We appear to have another catalyst coming in 2005 to drive the silver price higher. And in what we believe is a very unlikely scenario of the economy and the dollar doing well in the next few years, silver will hold up much better than gold because of the tightness in supply/demand and its industrial nature. But, as bullish as we are on gold because of its constrained mine production and the continued debasing of all fiat currencies (particularly the dollar), we believe the move up in silver could be several times higher than gold. We think that gold could again challenge its early 80s highs of 800 bucks an ounce. To quote Warren Buffett, "and mand is.relatively inelastic, we don't think price change required to reestablish an equilibrium between supply and demand would necessarily be minor."īoth gold and silver have long been neglected commodities, but we believe they are still in the early stages of a secular bull market for precious metals. In such a scenario of declining silver production and rising demand, the price increase required to bring on material amounts of silver supply could be quite large. economy may lead to a weak dollar, which spurs investment demand for both gold and silver due to the monetary nature of the two precious metals. In a weak economic scenario, you could see many base metal producers shutter production and as a consequence, the world silver supply would decrease. These base metal mines (65% of silver mine supply) will produce more silver when the economy is doing well and less when the economy is struggling and base metal prices are depressed. Zinc, copper, and lead are base metals used in broad ranges of industrial production applications. As strange as it may sound, zinc, copper, and lead prices are the primary driver of silver production in the form of by-products. In that scenario, silver's unique supply characteristics could cause a very large price increase. Even better for silver would be the weak economy scenario, which we believe is destined to occur. In a strong economic scenario, a resurgent industrial and electronic demand should propel silver demand higher, creating 50-100+ million ounce annual deficits, which should force prices significantly higher as inventories are depleted. We believe silver will do well, even if we are wrong about the economy's weakness to come. This interesting dynamic sets the stage for a potentially explosive move higher in the silver market. Only 35% of silver demand comes from pure silver mines and from gold primary mines where silver is a by-product. 65% of silver mine production is the by-product from copper, zinc, and lead mines. Silver supply is perhaps an even more intriguing situation. Investment demand in the last few years has been minimal but is picking up as concerns about the U.S. The rest of the silver demand is filled in by jewelry, silverware, and coinage. The majority of silver's current demand (560 million of 840 million ounces) comes from industrial and photographic uses due, in part, to its high conductivity. Silver has a dual role as both an industrial metal and a precious metal. This is where the dynamics of the silver market become very exciting for silver bulls. The only way to bring the supply/demand in balance for silver is higher prices. In all likelihood, less than 350 million ounces are available to fill supply deficits at anywhere near current prices.We are running at critically low silver reserves and it is entirely possible that some time in the next few years that silver shortages may occur. 130 million ounces and possibly much more of the roughly 500-600 million above ground ounces are owned by investors like Buffett, who have no intention to sell anytime soon. Silver deficits now run between 50-100 million ounces per annum. Since 1991, the above ground silver supply has declined from about 1.4 billion ounces to an estimated 600 million ounces (130 million of which legendary investor Warren Buffett may or may not still own from his 1998 purchase). The real story on silver is the massive inventory depletion that has taken place over the last decade as depicted in the graph below. We think that silver is a once in a lifetime opportunity to participate in the meteoric rise of a dramatically undervalued commodity.
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