All That Glitters Is Not Gold - Could It Be Silver? | Investment Guide|Silver Investment Expert

Part One

Silver has enjoyed a good run over the last 12-18 months.

In August 2006 it hit a 23 year high at $12 an ounce and since then has see sawed around this mark to reach over $14 by this weekend.

The question is when can we expect the price to break out either to the upside or downside.

Starting with a few personal opinions, I think that the biggest driver in commodities in general and precious metals in particular has been the realisation by the big dogs that the commodity markets now have a lot more profit potential than the increasingly precarious outlook for stock markets in most other sectors.

Even those high flying private equity funds are having to change tack as interest rates look set to continue to rise and there is becoming less value in M&A activity.

This and numerous other factors that we are not going into here are encouraging a bearish outlook for stocks in general

In the meantime, in a world awash with liquidity, alternative and potentially profitable money havens have to be found to sustain the profit streams that have become the norm in what has been a long running bull market.

That other profitable haven for big players and small investors alike has been commercial and residential property and its spin offs and in the US particularly that scenario with all its implications has seemingly run its course.

So where else to turn but to the forex market, which is highly speculative and frequently behaves contrary to perceived logic, and to commodities.

The markets in commodities have been largely ignored by institutions and other major players for years and have remained the stamping ground of specialist traders, but not any more as the big money moves in.

The base and precious metals sectors offer the most upfront value to the big dogs as their performance is not so affected by factors outside of their control and that are impossible to foresee, particularly as much of the trading is done on a forward basis.

For example bad weather can seriously damage a crop of, say, coffee beans forcing the price up when the following year good weather may cause a glut and a consequent drop in price.

Either way forward speculators in soft commodities have to have very specialist abilities and no shortage of luck.

With the options narrowing, more and more interest is gathering pace in metals and their derivatives and is a major factor in driving prices upwards.

The prices of precious metals tend to move in tandem, they either go up or go down together when a break out or reversal takes place although many of the fundamentals are not commonly shared.

For example bullion and jewelry are the principal uses for gold and the price is largely influenced by weakness in currencies as it is considered as a hedge against inflation, a safe haven and store of value and has little use in industry.

Silver on the other hand although considered a hedge to a limited extent and is widely used in jewelry also has an increasingly large usage in manufacturing and advances in medical and other technological developments.

Platinum and PGMs have many irreplaceable uses in industry and many of the developments in technology would not have been possible without these metals.

The market in precious metals has developed considerably in the last 12 months with the advent of derivatives tied to the metals and mining stocks and the opening of silver trading on the Shanghai Gold Exchange making these commodities easier to trade and so catching investors and speculators interest.

The growth in popularity of the iShares Silver ETF (SLV) that tracks the silver price is indicative of the new ease of playing the metals market.

Incidentally the fund held 15% of annual mining production at 1.2 million ounces by August 2006 just a few months after its launch!

At the end of this week 4/13/07 the silver ETF held 133,888,613 ounces of silver – now how’s that for growth!!!

Miners have traditionally hedged their bets by selling forward a proportion of their annual production to insure against a sudden drop in prices that could jeopardise their continued profitable operations.

The world wide demand for metals in general has reduced that risk, mines are more profitable and no longer feel the need for the former volume of forward sales as insurance and are reaping the profits while the good times last.

The market as also encouraged a host of junior miners to start up mainly in acquiring sites for exploration and seeking funding, many with highly dubious prospects of success, and silver juniors are not lagging in the start up rush.

The problem that they face is time

Raising capital, finding a viable prospect introducing the infrastructure, licences and permits, etc., etc. takes years before any metal comes out of the ground by which time the scenario may well have changed for the worse.

Unlike gold and most of the PGMs our planet is considered to have more than enough recoverable silver to last generations, it just has to stay at a price to make new mining operations worthwhile and an important part of that equation is the economy of the country of source.

However although silver mine production has increased in recent years demand has continued to outstrip supply from scrap and mining for each of the last seventeen years according to GFMS.

Of course during this period stock markets and metals have experienced some very poor years.

Just a thought but if thinking of gaining leveraged exposure to silver by investing in the mining sector a degree of insurance may be found by going into those companies where silver is a by product of other mining activity.

Another factor to consider is recycling. Until recently the photo industry was a major user of silver and much of it was recyclable.

Demand is now falling fast as digital photography booms, 2005 saw a drop of 25% over the previous year and continues to fall at an increasing rate.

Some industry analysts put the figure for recoverable scrap silver at around 50% of annual mine production but it seems to us that this can only be a best guess.

Never the less it is a significant factor to bear in mind when making any longish term silver investment plans.

The World Jewelry Confederation forecast last year that they expected a double-digit rise in silver consumption in the coming years led by India, China and Russia.

This week I have come across a report in a respected Indian newspaper that their jewlry trade is experiencing a severe downturn in silver usage with at least one major manufacturer having closed down operations and turned to trading silver bullion.

The opinion was that silver was pricing itself out of this important jewelry market – the question is are China and Russia following suit?

After all the standard of living and disposable income of the man in the street equates roughly to that of Indians.

Not so long ago and still in vogue with some, many market gurus were forecasting a major correction in commodities, that included gold and PGMs.

Well there has been a correction of sorts but the upward path in all seems back on track.

Despite reasons for optimism concerning other metals, I still have some reservations about the white metal; I am in the camp that believes that silver is one of the most speculative of all commodities.

I have memories of the Nelson Bunker Hunt attempt to corner the silver market in 1988 when I was fortunate enough to sell a very large amount of pre 1921 British silver coins for GBP 22.00 per one GBP face value.

The price still has a long way to go in both US$ and Sterling terms to reach those heady heights of 20 years ago, and that’s without adjusting for inflation!

In Part 2 we will get down to some of the basic fundamentals that are driving the price of silver and looking at some technical indicators that can help to firm up our opinion of the white metal’s prospects over both the short and longer term.