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How I went from being a silver bull to a silver neutral

Joel Bainerman
November 19, 2003

During the past year that I have begun observing (I am a journalist - not a professional investment analyst, so observing is what my profession has trained me to do) the movements of the gold and silver markets. While the gold bulls I could understand - I had a a problem with the silver bulls. I didn't quite buy into their story. While it was clear to me that the fundamentals of gold were strong - and hence its rising price - just a handful of analysts "silver bugs" if you will - are claiming the same strong fundamentals for silver.

At first - I had trouble believing them silver didn't seem to be of interest to anyone other than some industrial concerns and jewelry manufacturers. Gold was where the action was - I contended. Then, slowly, I started to find myself being drawn into the arguments of the silver bulls that in this new bull market for precious metals - silver - eventually - will outperform gold.

However just recently - after meeting in the US and the UK with a number of industry analysts (non-silver bulls who don't write opinion pieces about the pending rise in silver prices on the Internet) I've come to change my opinion and now believe that while money can be made in silver - and certainly silver explorers and producers will see their price rise during the next few years - ultimately - it will be gold and not silver that will carry the day.

Here are the claims of the silver bulls that I have a problem with:

1. Why the price of silver has not risen as much as gold?

We are told that silver is in a perennial, long term shortage. Yet the price of silver doesn't seem to move up nearly as much as gold. How can you have a market where a commodity is in demand and there is a shortage yet the price doesn't rise?

Some silver bulls will tell you it is because of manipulation on the Comex exchange similar to GATA's claim of manipulation of the gold price. However the argument for the manipulation of the gold price is much easier to accept as the US Treasury, or Fort Knox, or the Federal Reserve - has gold to lend out to the elite investment banks. Little if no silver stocks remain in government hands. Thus the manipulation of the price of silver would have to be by private hands - as government officials would have nothing to gain by participating in this fraud. Not that this can't happen - yet high level conspiracies usually only happen when some branch of the government are involved.

The answer may be that there are stockpiles of silver that are not in the public record - that get released (sold) by either companies or individuals - but don't make it into the official accounting of either the Silver Institute or other public bodies that monitor silver prices and supply and demand. It is important to remember that even with the price of gold being manipulated - the gold price is rising - due to rising demand for the product. If silver was just as manipulated and actual demand so high and actual supply so low - the price would be rising - regardless of whether there was manipulation on Comex exchange.

The silver bulls just take it for granted that the shortage is real - and the numbers are accurate - without taking into account of "under the table sales" and the lack of logic of a commodity being in short supply and the price not rising. Even if Ted Butler can finally prove that there is manipulation going on at Comex regarding silver - that in-and-of itself may not be the sole reason why silver is not rising in price. There may still be other factors - even if he is 100% correct in his assertions.

2. Silver has a monetary function:

Silver will not fulfill any monetary function or as a counterbalance to a weakening currency better than gold can. Gold performs that function just fine and there is no reason to believe that any country will adopt a silver standard to keep their currency honest - as long as gold is around. If gold were to be adopted as a backer of currency - the paper would still be needed so trading of goods can be facilitated. As long as the paper is backed up by a set amount of gold - the system will work - and be honest. Thus I fail to see how silver could have a role in that scenario - or why any country would look to silver to back up their currency - when gold fulfills that function without any need for a backup precious metal perform this same function.

3. The pending huge hike in silver prices in inevitable:

Whenever silver bulls say this - it is always followed by a "remember, silver once hit $50 back in the late 70s." Yes, but that was because the Hunt brothers tried to corner the market. One wonders if it would have hit anywhere near that price had that not event taken place. One would have to be a complete idiot to put money into a commodity on the expectation that this type of event will reoccur.

The fact is once silver starts heading up, say to $7 an ounce, all the scrap metal will enter the market - and nobody knows exactly how much that could be - but if one is a believer in supply and demand - it will keep on coming until the price of silver no longer is attractive. If you sell your silver when the price is still high - great - you will make a nice profit. However if you believe it will hit anywhere near $50 again - you are a certified dreamer. Even if it were to rise to $10 or $15 it wouldn't stay there for any meaningful length of time. An ounce of silver is like a share of a company that sells for $5. When the price of the share hits $10 - many investors will cash in their chips and eventually - if enough of them do this - the price of the stock will fall back. The same is true for silver - or any commodity that is bought by investors.

If silver bulls were sincerely interested in promoting silver as an investment option - then they would do well to hope for stable rises in prices - over long periods of time - rather than these huge spikes that one hears so much about from them.

4. Investment demand for silver will cause to rise as supply cannot meet the new demand:

Silver bulls should face the hard, cold facts, that if institutional investors are going to invest in precious metals - it will be gold and not silver. There are now a number of investment products which make buying gold easy for private and institutional investors. I know of none other than the Perth Mint that makes it easy and cheap for private and institutional investors to invest in silver. As for people like Warren Buffet and Bill Gates buying into the metal - who really knows if that is nothing more than rumors - or it was done as a payback to some slimy deal that went down on Wall Street involving one of the elite investment banks. Besides - if they did buy a large chunk of silver - they probably did it because they saw reasonable upside - and not the huge increase that the silver bulls refer to. As these people don't hype their activities at precious metals investment conferences - we will have no way of knowing what the actual reasons were for them to buy into silver - or if they even did so at all.

The point of this essay is not to demean the silver bulls - or silver as an investment target - but merely to play the devils advocate and present the other side of the picture - as most web sites that present info on precious metal prices are typically always bullish (unless the prices are down, and even then, they still are). That's okay but there is a difference between being bullish based on real fundamentals which are definitely the case with gold and unrealistic predictions about the price of a commodity that is not backed up by any fundamental or facts to prove the contention of the huge shortage - or impending future demand for it.

Bottom line is that while silver is classified as a precious metal - it is a very cheap one - at least in comparison to gold, platinum and palladium. As an industrial metal it has its functions and usefulness - but it may very well be that at $5 an ounce - it is at its correct market price. As with other precious metals - as more industrial and consumer uses for silver come onto the market - the demand could rise and prices as well. Yet as new ones will be found - old ones - such as photography - will weaken - over time.

Yet wouldn't steady price rises of 7-10% a year be much better for this industry - and for the miners and producers - than huge spikes which are the dream of the silver bulls? What seems clear that with the weakening US dollar it is unlikely that silver will go down in price but one wonders whether it will rise because it is in more demand (and in short supply) or that it is the weakening US dollar which is what is happening - not the strengthening of the value of an ounce of silver? As silver is a precious metal and we are in the middle of a bull market for precious metals - silver will definitely rise in price over the next few years - however it is not at all a given that it will outperform gold. This notion that "in a bull market for precious metals - silver starts off slower but eventually does better than gold" was only the case once - in the late 70s, and that was only because of the actions of one entity - not due to market fundamentals. There is no real reason why silver should do better than gold in a bull market for precious metals. If there is evidence to the contrary should be presented to the public as to why this will happen - rather than be based on the standard "in the last bull market in the late 70s silver went to $50 and gold only went to $800."

Today's bull market is very much a secular bull market - and the conditions today are not the same as in the late 70s - nor can we rely on an attempt to corner the silver market to back up the claims of a pending huge hike in the price of this metal.

If the silver bulls claim $5 an ounce for silver is cheap - let them come up with something more convincing than "the huge shortage out there" or "silver once sold for $50 an ounce." Perhaps at $5 silver is at its right price and we shouldn't be expecting anything other than an increase based on the increased usage and hence - short term lack of supply. That still doesn't preclude silver miners or producers from making money for shareholders - but I can't help but wonder if the individual investor would be better off investing in gold equities as that market will eventually attract the mainstream investment dollar well before silver equities see the majority of it.

In short, it isn't without just cause that silver is perceived as the poor brother of gold. Perhaps it really is - and this is why silver is in much larger supply (ounce per ounce) than gold. Perhaps the Eternal Creator in His infinite wisdom made it that way for a reason - regardless of how much silver bulls would like to make us believe otherwise.

Joel Bainerman
November 19, 2003

Joel Bainerman is a former high tech journalist who left the field of high tech due to the immorality of high tech valuations - to the more realistic world of mining stocks.

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