FYI | Dec 12 2007
Ever since silver broke through the US$6 per ounce barrier in early 2004, gold’s little precious metal brother has performed significantly better than gold bullion itself. One reason for this is that increased investor interest for what is intrinsically a much smaller market has had obviously a much bigger impact.
Another explanation, but one you will only hear when surrounded by real silver bugs, is that the price of silver would have been higher long time ago if not for the Chinese government who had some significant reserves left from the long ago abandoned silver standard and had been selling at every opportunity, effectively placing a price cap on the metal.
Thus silver had some catching up to do in early 2004. It had been seven years since the metal had managed to break through the US$6 price level and only for a brief time in 1997. Before that it had been close to nine years.
It goes without saying that when the price of silver went above US$6 per ounce once again, now nearly four years ago, the movement was greeted with more than just a healthy dose of scepticism. After all, the Chinese hadn’t migrated to Venus or something.
No, that hadn’t happened, but what had changed was that the Chinese government had finally run out of its stockpiled silver reserves, as had been rumoured and speculated about repeatedly in the preceding years. It didn’t take too long for silver to break through US$8 as well, and subsequently through the US$10 mark in early 2006.
The metal is trading at around US$14.40 currently. One does not have to be a mathematician to know that those who’ve jumped on the ride over the past years have done well. At least, that’s what one would be inclined to think on the basis of these few benchmark figures but the truth is, silver is also much more volatile than gold and at times it has been speculated that few but large traders have been playing games in the market which has unmistakably led to some serious losses for many a smaller fish.
This volatility has especially increased in 2007 with silver initially surpassing the US$14 price tag this year to subsequently fall back to near $10 only to surge back above US$14 again. And because gold has had such a good run since September it would seem that for the first time since early 2004 silver won’t beat its bigger brother this calendar year as far as price advance goes.
Don’t make too much of it, though. There are quite a few experts around who expect silver to pick up in 2008 where it temporarily paused at the end of 2006. With the US dollar to weaken further in the next few months (that’s almost universally accepted gospel these days with the Fed forecast to cut at least two-three more times) the outlook for gold should continue to look good, and for silver it should be even better.
Merrill Lynch’s team of resources specialists agreed in their update on the sector earlier this week: silver’s outlook is underpinned by strong supply-demand fundamentals. The team estimates silver’s spot price will average about US$13.25 this year. This is expected to rise to an average price of US$14 per ounce next year. Merrills forecast compares with a market consensus figure of US$12.37, says Merrills, indicating most of the resources specialists are either not focused on silver, or simply non-convinced when it comes to the aforementioned supply-demand characteristics.
But then again, market consensus has gold at an average of US$744 per ounce for 2008, says Merrills. Surely those who see the metal surpassing US$800/oz and move further towards a price tag in four digits must be rubbing their eyes right now, if not laughing out loudly.
But what would Merrills know -really know- about silver?
It’s probably better to turn to some real specialists. And don’t worry, they are genuinely more bullish on silver than Merrill Lynch is (and current market consensus if we can rely upon the Merrill Lynch report).
According to James Dines, from The Dines Letter, silver is still poised to take out its all time high of US$50/oz from January 21, 1980. Dines believes silver will ultimately reach beyond US$100/oz, but to put this in perspective: he also believes gold will ultimately be priced within the range US$3000-5000/oz – “believe it or not”.
For good measure, Dines was among the few who promoted silver in 2001 already, when the metal was trading at around US$4.55/oz. Admittedly, those who’ve followed up his advice have done well, but what a lonely time it must have been between 2001 and 2004.
Now you also know why Dines promotes himself as “The Original Silverbug”.
Apparently, and I am quoting from another source here, Dines has built up a huge following since he started his newsletter in the sixties and -equally important- he has been “extremely accurate” over the years (the latter probably explains the former).
Another silver bug, David Morgan from “money, metals and mining” newsletter The Morgan Report is equally positive about silver. In a recent edition of his newsletter he predicts the metal to soon break out to higher price levels.
The first quarter of each calendar year is always a good one for precious metals, says Morgan. He has set a target of US$18-22 for the metal in 2008 (compare that with the consensus) and believes gold could “maybe” reach as high as US$1200/oz next year.
Morgan favours silver over gold, which may suggest he sees silver reaching as high as US$22/oz (which would beat the “maybe” US$1200 price target for gold).
While most analysts will tell you that the supply-demand balance for silver has actually deteriorated this year and 2008 is expected to push the market balance back into surplus, Morgans (and other silver bugs) counter that these forecasts don’t take into account the growing interest from investors in the metal.
In other words: it is investor demand that will keep the silver market into a deficit next year, and thus prices high.
Apparently, this theory is also adhered to by the highly acclaimed industry consultant GFMS with a recent presentation by GFMS executive chairman Philip Klapwijk forecasting a range of US$13.20 to US$16.50 for silver in 2008, with possible price spikes in the US$17 to US$18 range.
For investors looking for equity exposure to silver next year, the obvious candidate in Australia would be Bolnisi Gold (BSG) which is expected to merge into the largest silver producer on the globe soon.
FNArena also received a research report by Lonsec Securities this week on Malachite Resources NL ((MAR)), a junior explorer looking to develop the silver-rich Conrad poly-metallic deposit located in the Inverell district of northern NSW (among other possible projects).
Though Malachite is still an “early days” developer, Lonsec believes the company offers an “an attractive risk versus reward opportunity for hardened resources investors” and has therefore slapped a Speculative Buy rating on the stock.
Malachite is expected to embark on a busy drilling program in the first quarter of next year.
Special note: what none of these experts is taking into account is that the US dollar may well make a comeback in the second half of 2008 as the euro should weaken with Europe staring into the eyes of a potential homegrown recession by then.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always firmly supported by the Ab Fab Team of Greg, George, Grahame, Pat, Joyce, Chris, Sophia and Paula).