A Perpetual Call on Silver
Dec 10, 2001
I have heard it said that the
easiest way to be successful in any endeavor is to copy the behavior
of those who are already experts. If someone wanted to focus
on investing to preserve wealth or better yet, to increase wealth,
there are a few investors around who have the touch of gold.
Or should I say silver because that's what legendary investors
Warren Buffett, Bill Gates and George Soros have in common.
Three years ago, world-class
investor Warren Buffett sunk over $500 million into 129 million
ounces of silver, more than the Hunt Brothers ever owned. He
kept his moves so quiet, he barely moved the price while amassing
the largest above-ground hoard of silver known.
And what does Bill Gates, the
richest man in history, drop his pocket change into? Silver stocks
in the form of a direct investment in Pan American Silver
[PAAS] to the tune of $10 million.
Not to be outdone, George Sores
and his brother Paul own 26 percent of Apex Silver Mines
[SIL] - with one project in the famed Potosi district of Peru
holding 470 million ounces of silver in reserves.
What do you suppose they think
is ahead for the price of silver?
No conspiracy exists to keep
down the price of silver. And silver isn't especially needed
as a war metal contrary to some popular silver bulls. Many metals
are far more critical to our war needs. But there is a price
where anything becomes a bargain and if silver isn't cheap now,
I'd sure like to know when it will be.
On the retail level, silver
got down to $4.00 on a spot basis recently . That's the cheapest
in real terms in 5,000 years of recorded history. Are you waiting
for it to get cheaper?
Robert Quartermain, President
of Silver Standard Resources (SSRI on Nasdaq, SSO on the
CDNX) waited patiently for silver to come down. He's buying silver
at what he considers a real good price, $.025 an ounce. That's
right, 2.5 cents per ounce of silver. It's in the ground and
still must be dug up and milled but it can't possibly get much
better. You don't really need a conspiracy to buy silver. You
don't even need a war. The fact it is so cheap is a darned good
reason to buy, all by itself.
Silver was lower in nominal
terms 9 years ago when it dropped to $3.52 but when you consider
inflation, it's lower today. I don't have any problem saying
any silver stock today represents excellent value.
Investors tend to look at silver
and gold as simple alternatives to each other. But the dynamics
cannot be more different. I've read that 80 percent of all the
gold ever produced exists today, we tend to hoard gold as a store
of VALUE as indeed we should. So when some talking head talks
about a deficit of production, the difference between demand
and supply, they are really disassembling. We have a 52-year
supply of gold above ground. It wouldn't make very much difference
to price if every gold mine in the world either went out of business
or doubled production. There is a lot of gold around.
Silver is another story. Most
of the easily-accessible above-ground stores of silver have been
consumed over the last 50 years. At the beginning of WWII, the
US alone maintained a strategic stockpile containing about 25
ounces per man, woman, and child in America. Indeed, silver was
so common and nickel was needed for the war effort, so the government
replaced the nickel in our five cent coins with a mixture of
manganese, copper and 35 percent silver during the war. The silver
stockpile is all gone now, we consume silver, unlike gold.
And unlike gold, few miners
produce silver as a primary metal. Most silver is produced as
a byproduct of gold, copper, nickel and zinc mining. And when
prices for the metals remain low as they do today, little silver
I came across some interesting
numbers recently. All the gold mutual funds in the world only
add up to about 1.97 billion dollars while the total invested
in mutual funds is about 3 trillion dollars, some 1,500 times
greater. Another 2 trillion dollars is in money market funds.
Essentially it means for every $1 in a gold fund, there are $2499
dollars not invested in gold funds which could be. Is there a
bright future for gold? I'd say so. Put another way, of every
$100 in mutual funds and money market funds, a mere 4¢ is
invested in gold. And silver, far less. Four cents out of every
$100 in precious metals, that's remarkable. We've got a fairly
good handle on the amount invested in gold, but silver is so
out of favor we don't even know.
Demand for silver remains high.
Is is so great that demand remains fairly constant no matter
what the price is. Economists call such demand inelastic.
In 1993, the management of
Silver Standard Resources made a strategic decision to concentrate
on the acquisition of silver projects based on their assessment
that (1) the price of silver is cyclical and (2) the constant
imbalance between supply and demand for silver would eventually
cause the price of silver to rocket.
And strangely enough, even
though the price of silver has essentially been a disaster for
the last 8 years, going from $3.50 in 1993 to about $6.80 in
1998 before tumbling to $4 recently, the price of silver properties
declined even more. Silver Standard Resources has picked up some
properties for as little as 2¢ per ounce of resources.
Naturally it will take a sustained
rise in the price of silver to confirm the wisdom of the decisions
made in 1993 but for owners of SSRI shares, they have purchased
a perpetual, low cost option on the price of silver, a metal
which has maintained a supply deficit for 11 years. At a recent
price of about $2 per share, the owner has an unexpiring call
on about 12 ounces of silver. SSRI holds positions in mines adding
up to about 414 million ounces of silver while there are about
35 million shares on a fully diluted basis. With a daily trading
volume of above 100,000 shares, SSRI has the liquidity to both
get in and out of a position. We highly recommend the shares
of SSRI for those who believe the price of silver is due for
a serious advance. Which includes us.
Dec 10, 2001
Neither the author nor 321Gold
will make any purchase or sale of Silver Standard Resources for
30 days before or following release of this piece. We have not
been compensated for writing this piece and any opinion expressed
is our own.