Tdl's Latest on Silver: "The Coming Silver Boom"

March 11, 1998

Knock-knock

Who's there?

Wayne

Wayne who?

Wayne, wayne go away, come again another day!

After the fifteenth century most sailing vessels were equipped with rope ladders leading to the main spars so that seamen could easily climb the rigging to trim or raise sails. Because storms sometimes arrived quickly, nervous captains often ordered most of the crew aloft immediately. After having furled all the canvases, sailors had to get down on deck as quickly as possible to avoid being jerked overboard when the ship tossed. The clumsy rope ladders were so slow that most sailors simply caught large ropes and climbed down "hand over hand," which emerged in the English language as any rapid progress. Because of the increased interest in boxing in the late eighteenth century, the expression was modified to hand over fist. Steamships eventually made descent of rope obsolete, but by then the expression had been locked into the English language, and it eventually evolved into the financial phrase "making money hand over fist." Ironically what was a descent had become an ascent.

Our prediction of wild weather in our 24 Oct 97 TDL has certainly come true these days, such that here in San Francisco we are considering investing in an ark. We are mollified however by the wild rise in silver markets, where silver investors are making money hand over fist.

Since last summer our charts have demonstrated silver's Uptrend that unmasked intense buying. Now it is announced that the legendary Warren Buffett had begun buying silver at $4.18 last July 25th, a time during which the pessimism toward silver investing was virtually total, for those who care to recall. But if we recommended silver ahead of Warren Buffett the "Sage of Omaha," does that make us the "Presage"?

Buffett's purchase of 129.7-million ounces, over 20% of this year's production, sent silver flying over $7, its highest price in nearly 10 years and giving him a profit of one-quarter-of-a-billion-dollars on his investment of $650 million. Security Analysts worldwide were astounded by the deviation from his usual pattern, which he explained by declaring that, "Equilibrium between supply and demand was only likely to be established by a somewhat higher price." (Translation: bullish.) Buffett once said that his secret was, "Having a pretty good idea where his investments were going to be in 10-year's time," and he loves "the idea of wild swings because more things will be mispriced."

The prejudice against the four precious metals (gold, silver, platinum and palladium) was so total in 1997 that we were confident it was a Major Bottom, by the Dines Theory of Positive Negativism.* Weak gold prices, manipulated lower by central bankers, have decoyed investors away from paying attention to the other three metals, two of which are in clear Uptrends (see chart, page 2, right side), resulting in an astonishing lack of investor awareness typical of new bull markets. As with gold and uranium for example, silver is in fundamental undersupply at these low prices, so inventories have been run down to the point where there are virtually none left. A shrewd Buffett purchase indeed. While silver is like gold in that it has a monetary aspect (gold or silver coins are good anywhere in the world, thus useful for semi-investments such as jewelry), it differs from gold in that there is no central-bank overhang of sellers. So desperate short-sellers, plus newly-awakened investors, clambered aboard the bandwagon, even driving silver into bullish "backwardation" in the commodities futures markets.

* Dinesism #12, see Mass Psychology book, page 329.

Since most investors prefer shares over commodities, Buffett's purchase caught the world's Security Analysts so flatfooted that they had no idea which silver-mining shares to recommend; they unimaginatively resorted to outdated favorites such as Hecla, Sunshine and Coeur d'Alene, which will be merely average performers. Instead, we recommend a "package" of Pan American, Silver Standard and Peñoles based on Fundamentals. Smaller investors who can only afford to buy one of these three should pick Pan American.

Eerie comparisons with Bunker Hunt's 1980 attempt to "corner" the silver market with his control of around 200-million ounces (then about half the world's deliverable silver) immediately raises in our minds the possibility of a 20-year cycle for another silver run in 2018. In 1978 Sir James Goldsmith was portrayed as "Goldfinger" in a James Bond novel, and perhaps now Warren Buffett will be "Silverfinger." Hunt's attempted corner occurred when few believed inflation would ever end, whereas now inflation is considered to be kaput. Indeed, many fear that Asia's currency crash will result in deflation, possibly an Elliott Wave "Alternation."

One big question is, at which price silver sales will begin to replenish inventories that are now at their lowest since the war. Silver jewelry is India's favorite form of saving, especially by farmers in the Northern tribal belt, but there has been a collapse in demand because of the soaring price in terms of local paper currencies. Obviously, at some point, silver scrap will come onto the market, but we are unconcerned about it because a worldwide flight into precious metals inspired by Mass Fear would swamp it. Nor could increased silver mining be a new source because it is almost entirely a byproduct of copper, gold, lead and zinc production; the long silver depression has eliminated most "pure" silver plays. Silver demand last year was around 800-million ounces, but only 570-million ounces were produced, so aboveground inventories supplied the relentlessly increasing demand from the photographic, jewelry, electronics and flatware industries. Huge new an aggressive hedge funds, willing to commit enormous sums of money to this illiquid market, might yet lead to a phenomenal short squeeze that would overrule all other considerations.

Even now, we appear to be the only Security Analysts in the world to declare that this is the sixth year of a new silver bull market, and see how difficult it has been to wait this out? The proverbial "rock bottom" is always the slowest part of bull markets. The following excerpt proves that the person offering the ultimate cachinnation possesses, thereby, the optimal cachinnation!*

* He who laughs last, laughs best.

Silver bullion made its low at $3.52 way back on 22 Feb 93, shortly after our "Major Buy signal" on 9 Nov 92, so we are now into the fourth year of a Major silver bull market while the masses doze. Silver is so dirt cheap that, adjusted for inflation this century, its price is below zero, and might well be the single most-underpriced commodity in the world today. Silver inventories have descended to levels from which a serious shortage becomes increasingly likely in the coming period, such that we are looking for an assault on the 1987 high above $9, around which time we luckily flashed our last Major "Sell" signal on silver. THE DINES LETTER, 21 Nov 97

The Dines Letter (TDL) offers regular features such as TDL's Latest on Silver, and the above is our Latest on Silver feature excerpted from our Letter dated 13 Feb 98. In addition, other features covered regularly: TDL's Latest on Gold, TDL's Current Market Analysis, TDL's Seasonalities, TDL's Latest on Currencies, TDL's Newly Recommended, TDL's Supervised Investment Lists -- The Dines Letter also offers timely articles and special writeups as market conditions warrant.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.