Whilst it is hard to envisage the headline, "Gold Bubble Ready to Burst", the challenge for investors and speculators alike is to find the next sector of the market whether it be in equities, commodities or even collectables that has the potential to rival the bizarre craze associated with the Nasdaq boom from 1999-2000. In a recent article, "Riding The Next Speculative Wave", I briefly discussed a number of sectors, and put forward some reasoning as to why I felt silver could well be the next sector to enjoy somewhat of a "speculative bubble". In order to address a number of issues in greater depth, I feel a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) is justified considering the perceived strengths, weaknesses, opportunities and threats that the silver sector could well be faced with in the short-medium term.

STRENGTHS

• Mankind's fascination with silver has been dated back over 6,000 years, through it's usage as a medium of exchange.
• Silver is an essential ingredient of industrial and commercial activity, without losing it's appeal for jewellery, silverware and a storehouse of wealth.
• Of all metals silver has the highest electrical conductivity, highest thermal conductivity and greatest reflectivity.
• Silver halides are sensitive to light and X-Rays (hence usage in photography and radiography).
• The POS (adjusted for inflation) is near 100-year lows.
• The deficit (12 years running) for 2002 is estimated to be in the vicinity of 120m ounces rising from 83.8m ounces in 2001.
• 75% of the worlds mined silver production is associated mainly with zinc-lead-copper-gold where falling commodity prices have resulted in the production rates slowing.
• Small market with far less press attention than gold in the current environment.
• Limited investment opportunities in silver equities, due to poor prices and a lack of investor sentiment.

WEAKNESSES

• Relatively small market that tends to be dominated by regular participants during less volatile periods.
• In comparison to other sectors there are limited investment opportunities in silver in terms of major producers with a market profile.
• Prone to greater volatility on light volume which may be a psychological barrier for new investors.
• Silvers image may have been somewhat tarnished by the Hunt brothers attempt to corner the silver market (scandal), despite Berkshire Hathaway announcing a major purchase in 1998.
• Despite a 12- year deficit the POS has experienced minimal appreciation, which may lead some investors to question what could possibly propel silver and related equities higher.
• Concerted calls for price movement from certain parties have been continually met with disappointment. New investors may be reluctant to enter the sector with the belief the metal will "never do anything".

OPPORTUNITIES

• The potential exists to significantly increase the silver market participation rate, which would subsequently result in more spectacular gains with the momentum snowballing.
• New uses for silver in medicine and water purification based on its bactericidal qualities.
• Ability to gain market share from traditional gold investors based on the leverage potential and being viewed as a "cheap option" on the POG.
• With the broader market falls and negative fund returns, investors may be more open to assessing new sectors after 3 years of sub standard performances in equities.
• With retirement funds struggling, the risk profile of some could well increase and look for alternative investments.
• New discoveries could provide the catalyst for the next stage of the silver "bull" market as the money flow filters down to the junior explorers.
• Within the silver sector there exists junior companies with the upside potential to rival the Nasdaq darlings of 1999-2000.
• A rising tide lifts all boats, and with limited companies focused on silver, even those that are lacking in a number of areas will experience significant percentage gains.
• Potential for the mainstream press to feature silver more widely in financial publications and invite silver analysts to voice their opinion on CNBC and Bloomberg.
• The general public is aware of silver mainly through utensils and medals won in sporting events, and grasping the investment concept whilst taking some time could be far more easily digested than the "New Economy".
• The development of new financial products (derivatives) that could provide even greater leverage than equities and options.
• An increase in activity would lead to a flood of new IPO's and with it the opportunity for stag profits for those loyal to the sector.
• Silver could increase 400-500% and still be viewed as being relatively cheap to investors that have not followed the sector closely.

THREATS

• Slowing economic growth dampening industrial demand.
• Continual selling pressure from speculative longs at the first sign of any significant rise in the POS.
• Selling from China and Russia. (Unknown stockpiles)
• Warren Buffet coming out and painting a negative picture for silver after selling his stake.
• Ted Butler finally throwing in the towel despite his enthusiasm and persistence (many will argue this could well be a major opportunity rather than a threat).
• Further developments in photography that further eliminate the need for silver.
• A major market meltdown that would have a near-term impact on silver equities in the race for liquidity.

POTENTIAL STAGES OF A SILVER BULL MARKET

• POS drifts lower on limited volume, and sentiment falls further. Analysts suggest further downside for silver with limited potential to rally.
• The POS makes its low, and begins to attract increasing volume.
• Silver enthusiasts start to accumulate physical silver and place low bids for unloved and illiquid equities. Those caught in the previous rally begin to liquidate positions as their stocks recover somewhat (stale bull selling).
• Momentum starts to build, and as a result discussion increases on the Internet and in the press. Those that dare to start a topic on silver are immediately cut down by those burnt in the previous rally.
• Further research is undertaken by those curious on silver investment, despite the near-term excitement fading. The silver price and related stocks continue to plod higher, under increasing scrutiny from the short-term traders who start to trade around the POS movements and initial exploration results.
• As interest in gold increases, the silver price is quoted on the evening news, and questions such as "What are some decent silver producers in Australia?" start to litter financial forums along with "How do I invest in physical silver?"
• The POS rallies along with a number of stocks, and profit taking moves in from the stale bulls and those that bought in cheaply. Many regard the rally as a false alarm and those that purchased near the short-term peak are immediately posting on websites, "Do not touch silver or you will get burnt". The smart money is aware of the weak hands and under the cover of a glitch in sentiment pick off stocks cheaply along with adding to their physical holdings.
• The POS reacts to a rising POG, and silver stocks touch new highs on heavy volume. Analysts begin to place targets on silver and selected stocks, and the metal is given its 15 minutes of fame on CNBC. The POS meets major resistance and silver stocks are pineappled on the back of a falling physical price and calls from the weak to evacuate the sector. Long-term silver enthusiasts would have lightened holdings into this rally, and are again placing low bids on selected stocks as liquidity dries up.
• The POS reacts to a rising POG, and silver stocks touch new highs on heavy volume. Analysts begin to place targets on silver and selected stocks, and the metal is given its 15 minutes of fame on CNBC. The POS meets major resistance and silver stocks are pineappled on the back of a falling physical price and calls from the weak to evacuate the sector. Long-term silver enthusiasts would have lightened holdings into this rally, and are again placing low bids on selected stocks as liquidity dries up.
• The constant watching of the spot POS is reduced a trickle, however new support is found and silver equities begin a steady climb with limited fanfare.
• New IPO's begin to litter the market as interest increases. Major exploration efforts are announced as those companies that elected to go Dotcom dust off their silver tenements and search for low cost acquisitions of tenements and producing operations in countries with above average sovereign risk profiles.
• Drilling results released are favourable and silver equities become targets for the daytraders. The rallies are short and powerful, and again negativity creeps in for those caught near the short-term peaks. New IPO's list at significant premiums to their issue prices, and capital is readily accessible for those already exploring (placements, options and bonus issues).
• Stock prices continue to increase, and new silver related websites are developed along with the opportunity to attain significant leverage through complex derivatives products, margin lending and spread betting.
• New targets for the POS and equities are released, as the influx of new IPO's increases significantly. Despite warnings from experienced investors, green investors continue to flock into the sector (usually on borrowed money) to cash in from the boom.
• The "speculative bubble" in silver is now out of control, with 6 page features devoted towards silver investment in the financial press. Cracks start to appear, and once the POS begins to accelerate in its decline the speculative shares suffer significant price falls with buying support virtually non-existent.
• There is some near-term respite as prices stabilise and begin to rally, however the damage is done and for the time being silver is effectively in a new "bear" market with powerful rallies developing to again stir in interest and suck in those oblivious to the longer-term trend.

Despite the excellent underlying fundamentals for silver the price has done little to inspire of late. The near-term future for silver could well be related to the POG and sentiment towards it. The relatively small market, supply/demand imbalance and the potential for new uses have the ability to underpin a more sustainable rally in silver and related equities. I would expect that "Investment Demand" would provide the initial catalyst whilst economic factors could dominate in 3-5 years. The outlook for silver is certainly positive, however with any market that is recovering from significant lows the development of the new "Silver Bull Market" could well still be in its infant stages.

Tony Locantro
locantro@iinet.net.au

24 September 2002

Tony Locantro is a client advisor in Perth, Australia, and the author of "The Green Room", A Guide To Speculating on the Australian Stock Market. Tony was previously a major contributor to Australian Internet forums under the nick "Budfox" from 1998-2001. Stocks mentioned in this article are for illustration purposes only and do not represent investment advice. The author has both direct and indirect interests in stocks mentioned in the article and these may change without notice.