Part I: Look for the Silver Lining: The Coming Bull Market in Silver

November 9, 2000

INTRODUCTION

This writer first acquired silver dollars in the 1950s and '60s, when, due to a lack of inflation, they could be acquired for only a little over a dollar. It was understood by all that these silver dollars were money - similar to the silver dimes, quarters, and halfs - all of which were used to buy goods and services just like paper currency.

During Lyndon Johnson's presidency, silver was removed from most U.S. coinage as the federal government began to develop far more inflationary policies (i.e., the days of "guns and butter"). By the early 1970s, silver (which the government said had been "demonetized"), began to rise in price along with gold, platinum, oil, inflation, and U.S. interest rates - ultimately rising 2500% by 1980 (i.e., from about $2 to $52/ounce).

Wall Street, the government, and conventional wisdom later attributed the rise to "market manipulation" (or cornering) by Texas oil billionaire Bunker Hunt and his brother Herbert, but this was not true. The Hunts did take very large positions in silver (i.e., at least one hundred million ounces) because the price was cheap and the inflation-induced upside potential was huge. They bought most of their silver under $10 per ounce and all of it under $15.

These purchases of an underpriced commodity were not unlike the very large purchases of silver (or silver shares) over the past year or two by Warren Buffett, George Soros and Bill Gates - who, like the Hunts in the '70s, recognize a very undervalued commodity in a sea of very overvalued investments.

In the late '70s speculators jumped into the silver market and gave the metal its final run to $52. The ultimate collapse of silver from this overpriced pinnacle was blamed on the Hunt brothers by Washington and Wall Street. But that was as dishonest as the non-stop economic/financial lies that come out of Washington and Wall Street today, and the manipulation by financial officials was as blatant then as it is today in financial markets.

The Comex and the CFTC (Commodities Futures Trading Commission) changed the silver trading rules (i.e., they raised the margin requirements to 100%; they refused to let the Hunts take delivery of their silver; and they allowed only futures sell orders, not buy orders). Of course the market could do nothing but collapse. But first (before changing the rules) a number of the board members of the Comex and the CFTC shorted massive quantities of silver. They made billions in the greatest financial manipulation in history - up until that time and blamed the Hunt brothers for the collapse of silver. [ED. NOTE: Today's stock and financial market manipulations are even larger and more blatant.]

Over the past 20 years, silver has given up most of its 1970s gains and has retreated to the $5 range (where it has been building a huge base for several years) and where it is trading today (in inflation-adjusted terms) at its lowest level in almost 100 years. It is today (i.e., $4.92 at this writing) the most undervalued investment vehicle in the world, a fact that has not been overlooked by Buffett, Soros, Gates and other large value conscious investors.

Today, the fundamental factors in the silver market are very similar to, but even more extreme than in the early 1970s. Industrial, consumer, and jewelry demand for silver are rising all over the world even as production is declining. The greatest supply/demand shortfall in history now exists - even greater than the one the Hunts spotted in the early '70s, which, along with sharply rising inflation, helped to trigger the 25-fold rise during that decade.

A similar confluence of factors: rising global inflation and interest rates; rising oil and commodity prices; severe silver shortages; and huge political instability in the Middle East all bode very well today for this long overlooked investment vehicle. And as long-time precious metals investors know, silver is by far the most volatile and potentially profitable of all the precious metals (i.e., when it moves, it can literally double overnight).

BULLISH SUPPLY/DEMAND FUNDAMENTALS

A historical perspective of silver supplies might be helpful: A half century ago, at the end of World War II, total known (i.e., above-ground) stocks of silver were over ten billion ounces, with the U.S. government holding 4 billion ounces of that total. At that time we were entering an era of unprecedented global economic expansion and prosperity which has lasted to the present.

During this era, silver was consumed in a variety of vital modern applications at a phenomenal rate. Today, known global stocks of silver (in private or government hands) have shrunk over 90% to under a billion ounces. This 9 to 9½ billion ounce drawdown was the result of a persistent shortfall between supply and demand which continues to this day. Today, demand for silver is 170% of mine supply, and continues to grow. A severe deficit has existed between demand and supply for over 10 years now. It was bad in the '70s; eased off in the '80s; and was huge throughout the '90s. This deficit has accounted for the drawdown in above-ground supplies. The great majority of the above-ground stocks (or inventories) have been depleted to fill the supply shortfall and avert a price explosion. These supplies are now effectively gone.

1. SILVER DEMAND - Similar to platinum and palladium, the lion's share of demand for silver is for industrial applications, in which the metal is a small part of the finished product. Consequently, if silver goes up 3, 5 or 10-fold (or even 25-fold as it did in the 1970s) it will diminish industrial silver demand very little (i.e., if a $1,000 item has $2 worth of silver, and the price of the silver content of that item rises to $10 or $20, it will not keep the manufacturer from using silver, or the end user from buying the item).

Industrial demand for silver has been explosive since 1950 (but especially in the 1990s), using up most all of the 10 billion ounces of global reserves accumulated since the days of the Roman Empire. Prior to the twentieth century, silver was used primarily as a monetary metal - hoarded like gold. However, in the last century, industrial demand kicked in, and became the dominant end use for silver. It is noteworthy that virtually all of the gold ever mined is still with us, whereas most of the silver ever mined has been used up (consumed).

a) SILVER'S UNIQUE PROPERTIES - Silver has unique properties which are not replaceable in industry. It is malleable; fatigue resistant; corrosion resistant; it has high tensile strength; it is soft enough to be formed and stretched; it is wear resistant; has a very long functional life; it is very sensitive to and reflects light, conducts heat, and electricity; it provides catalytic action; it renders unique properties when alloyed with other metals; it reduces friction; and is a bactericide which can be used in infection fighting applications. Because of its unique properties, it is virtually impossible to replace silver in most of its tens of thousands of applications.

b) SILVER'S INDUSTRIAL APPLICATIONS - Silver is used in the manufacture of high performance batteries, with billions of silver oxide batteries generating power in tools, portable electronic equipment, cameras, watches, etc. Silver zinc batteries have a wide number of high-tech military and space applications (i.e., rockets, torpedoes, satellites, missiles, etc.). Silver coatings are used in bearings in virtually all jet engines, in diesel engines; silver is used in auto manufacture and in virtually all motorized equipment; silver is used in plumbing, soldering; in computers in circuit boards, capacitors and chips; in mobile phones; it is used in the chemical industry in tens of thousands of applications.

Silver is used in thousands of electrical applications (i.e., switches, contacts, fuses, household appliances, in over 40 switches in a typical large auto, in computers, etc). Silver has thousands of high-tech applications where reliability, precision and safety are imperative. Since silver kills bacteria, it has hundreds of medical and dental applications.

Tens of thousands of industrial and medical applications of silver make up about half of global silver demand. About a third of the world's silver supply goes to jewelry and silverware (with a lot of that being consumed in India), and the remainder (about 20 percent) is used in photography. (In 1999, 280 million ounces of silver were used in jewelry and silverware and 245 million ounces were used in photography.)

c) PHOTOGRAPHIC DEMAND FOR SILVER - Since 1980, silver bears have been arguing that silver usage in cameras and photography would cease - to be replaced by digital cameras. Photographic demand for silver has grown every year since then right up through the present (see chart), now totaling almost 250 million ounces per year. Photographic demand in 1999 jumped 3.9% over 1998, and is forecast to grow by 4.5% in 2000 over 1999. Amateur and professional photographers around the world (numbering in the hundreds of millions), rely on silver halide film and paper, used in hundreds of millions of cameras to take tens of billions of photos each year.

Even if digital cameras should become popular, traditional camera use and photography will continue to grow because of its convenience, low cost, and better image quality. Nothing else reacts to light like silver salts. It is not likely the $800 digital camera and $2000 computer needed to display the pictures will be a competitive substitute for a $7 disposable camera. Silver is also used widely in x-rays; graphic arts; and film for movies and videos.

d) TOTAL GLOBAL SILVER DEMAND - grew in 1999 to 877.4 million ounces (see chart). Asian demand was down in 1997 and '98 due to the Asian financial crisis but is now rising strongly as the region recovers. Overall demand for silver has doubled over the past 14 years (with most of the growth coming from industrial applications and photography), and is likely to continue growing at about a 4 percent annual rate. Demand for silver in coins and medals is the only category that has declined sharply over the past decade (i.e., to 29.5 million ounces in 1999) reflecting a decline in investor demand in the 1990s.

2. SILVER SUPPLY - Mine production of silver only supplies 58% of demand, with the supply/demand deficit growing steadily since 1989. Total supplies of silver from mine production in 1999 shrunk to 546.8 million ounces (versus total demand of 877.4 million ounces). The total "structural deficit" (i.e., total fabricator demand less total supply - ignoring supply from government sales and paper derivatives) jumped to 155.7 million ounces in '99, up from 94.5 million ounces in '98. The cumulative deficits (from 1990-99) total 1,224 billion ounces (see chart).

a) ABOVE-GROUND SUPPLIES OF SILVER ARE DISAPPEARING - Clearly, the supply/demand shortfall has been made up over the past decade from sales from government hordes, and from silver bullion bars and coins which have been melted down. In 1999 alone, 335 million ounces were taken out of above-ground supplies. Investor's coins and government (or investor) silver bars have been melted down and turned into industrial or consumer products which have been consumed. That silver is gone forever!

The 1999 total supply/demand deficit of 335 million ounces was covered: 208 million ounces from scrap or recycled silver; 30 million ounces from governments (including 6 million from the U.S. government); and 97 million ounces were supplied from melting down bullion, coins, and private inventories and converting them to industrial applications.

The important point to note is that most of the above-ground supplies of silver (which in 1950 were a little over 10 billion ounces and are now down to less than a billion ounces - down almost 95 percent - have now been used up to fill the growing industrial appetite for silver. Unlike gold, there are virtually no above-ground silver reserves. And large new silver mine production cannot be geared up since 75% of silver production is a by-product of lead-zinc, copper or gold mining operations. It is improbable that these operations would be expanded due to a silver price rise.

The U.S. government used to hold 4 billion ounces of silver in its strategic reserves (i.e., for wartime or other crises). Today, most of that is gone. The Defense Department silver stockpile is down 85 percent from the sale of mint coins alone (i.e., American Eagles).

b) WHERE ARE THE ABOVE-GROUND SUPPLIES?

Of about 933 million ounces of global above-ground reserves, bullion and coins held worldwide (including market and industrial inventories) were down to 757 million at the end of 1999 (and probably under 700 million at the end of 2000). Most of these coins and bars are held by long-term players who will not turn loose of that silver.

Global governments held 153 million ounces at the end of '99 (part of the 757 million ounces), having sold 150 million ounces in the '90s. Berkshire Hathaway (i.e., Warren Buffett) held 130 million of the 933 million ounces. As of 12/31/99, market inventories held by Comex, Tocom, etc. and industrial inventories were at the lowest levels in decades (i.e., 113 million ounces). They are lower at the end of 2000.

THE BOTTOM LINE

There is a 335 million ounce supply/demand shortfall or deficit, and it is growing each year. The shortfall has been met from above-ground supplies and those are now running out. This will bring about an explosive rise in silver prices in the not-too-distant future ala the 1970s and perhaps even greater - because global silver consumption is far larger today than in the 1970s; global above-ground reserves are down almost 95 percent; and the annual deficit is much larger.

B. THE BIG GUYS SEE THE GIANT SILVER SQUEEZE COMING

Just as the farsighted billionaire Bunker Hunt saw the incredible silver opportunity in the early 1970s and acquired a huge position at low prices in anticipation of the great silver bull market, so Warren Buffet, George Soros, Bill Gates, and other very wealthy investors (including some Middle East oil sheiks) have been quietly acquiring silver (or silver equities) at the lowest nominal prices in over 25 years and the lowest inflation adjusted prices in almost 100 years.

These are very savvy investors as well as entrepreneurs who made their substantial fortunes by being ahead of the crowd, by being mavericks, and by recognizing value when no one else did. As Buffett has said, he does not see value in the present stock market (especially the high-tech sector) but he does see value in silver. In 1997 Buffet quietly accumulated what was then believed to be one-third of the available above-ground supply of silver - using 2% of Berkshire Hathaway's substantial holdings (i.e., he bought 130 million ounces for $650 million). He announced the acquisition in February '98, which prompted a 25% temporary run-up in the silver price.

If one considers the tightness of the 933 million ounce global (above-ground) float of silver, much of which is in strong (long-term) hands, which have no intention of parting with it anytime soon, Buffett is in a rather commanding position in the world silver market. What if more large OPEC oil producers begin to convert let's say one or two percent, or five percent of their petro dollars into silver (as they did into gold and silver in the 1990s)? The global squeeze in silver and spike in price would be huge. And like the present price rise in oil, it might last a lot longer and rise a lot farther than it did in the 1970s.

Gold is perfect for use in coins and jewelry as it does not react with air or water like many other metals.