for sale at $6/oz. in the world today. If a billionaire was
willing to pay any price to obtain "a billion dollars of silver", and
if he found out that he could only obtain 25 million ounces, he might
bid the price up to $40/oz.! Therefore, a major price rise can
happen at any time one very wealthy person decides to buy.
The other reason I'm so much more
bullish is that nobody presented any arguments to me that refuted what
I was saying. If you go out in public, and say something ridiculous,
you expect to be corrected rather quickly. But I wasn't. But two
people raised some objections, which I will mention.
The first was "The dollar will never
be destroyed, because the U.S. is too big." I will refute this
argument by saying that the U.S. is not bigger than the world, just
like the Titanic was not bigger than the ocean. The world is bigger.
Furthermore, all frauds in the history of the world, and all fraudulent
paper money in the history of mankind, all come to an end at some point.
Some investors said, "The dollar may
collapse to zero, but not in my lifetime." This is a rather sad
commentary on the state of mind of many older investors. They have no
trouble investing in fraudulent dollars, thereby helping to support
fraud. They may be approaching the end of their lives, but they have
no thought of the eternal ramifications that their actions here on
earth may have on their soul. If anything, the elder investors should
be even more concerned that they are doing the right thing in God's
eyes, not only for their own souls, but also for the benefit of those
who will come after them. Unfortunately, it seems as if they are only
out for the quick buck! The 70 and 80 year olds! Amazing!
Another investor said, "Perhaps people
are not investing in silver, because they have heard this silver story
for 15 years now, or longer." However, the silver story is changing
significantly. There has been an ongoing deficit, and it has reduced
above ground silver supplies at about the same rate as the size of the
deficit. So, the silver story is changing. The warning is now more
clear and urgent than ever before. So, if these investors who have
heard the story have not yet moved into silver to protect themselves,
they will have absolutely nobody but themselves to blame.
I would also like to address two other arguments that came up at the show.
The first was that India has plenty of
silver that they may export, and may cap the silver price. Actually,
India is a large importer of silver. Therefore, India is not capping
the price, but supporting the price. There is no need to wonder
whether India's supplies of silver may cap the price until they become
sellers.
Second, it was pointed out that mining
exploration is extremely risky. The point was made by several authors
that only one in 1000 or one in 3000 exploration projects become
mines. That may be true during the past 24 year bear market, but will
not likely remain true if we have a bull market that drives the price
up significantly. Today, there are virtually no silver mines operating
at a profit, and most silver is produced as a byproduct of lead, zinc,
copper, and gold mining. The fact that silver mining is an
unprofitable business goes to show exactly why silver is too cheap!
As the New York Times, January 11,
1859, page 2 said--- "It is well known that the most colossal fortunes
the world ever saw have been based on silver mines..." --quote found
by silver researcher, Charles Savoie.
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Paper money fails when paper money is
no longer able to buy the things that the holders of the paper money
wish to buy. Today, that is happening more and more each day. Supply
shortages are evidence of communism, which, it has been proven, does
not work. We are seeing supply shortages in uranium, electricity,
natural gas, oil, iron, steel, cement, copper, zinc, cobalt, nickel,
selenium, and silver. (And I may have left out many other important
commodities.) If you have a billion dollars, and you cannot buy a
billion dollars of silver or basic commodities, your dollars are no
good! Well, actually, a billionaire will always be able to buy a
"billion dollars worth" of silver, but just not at today's prices!
Perhaps the reason that it has taken
so long for paper money to fail in the U.S.A. is that the very wealthy
people have nothing substantial to buy. The U.S. is already
industrialized. We already have plenty of mansions, sky scrapers,
highways, bridges, and those expensive things. However, in China, they
are still industrializing. They are building everything at a rapid
pace, and so, the raw materials for building all those things are
finally running out.
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Inflation vs. deflation? Low interest rates vs. high interest rates?
I believe whether there is inflation
or deflation, the price of gold and silver will go way up from here,
and the reason is how much paper money they have created; excessively
and fraudulently.
If there is inflation, of course, gold and silver will go up.
If there is deflation, it is usually
the result of bankruptcies. If money is being destroyed due to bank
failures, it would encourage other depositors to withdraw their money
and to buy gold and silver, which do not default.
Richard Russell was recently bullish
on silver, and then he backed off. He has written that if there is a
deflation, that silver will not perform well, since silver is
"demonitized" during a deflation. Richard Russell has said that the
high levels of debt are like a short position on the dollar, and that
it is dollars (not gold or silver) that will be in strong demand to pay
off the debt. Thus, he concludes that people may even sell gold or
silver to raise the dollars needed to pay off debt.
Let me refute Richard's argument. I
believe that those who are in debt will be more likely to buy silver to
pay off their debts! As an example, look at General Motors, (GM). GM
has a market cap of $27 Billion dollars, and a P/E ratio of 10. Thus,
they earn about $2.7 billion per year. GM has $28 billion in cash, and
$297 billion of debt. Thus, it will take GM over 100 years to pay off
their debt! If interest rates rise by more than 1% of what they are
today, GM is effectively bankrupt. If not for the debt, GM may look
like a good company. I imagine the only thing that will save GM from
bankruptcy is a massive inflation. Interestingly, GM can cause such an
inflation by buying silver, and pushing the price up to about $50/oz.,
by spending less than a billion dollars. GM has $27 billion on hand,
so why not? But GM is not likely going to be able to sell $297 billion
dollars worth of gold or silver to pay off their debt.
What is Richard Russell thinking?
There is not enough gold or silver at these prices to pay off the
dollar denominated debts, not at all. The debt load on society is
perhaps $30 to $40 trillion, and there is less than $2 trillion in
gold. If anything, people are more likely to take out a second
mortgage on their homes, or borrow on their credit cards (strategies I
do not recommend), and use the money to invest in silver bullion, not
the other way around!
Historically speaking, allowing silver
to be used as money is "inflationary" since silver would add to the
money supply that consisted otherwise, only of gold. However, today it
is different. Today, neither silver nor gold is used as money. Today,
a deflation will be caused by bankruptcies, not by reducing silver's
role as money. You cannot reduce silver's role as money any further
than it already is, since silver it not being used as money anywhere in
the world. With no monetary demand for silver, monetary demand can
only go up, it cannot go down.
Furthermore, M3 could deflate all the
way down to $4.5 trillion from the $ 9 trillion it is today, and the
gold price could still skyrocket to $16,000/oz., instead of
$35,000/oz. Deflation will not cause the gold price to drop, but
rather, it will go up, regardless.
Now, on to interest rates.
If interest rates stay low, such easy
money creation by the U.S. Federal reserve will create further
inflation, and will cause gold to go up.
If interest rates go up, it will
likely be the result of people selling more bonds than the Fed can buy,
since the Fed has been buying bonds to keep up the bond market. Thus,
if people sell bonds, it will be because they will be looking for
another competing asset in which to invest that will provide a return,
such as gold and silver.
Therefore, I do not care whether we have more or less inflation from here, I do not care where interest rates go from here.
The point I make is that it is the
past inflation and money creation that has already taken place that
will eventually catch up to us and will cause gold and silver to go
way, way up. This is a much neglected point among market commentators.
How much money is there? How much wealth is there in bonds? These are the two biggest questions, often overlooked.
There is over $9 trillion in M3, money
in U.S. banks. If all that money would be backed by the official U.S.
gold of 261 million oz., the gold price would be over $35,000/oz.
There is over $20 trillion in
bonds. If all that "money" was backed by U.S. gold, the gold
price would be over $110,000/oz.
No changes in inflation or deflation, or changes in interest rates, can change those facts.
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The death of paper money!
Modern society today uses paper money,
it is said, for "convenience" and by "mutual agreement". This is
communism, make no mistake, and it will fail. Some people think that
gold and silver have no future, unless everyone were to move to gold
and silver all at once, and they do not see that happening, and so they
are willing to "follow the crowd" and stay in paper money.
What they do not realize is how much
money has been fraudulently created, and how few investors need to buy
gold and silver to cause a major change in the prices!
By the time less than 1% of dollar
holders sell dollars for gold and silver, the prices will far exceed
$1000/oz for gold and $50/oz. for silver! Thus, it will not take a
shift of all of society to create major price changes. And by the time
silver rises to reach $50/oz. how many more people than 1% of society
will want to buy silver? If it's more than 2%, we will have a positive
feedback source of escalating monetary demand. And that's exactly how
paper currencies fail. When they fail, they fail rather quickly, so
that people literally have no escape and no warning, except for the
warnings that are being issued now by people like me.
People who think they will be able to
"follow the crowd" back into paper money will likely never get the
chance, or they will move far too late.
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The big name newsletter writers.
At the gold show in Vancouver, many newsletter writers were very bullish on silver, moreso than gold. David Morgan,
of course, is the recognized "silver guru", and there was myself, of
course. Two other big names are Doug Casey, who is also bullish
on silver. Doug Casey's latest newsletter covers the silver fundamentals. And Bill Murphy is bullish on silver, and has supported Ted Butler's work. Bill Bonner, at the gold show in New York in June 2-3, did not mention silver, but had just issued a silver informational email. Jim Dines is also bullish on silver.
The warnings are going out. Very
well respected newsletter writers have investigated the silver
situation, and are putting their reputations, and investment portfolios
on the line, and into silver. Are you?
For more information, or to sign up for my free weekly silver stock report, please see goldismoney.com
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