Have you seen the price of silver and gold lately? Holy moley!
Just in the past 48 hours, gold has surged a whopping $23 to $623.10. Meanwhile, silver’s up an amazing 96 cents, busting it clean above the $13 level and carrying it all the way to $13.82.
In percentage terms, gold’s up 3.8%, which is huge. But silver’s rise is nearly double gold’s — an explosive 7.5%.
All in just two days! All despite the fact that the big money has barely begun to pour in to these markets.
I’m delighted, and I assume you are too.
Subscribers following my recommendations are loaded with silver and gold positions. And I’ll be telling them to take out some nice, juicy profits as the metals climb.
One trader says metals are frothy. Another calls it “a fund-buying frenzy.†That may be true. But with the Iranian crisis exploding and markets on fire, who’s to say it’s not going to continue, or even accelerate? So no matter how much I like to take out profits along the way, I also insist on letting the rest of my positions ride.
Hey, who’s to say gold won’t just zoom to $780 and silver to $20?
Sure, we’re bound to get a pullback sooner or later. And it could be a relatively sharp one. But don’t let that bother you. This is just the beginning of Phase II of the natural resources boom. So any pullback could be your chance to jump in or add.
When that happens, you’ve got to be ready with your ammunition in place. And you’ve got to know, ahead of time, what you want to buy.
Me, I’ve got my eye on some choice miners in Canada and Australia. They’re still cheap, and, compared to the surging value of their metal in the ground, they’re getting cheaper as gold and silver sprint higher.
In Money and Markets just a few days ago, Larry told you what’s driving gold higher: Dwindling gold reserves … lagging production … the U.S. dollar on a slippery slope … inflation … petrodollars pouring into gold … a surge in investor demand … and the explosion of worldwide conflicts.
So now let’s look at the key forces driving up silver …
Silver Force #1
Stockpiles Are
Being Depleted
Finding rock-solid statistics on silver is as tough as finding an honest man in a corrupt government. But here’s what we know:
Each year, the amount of silver mined has repeatedly fallen short of the amount consumed — in everything from jewelry to industry.
According to statistics compiled by David Zurbuchen, the world has continually demanded more silver than has been produced.
That would mean there has been a chronic supply/demand deficit.
Could this data be overstating the deficit? Perhaps. But it also points to the potential for a major supply squeeze.
Other, more conservative estimates also talk about deficits — ranging from 21 to 138 million ounces annually. And CIBC World Markets expects there will be a deficit of 77 million ounces of silver production this year too.
How did silver production fail to meet supply even while silver prices remained in the gutter for so long?
One reason is that, at their peak, the above-ground stockpile of silver was an enormous 2.2 billion ounces. Now, there are less than 300 million ounces, and some estimates are as low as 200 million ounces. That’s not much.
Silver Force #2
Mine Delays Add
To Chronic Scarcity
The supply/demand squeeze isn’t going to ease anytime soon. For one thing, there are only 22 pure silver mines around the world. And yes, explorers are busy.
But it used to take only about five years to bring a new mine online. Now, thanks to higher regulatory hurdles, it takes about eight to ten years to move from promising prospect to real production.
Silver Force #3
Rip-Roaring Industrial Demand for
Plasma Display, Solar Cells and More
Jewelers suck up about 30% of total annual silver production. And silver coins and medals account for tens of millions of ounces.
But the big demand for silver is industrial. Among nearly all metals, silver is the best electrical conductor. And while most of the gold that’s “consumed†is still around, a lot of the silver used for industrial applications cannot be easily recovered.
Sure, the demand for silver in photographic film has dropped to about 8%. But now that decline has stabilized and the film-digital transformation is mostly history. Meanwhile, 44% of the silver that’s produced each year is being gobbled up by the electronics industry. For example:
- Plasma displays: A 32-inch plasma display panel uses between 0.96 and 1.3 ounces of silver. And there are millions of plasma display panels made every year.
- The chemical industry: Silver is the perfect catalyst for some chemical reactions. It doesn’t react with organic acids and bases, so it’s ideal to line vats and other containers. Plus, silver can be used to make everything from adhesives and heat-resistant surfaces to toys, auto parts and more.
- Solar energy: The most common type of solar cells are crystalline silicon photovoltaic cells, and silver is integral to their manufacture. Solar cells are hot and getting hotter, thanks to rising energy prices. Near Barstow, California, for example, nearly 2,000 silver-coated mirrors reflect solar heat onto black-coated stainless steel tubes atop a 300-foot tower. This array generates enough power for 10,000 homes.
- Batteries: Speaking of energy, you may have used small, button-shaped batteries. They’re silver oxide batteries, which are 35% silver by weight. And billions of silver oxide-zinc batteries are snapped up by consumers every year.
- Silver is used in medicines … hair dyes … inks … you name it.
And now we’re looking at a new, explosive source of demand for silver …
Silver Force #4
Rip-Roaring Investor Demand:
The Giant Elephant in the Room
I’m talking about the upcoming silver ETF. If the recent investor rush into silver could be pegged on one thing, it’s the looming debut of the new Barclay’s silver ETF.
But there’s some misinformation about this ETF. So let’s clear that up.
Some investors think that as soon as the silver ETF comes on the market, it is going to gobble up 130 million ounces of silver. In a word, “no.†When the silver ETF starts trading, 150,000 shares will be initially issued for distribution. That’s backed by only 1.5 million ounces. So don’t let the hype fool you.
But what you can and should get excited about is the potential demand generated by the silver ETF going forward: As more people want to buy silver through that ETF, the fund will automatically need to scoop up more of the metal. For a sneak preview, just look at what gold ETFs have done for gold:
Right now, there are two ETFs investing directly in gold bullion, buying bars of the yellow metal and keeping it in a vault. Investors have pumped over $6.5 billion into State Street’s streetTRACKS Gold Reserve (GLD), which launched in November 2004. The Barclays iShares Comex Gold Trust (IAU), launched a little later — January 2005 — buying up another $671 million worth.
Because they make buying gold so easy, these two funds have become tremendous drivers of the gold bull market. And now it’s silver’s turn to be in a “fund-buying frenzy†because investors believe, rightfully so, that we could see a similar pattern when the silver ETF is launched.
And wouldn’t you know it — another silver vehicle is waiting in the wings. This month, a silver-based “exchange-traded commodity†is set to debut in London. This won’t be backed by physical silver, but it will buy contracts to track the underlying commodity price, giving investors still another way to put money into the metal.
This new instrument will be structured along the same lines as the existing Gold Bullion Securities and Oil Securities already listed on the London Stock exchange, already up to $1 billion in assets.
And then there’s Dubai. The Dubai Gold and Commodity Exchange is now trading more than two metric tonnes of gold per day, and now it’s going to launch a silver contract. The contract size will be 1,000 ounces of silver of 99.9% fineness, deliverable at the DGCX approved vaults in the United Arab Emirates.
What’s going to happen when Barclay’s silver ETF is launched? Don’t be surprised if the price of silver actually dips temporarily. That’s what we witnessed when the gold ETF first rolled out. But if it happens, it will be a buying opportunity.
Silver Force #5
Global Commodity Investing Is
Just Beginning to Pick up Steam
According to Citigroup, global investments in commodity funds now total about $200 billion. That sounds like a lot, but it covers all kinds of commodities.
As big mutual funds and trusts look to diversify away from stocks, they’ll start playing the commodities game — and drive the price of metals higher.
And as long as we’re talking about commodities, let’s talk about the biggest market in the world for most commodities: China.
We keep hearing that China’s economy — and its appetite for commodities — is “going to slow down.â€
Perhaps someday in the future. But right now, the facts don’t jive with that theory: China’s economy just grew at the breakneck pace of 10.2% in the first quarter.
That’s higher than every single forecast in a recent Bloomberg survey of economists. It’s higher than the 8% growth that China’s own government was targeting. And it means that China is on its way to its fourth year of economic expansion above 10%.
China’s demand for metals is growing in tandem. In the past five years, it has increased by double-digits every year, and for obvious reasons: The country is experiencing an industrialization and building boom that normally comes along once in a century. Indeed,
- China uses 40% of the world’s cement
- It builds a city the size of Boston every two years
- China has 15,000 highway projects ongoing simultaneously
- About a fourth of China isn’t on the national electrical grid yet. China plans to change that in a matter of a few years.
I say this kind of building boom normally comes along once in a century. But these are not exactly normal times because, right now, we actually have two parallel booms at the same time: India, sitting next door, is eyeing China’s economic revolution enviously.
India, whose own economy is growing at nearly 8% a year, is only just starting to begin the building boom that is already changing the face of China.
How does that affect silver? Simple: Industrial demand for silver goes hand in hand. Plus, booming economies and big construction projects pour money into the economy, giving millions who never could afford precious metals a chance to buy silver and gold.
Indeed, China’s domestic silver supply and demand is expected to go into deficit in the next four years, and maybe sooner!
Silver Force #6
The Sinking Dollar and
The See-Saw of Pain
The U.S. consumer price index jumped 3.5% in 2005, after officially decreasing in 2004.
However, the way the inflation numbers are low-balled makes the resulting stats laughable … even useless. Consumers who have seen the price of homes, health care, fuel, and college tuition soar are voting with their portfolios — and buying precious metals.
And ultimately, inflation can be measured in the declining value of the U.S. dollar. And guess what: The dollar took a shellacking on Monday, the same day that gold and silver catapulted higher. This is no coincidence.
Precious metals and the dollar are on what I like to call “the see-saw of pain†— when one goes up, the other usually goes down. The reason for this is simple: Gold and silver are priced in dollars. So, as the value of the dollar declines, it takes more greenbacks to buy the metals.
The see-saw of pain was out of whack for most of 2005, when the dollar rose at the same time as silver and gold. But lately, the dollar’s faltering steps have helped light a new, even hotter fire under the metals …
On the chart, the U.S. dollar is the black line, gold is red, and silver is blue. Here’s a year-by-year account of what’s been happening:
In 2004, the usual relationship held – the dollar was up, and that weighed on the two metals. All three rallied in 2005, but as the dollar has started to slide again in 2006, the metals have kicked into overdrive.
Why? Well, last year, the U.S. dollar was seen as a safe-haven currency, and the Fed’s interest rate hikes made it attractive. The Fed raised interest rates 15 times since June 2004, taking the federal funds rate to its current 4.75%. The consensus on Wall Street – which may be wrong – is that the Fed is close to finished hiking rates.
Anyway, the meager, quarter-point rate hikes are not cutting it any more. The dollar has a huge twin burden — the run-away budget deficit and the record trade deficits. The U.S. needs to lure more than $2 billion a day to offset its record current account deficit, the broadest measure of trade. As a result, whether the Fed continues to hike rates or not, the dollar is losing its luster as gold and silver shine brighter.
How to Stake Your Own
Claim to Gold and Silver
Here are two funds to consider…
- American Century Global Gold Fund (BGEIX) is a no-load fund that has a total expense ratio of just 0.67% (less than half the category average). It’s up 11.2% in the last three months and 76.8% in the last year. Its portfolio is stuffed with gold companies, but many of them produce silver as well.
- U.S. Global Investors World Precious Minerals (UNWPX) is another no-load fund. It has a total expense ratio of 1.48% and holds companies that produce not only gold, but also platinum and silver. It’s up 26.4% in three months and 98.99% in the past year. Wow.
Looking for Values up
North and Down Under
If you’re buying individual issues, small-cap silver stocks were underperforming the price of the metal recently. Good. That translates into some great values.
Moreover, it’s changing fast, and I have my eye on select stocks that are ready to power up. I find good values in both Canada and Asia/Australia. Both have …
- An abundance of natural resources
- A wealth of world-class mining expertise
- Real bargains due to under-investment, as great stocks were overlooked by US investors
- Great positioning, both geographically and economically, to feed the metal eating monster that is China
I have one service dedicated to each. And I’m making new picks for both. The Canadian service is sold out. But if you want to get on board with my latest precious metal picks in Australia, let me know now by calling 800-898-0819. We have only 103 slots left.
Yours for trading profits,
Sean Brodrick
For more information and archived issues, visit http://legacy.weissinc.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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