DOW THEORY ANALYSIS SAC
The Silver Report
Insanity Reigns or...

Enrico Orlandini
26 April, 2006

It's been a long time since I've actually written anything on silver. I make my usual comments in my Daily Reports but that's been the extent of it for almost two years. I rode the first silver rocket up from 4.75 to 8.50 only to watch most of my profits disappear as the rocket came tumbling back to earth. Admittedly, I was somewhat wiser for the experience. I then took a seat on the bench for more months than I care to remember and just watched. Well, actually I did a lot more than watch; I studied. There were a lot of fits and false starts but nothing of any consequence. Just a long period of sideways movement that, with 20/20 hindsight, one can easily classify as "accumulation." Of course, you don't actually know its accumulation until the market turns to the upside.

Take a good look at the Weekly Chart of silver above and you'll see that the price hung around the 7.25 area for more than a year. That's a long time for a speculator to have his hands tied, but sometimes it's necessary in order to 'catch the trend' at the right moment. I finally decided to take the plunge back in early September of last year when silver dipped below 7.00 for the umpteenth time. After that, I bought into the three minor corrections that occurred as the price approached 8.00, 9.00, and 10.00 respectively. Once the 10.00 mark was breached, I again sat on my hands and watched. I've seen silver trade as high as 14.69 last week and it closed at 12.96 on Friday April 21st. Now I am looking to buy some more as I am certain that this particular leg up will go higher and run longer than most anticipate. As far as the long run is concerned, I see a long Bull Market for silver that stretches well beyond the year 2010 and will eventually produce prices that we can't even imagine today.

After reaching a Bull Market high of US $48.70/ounce in 1980, silver began a long decline that eventually led to a Bear Market low of $3.52 in 1993. That was a full six years before gold managed to bottom! It then began a long period of consolidation, trading in a range that extended from $4.15 on the low side to $6.30 on the high side. That accumulation will now serve as a very powerful base for a rally well into the double-digits. During that time there were a lot of false starts and dashed hopes as rally after rally fizzled, but nothing of substance. Most of the speculative world gave up on silver and even went so far as to "downgrade" it from a precious metal to an industrial metal. I suppose you could say that it was punishment for its poor performance. In any event, we began to see signs of life in late 2003 and then the first wave of speculative buying hit in early 2004, driving the price up close to $8.50/ounce. Like gold's first advance that began in mid-2002, the silver rally failed and we fell all the way back down to +/- $5.50. Discouraging to say the least! So much so that most investors lost sight of the true market forces that would eventually propel silver through the $10.00 barrier. I'll go so far as to say that the Bear Market in precious metals devastated silver much more than gold, platinum, or palladium. Peru, which produces 15% of the world's silver, saw a drastic decline in silver production as mines closed down throughout the decade of the 90's. With very few exceptions, you just can't mine silver for a profit with prices below $5.00/ounce, and a good percentage of mines actually need to see $7.00 an ounce.

Currently, demand outpaces supply by 3% per year and I've seen estimates that put the deficit beyond 6% per year. Everyone talks about the decline in silver usage in photography, but I maintain that that has been more than offset by the development of new uses for silver in medicine, mobile phones, solar power, and computer technology. Then there is the increased demand in the jewelry industry as well as the silver ETF that the SEC is trying to keep on the back burner. If the gold-backed ETF is any indication, a silver ETF will be very well received. So we have new requirements surfacing regularly leading to increased demand, the inability to increase (or even maintain) current supply, and a dwindling stock of silver. If the laws of supply and demand still work, then the price of silver must head up. How high? Lets take a look.

I would like to say that silver is, in my opinion, the cheapest thing out there. It's even cheaper than gold, and that's saying something. To date, gold has retraced +/- 60% of its Bear Market decline (875.00 to 252.00) while silver has managed a mere 20% recovery of that same decline (from 48.70 to 3.52). Simply put, it is well behind the curve but it will catch up. Then you could compare it to the price increases of copper, lead, and platinum and you'll see that the silver rally is still in the cradle stage. That's why I can sit on my hands when silver drops 1.99 in a day like it did last week. I know what's coming down the road.

For further clarity, let's take a look at the Silver/Gold ratio, i.e., how many ounces of silver does it take to buy an ounce of gold. Traditionally, the average has been around 30:1. When both were at their respective Bear Market lows, that average was close to 70:1. When silver and gold hit their highs in 1980, that average dropped to 18:1! Currently, this ration stands at 50:1. Most of my clients know that I have projected a Bull Market high of US $3,000 for an ounce of gold in the year 2011. Using that same 18:1 ratio we saw in 1980, that equates to a silver price of US $166.00/ounce. History often repeats itself because human emotions are the same under similar circumstances over time; therefore my projection for a Bull Market high in silver is US $166.00/ounce. And that could be on the low side given coming problems with the dollar and the U.S. economy. Please note there are no outrageous assumptions here, only the premise that history will repeat itself. If you want some perspective, take the 1980 Bull Market highs and adjust them for inflation using government statistics, and you would probably exceed my projections!

It's even more amazing when you stop to think that silver is still regarded as a commodity and a pretender to the "real money" throne that gold holds. Gold used to be a commodity, but not any more. It became money when it entered the second phase of its generational Bull Market. Silver has made some progress though as it moved up in status from an industrial metal to a precious metal. Eventually silver will take that inevitable next step to being regarded as money. I believe that will happen when silver is able to close above the spot price of $20.73. That represents a .381 retracement from our Bear Market low back up to the Bull Market high of 1980. It is my belief that you will see a 20.73 print sometime this year and it will coincide with gold's first attack on 728.00. There will be the inevitable "minor" corrections along the way, and volatility will be off the charts, but the trend will continue to be up. But the real test for silver will come when it attacks the $26.11 spot price. That's the halfway point between the Bear Market low and the Bull Market high. Once that falls, silver should really and truly be off to the races.

In conclusion, market forces dictate higher silver prices over time. There will be the occasional bear raids, and they will have some minor successes, but over the long run we'll see much higher prices. How should the average investor play the silver bull? In my opinion, I would focus my attention on two stocks: Coeur D'Alene Mines Corp. (CDE) and Silver Wheaton Corp. (SLW). I have included a Daily Chart of CDE below, and as you can see, it has done very well.

From just over US $4.00 in early January, we closed at $7.06 on Friday, April 21st. In case if you're wondering, SLW did even better. These are the two premium silver producers as far as I am concerned and should be accumulated, in small amounts, on a monthly basis by the average investor. Additionally, the average investor should accumulate silver coins on a regular basis, with no attempt to catch the dips. Some day you'll need them when silver takes its place along side gold as the only real money. No one except the most sophisticated investors with the deepest pockets should try to play the futures market. Why? Here is a case in point. On April 20th we saw a one-day decline that represented a US $10,000 loss per contract. Margin and human nature being what they are, I have no doubt that a large number of small investors were wiped right off the board with that move. The simple approach outlined above will be more than sufficient to give a small investor a significant profit. And that doesn't take into consideration the cash dividends these companies will pay out as silver soars. My best advice is to avoid the trading game altogether and just accumulate, little by little, silver coins and quality stocks with no attempt to buy bottoms or sell tops. That's a fool's game. Just buy and sit tight!

26 April, 2006
-Enrico Orlandini
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