The Silver Market - Tips for the Prudent Investor 7/5/05
Demand for silver is growing steadily. Existing applications are consuming more silver each year and that pattern is likely to continue. More importantly, new applications are constantly being developed.
Production from mines, in the near-term, is likely to grow slowly at best. A sustained higher price is required to raise enough money to develop the larger mines that will have an impact on supply.
Last year the price of silver increased 36%, to an average price of US$6.66 per ounce. Silver is currently trading at US$7.30 per ounce. Mine production increased only 4% to 634 million ounces in 2004.
Demand has outpaced mine supply for the past 16 years, meaning that a large quantity of silver has been converted from coins and ornaments into other products where it is effectively lost from the market.
The big question in the silver market is: How much silver remains in above-ground stocks that can continue to supplement supplies of the metal? Continued decline in scrap supply and substantial decreases in government bullion sales will eventually lead to a crisis in the silver market.
On balance, in the near-term, a silver price of US$7 or US$8 would bring on new supplies of silver, while dampening demand on the consumer side. In the absence of other factors, the market would reach a balance somewhere around that level.
The wild card in the silver market is investor sentiment. For example, Warren Buffett's funds bought 129 million ounces of bullion in 1997. News of Buffet's foray into the silver market brought in the momentum players and drove the price sharply higher.
Buffet's metal is still apparently held, although a portion of it may be leased out. Other investors, large and small, are aware of the long-term outlook in the silver market, and are waiting for the right moment to step into the market.
A major economic shock could push a large number of investors to buy silver as a safe haven. For example, earlier last year amid concerns of a sharp fall in the U.S. dollar, the silver price spiked sharply higher, reaching $8.40 in April.
Any shortfall in metal supply would quickly translate into a higher price. That would generate momentum buying among investors and could also push industrial users of the metal to stock up, creating a surge in the metal price.
Some investors may want to hold a position in silver bullion. My preference is to gain the much greater leverage that one can obtain by owning silver companies. That is, silver equities will magnify the moves in the metal price, creating the potential for massive payoffs as the silver price trends higher.
In view of the uncertainty with regard to the timing of moves in the silver price, I prefer to focus on silver companies that are generating shareholder value by advancing silver deposits through the development cycle. This approach provides investors with long term exposure to the silver market, and also with the potential for near term gains as the companies enhance their values.
Regardless of the near-term price, the mining industry must develop new mines in order to replace older mines that are being depleted and to keep up with the rising level of consumption.
I expect to see numerous small silver mines emerging in the coming months. Over time, some of them will be absorbed into larger companies, and some of those new producers are likely to come together to form substantial silver companies.
Lawrence Roulston, editor of Resource Opportunities, is a geologist with engineering and business training, and more than 20 years of hands-on experience in the resource industry as a consultant and independent mining analyst. He is renowned as a guest speaker at industry conferences and events, and can be heard on popular programs such as ROB TV and CKNW's "Money Talks". Mr. Roulston's years of hands-on experience and extensive personal contacts in the industry provide unique insights that have generated an impressive track record for Resource Opportunities. Visit www.resourceopportunities.com for more information.
Production from mines, in the near-term, is likely to grow slowly at best. A sustained higher price is required to raise enough money to develop the larger mines that will have an impact on supply.
Last year the price of silver increased 36%, to an average price of US$6.66 per ounce. Silver is currently trading at US$7.30 per ounce. Mine production increased only 4% to 634 million ounces in 2004.
Demand has outpaced mine supply for the past 16 years, meaning that a large quantity of silver has been converted from coins and ornaments into other products where it is effectively lost from the market.
The big question in the silver market is: How much silver remains in above-ground stocks that can continue to supplement supplies of the metal? Continued decline in scrap supply and substantial decreases in government bullion sales will eventually lead to a crisis in the silver market.
On balance, in the near-term, a silver price of US$7 or US$8 would bring on new supplies of silver, while dampening demand on the consumer side. In the absence of other factors, the market would reach a balance somewhere around that level.
The wild card in the silver market is investor sentiment. For example, Warren Buffett's funds bought 129 million ounces of bullion in 1997. News of Buffet's foray into the silver market brought in the momentum players and drove the price sharply higher.
Buffet's metal is still apparently held, although a portion of it may be leased out. Other investors, large and small, are aware of the long-term outlook in the silver market, and are waiting for the right moment to step into the market.
A major economic shock could push a large number of investors to buy silver as a safe haven. For example, earlier last year amid concerns of a sharp fall in the U.S. dollar, the silver price spiked sharply higher, reaching $8.40 in April.
Any shortfall in metal supply would quickly translate into a higher price. That would generate momentum buying among investors and could also push industrial users of the metal to stock up, creating a surge in the metal price.
Opportunities For Profits In The Silver Market
Some investors may want to hold a position in silver bullion. My preference is to gain the much greater leverage that one can obtain by owning silver companies. That is, silver equities will magnify the moves in the metal price, creating the potential for massive payoffs as the silver price trends higher.
In view of the uncertainty with regard to the timing of moves in the silver price, I prefer to focus on silver companies that are generating shareholder value by advancing silver deposits through the development cycle. This approach provides investors with long term exposure to the silver market, and also with the potential for near term gains as the companies enhance their values.
Regardless of the near-term price, the mining industry must develop new mines in order to replace older mines that are being depleted and to keep up with the rising level of consumption.
I expect to see numerous small silver mines emerging in the coming months. Over time, some of them will be absorbed into larger companies, and some of those new producers are likely to come together to form substantial silver companies.
Lawrence Roulston, editor of Resource Opportunities, is a geologist with engineering and business training, and more than 20 years of hands-on experience in the resource industry as a consultant and independent mining analyst. He is renowned as a guest speaker at industry conferences and events, and can be heard on popular programs such as ROB TV and CKNW's "Money Talks". Mr. Roulston's years of hands-on experience and extensive personal contacts in the industry provide unique insights that have generated an impressive track record for Resource Opportunities. Visit www.resourceopportunities.com for more information.
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