Silver - No longer in gold’s shadow
Small Cap DigestGold prices move—to a greater or lesser degree-- on almost an emotional level. Silver, on the other hand, while viewed by most investors as a precious metal play, is more correctly aligned to the fortunes and the vagaries of other industrial commodities such as copper and aluminum. While price movement of the two shiny metals tend to be lumped together—especially as gold rises—silver’s diversity of uses makes it both a commodity play as well as a precious metal investment.
That said, it would be extremely useful to readers—if you haven’t already—to take a moment and read our recent Gold article. Many of the parameters detailed there will have direct implications on the continued appreciation of the silver price.
As we sift through companies that we believe will be of interest to SmallCap Digest Natural Resource readers, it is quickly becoming apparent that a top quality junior silver producer may prove very compelling.
To that end, as we finish up our search, be assured that our first gold/silver Trading Alert will be forthcoming. We intend to bring the readership an exciting junior mining idea in the next week or so.
The above chart evidences that the price rise in silver is due to many of the same factors as those affecting gold—lower US$, deficits, supply/demand imbalances. It is the latter—supply and demand—that should prove most beneficial for silver—perhaps even more so than for gold.
Demand rises, supply doesn’t.
Annual demand for silver ranges around 850 million ounces per year. Mining meets about 600 million ounces while the balance, historically, has been made up of the recycling or reuse of scrap as well as government sales of previous production or what is known as ‘above ground’ silver. Apparently, the supply extraneous to actual annual production is waning and government sales have lessened if not curtailed completely—at least for now. Of the 68 percent of new supply made up by annual mining production, roughly 30 percent comes from primary silver mines.
Silver supply/demand is in deficit and will likely continue so for the foreseeable future.
At SmallCap Digest Natural Resource, we aren’t about simply predicting gold or, frankly, silver prices. In totality, we’re about picking smallcap companies for your consideration against favorable technical and fundamental backdrops—whether precious metal, technology or biotech-- that we believe will profit most. Of course, our picks are always in combination with our 3 “M’s”—money, management and moxie.
We believe a significant opportunity to profit from a bullish silver (and gold) market, is at hand.
Silver shares: 2 to 1 move against the metal.
There is little doubt that as gold goes, silver will follow. The price of silver has risen nicely—50 percent—since the metal broke out roughly a year ago. Stocks such as senior silver miners Hecla (NYSE: HL) and Pan American Silver (NASDAQ: PAAS) have seen more that 100 percent increases in their respective share prices over the same period, proving our previous observation that whether gold or silver, stocks tend to outperform the underlying metal.
I’ll wager you didn’t know that top three silver producing countries are Mexico, Peru and Australia. Interestingly, the US is ranked fourth. Although most of the metal is produced as a by-product of the mining of other metals, only about 25 percent of supply comes from mines where silver is the primary commodity. We are zeroing in on ideas within that 25 percent.
Silver: More diverse than gold. And safer?
Silver has more industrial uses than gold. Indeed, industrial uses make up 40 percent of demand, while jewelry/silverware and photographic applications make up roughly 30 percent and 25 percent respectively. The balance is made up of coinage—primarily the US—and production hedging. While these numbers tend to remain fairly constant, there has been a decline in photographic uses with the trend away from film to digital cameras.
As with gold, the bigger bang for investors is identifying appropriate junior silver mining stocks. There are only a handful of these companies worldwide. Accumulating a position in one or more of these unique companies should be of interest to precious metal aficionados as well as those who feel, as we do, that some speculative exposure to the precious metals sector is warranted.
The US dollar continues to look ugly, although it has perked up slightly of late. Ugly is good for precious metals.
Further, Warren Buffet figures twice in our silver thesis. First, in his latest note to shareholders, it’s apparent that Mr. B is still bearish on the greenback as he continues to move a few more billion of cash and equivalents into foreign currencies as a hedge against what he sees as further US$ weakness. As well, Mr. Buffett has been an active purchaser of silver for the last decade. His buddy Bill Gates owns a 10 percent stake in the afore-mentioned Vancouver-based Pan American Silver.
There is little doubt that significant opportunities have arisen in the junior mining sector as the prices of gold and silver move higher.
We’ll bring you proof and a nifty idea within a week or so. Promise.
23 March 2004
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First published by SmallCap Digest
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