Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Silver Bull Market Outperforming Gold

Commodities / Gold & Silver Mar 28, 2008 - 10:14 AM GMT

By: John_Lee

Commodities

Best Financial Markets Analysis ArticleIn August of 2004, when Silver was $6 and Gold was $380 I wrote the 4 reasons for liking silver more than gold.

- Supply and demand -
Mine production could not satisfy physical demands of either gold or silver. However, I like silver better because most official sectors, such as the US government, have run out of silver. Only governments do nutty things like selling a valuable asset to suppress its price. I trust the private enterprises holding silver stockpiles to be logical (i.e. profit-seeking) participants in the silver market.


If Mr. David Morgan were right that China provided most of the silver to fulfill the demand for the last few years, then the silver picture would just get more bullish. I expect China in a year or two will be a net silver importer (if it has not already), just like soybeans, copper, steel, and any other commodity you can think of.

- Commercial position -

Every short position has to be covered. The silver commercials at times are net short an entire year of silver mine production. The situation for gold is much less severe. If any COMEX market has a chance of blowing up, silver is it.

- Consumed vs Stored -

There is a lot of gold above ground to go around. But for silver, once it goes into that laptop or fridge, it is gone. Silver has a chance to repeat what palladium did in 2000 (when it raced from $350/oz to over $1,000/oz in 12 months).

- Speculative/public interests -

Thanks to Ted Butler, David Morgan, and Gata, I think a number of people with $billions are watching silver. Tech funds are not all that stupid. Now that they have been burned a few times, they will figure out a way to beat the commercial shorts. And the way to do it is quite easy as Buffet did it in 1997: accumulate the physical and make it known after the fact.

Back in 2004, silver bears pointed to three things:

- Unknown quantity of existing stockpiles -

They say there is a lot of Indian silver to go around. Well, obviously not at $5/oz or the US government will not have run out of silver last year. The least we can say is that existing silver owners expect to release their inventories at a price above $5/oz.

- Silver is bulky -
That has to be the lamest excuse. Storage fee amounts to no more than 2% a year. In 1998, I did not hear mutual fund investors complain about the 5% front sales load when they received double-digit returns.

- Silver is an industrial metal and not an investment-

Well for me, anything that goes up in price is a good investment. In the past month, silver handily outperformed gold, platinum, and palladium. That sounds like a good investment to me.

I continue to hear arguments on gold vs silver. Most of them are personal opinions. Some analysts pointed to how much more silver is produced over gold (600 million oz vs 80 million oz). Well by that logic. palladium with 4-million-oz of annual production, should be trading at well over USD $1000/oz+.

Other analysts pointed out some historic data and concluded that gold will outperform silver. I let the market do the talking. Both silver and silver shares have performed better than gold and gold shares this year. There is a gold equivalent of SSRI and it is called VGZ and it sells at 1/10 of SSRI's market capitalization. This shows how much premium silver shares command in the market over their gold counterparts. In today's world, where paper money far out-supplied any metal at current prices, fundamental physical supply and demand of the metal itself is really irrelevant. Simply put, people will be voting with their papers.

The scenario will go like this - a $1 billion hedge fund makes $200 million from gold futures, reads about silver, decides to put $100million in silver and instantly bumps the silver price by $2/oz. Others read the tapes and follow - the bull becomes a self-fulfilling prophecy. Coupled with that, apparently no-one can go to the physical market and dump 100 million oz of silver to cool the fire makes silver a no-risk bet.

Update: Today

- Stated government sale has not decreased-

Official Government sales according to the world silver survey have not decreased since 2004.

World Silver Supply and Demand
(in millions of ounces)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Supply
Mine Production
520.0
542.1
556.8
590.9
606.2
593.8
600.7
622.2
645.7
646.1
Net Government Sales
--
33.5
97.2
60.3
63.0
59.2
88.7
61.9
65.9
77.7
Old Silver Scrap
169.3
193.9
181.6
180.7
182.7
187.5
184.0
181.5
186.4
188.0
Producer Hedging
68.1
6.5
--
--
18.9
--
--
9.6
27.6
--
Implied Net Disinvestment
78.9
45.2
42.0
83.5
--
8.3
--
--
--
--
Total Supply
836.3
821.2
877.5
915.4
870.8
848.7
873.4
875.2
925.6
911.8
Demand
Fabrication
Industrial Applications
319.5
313.2
336.1
371.3
332.4
336.5
346.8
364.2
405.8
430.0
Photography
217.4
225.4
227.9
218.3
213.1
204.3
192.9
181.0
162.1
145.8
Jewelry
150.6
140.6
159.8
170.6
174.3
168.9
179.2
174.8
173.8
165.8
Silverware
117.7
114.2
108.6
95.6
105.2
82.6
83.0
66.2
66.6
59.1
Coins & Medals
30.4
27.8
29.1
32.1
30.5
31.6
35.6
42.4
40.0
39.8
Total Fabrication
835.6
821.2
861.5
888.0
855.4
823.9
837.4
828.6
848.3
840.5
Net Government Purchases
0.7
--
--
--
--
--
--
--
--
--
Producer De-Hedging
--
--
16.0
27.4
--
24.8
20.9
--
--
6.8
Implied Net Investment
--
--
--
--
15.4
--
15.0
46.6
77.2
64.5
Total Demand
836.3
821.2
877.5
915.4
870.8
848.7
873.4
875.2
925.6
911.8
Silver Price
(London US$/oz)
4.897
5.544
5.220
4.951
4.370
4.599
4.879
6.658
7.312
11.549

SOURCE: World Silver Survey 2007

In 2004, silver's established firm bottom around the same time the US Treasury ran out of silver may be a pure coincidence. Or maybe:

1. Other governments demanded a better price for their silver than the US government causing the silver price to rise despite persistence government sales.

2. The well advertised fact of the depleting US treasury silver inventory might have triggered more net implied investment demand, up from 15 million oz in 2003 to over 70 million oz in 2005.

- Commercials short position is bigger than ever

Commercials piled on 100,000+ short contracts in 2004, now it is at 140,000+. That is 500 million oz before vs 700 million now. How does one explain more shorts with a rising silver price? Perhaps the day of reckoning of massive short covering is to come? Or perhaps there is no real correlation between silver shorts and the silver price?

- Implied Net Investment Demand Grew

While net investment demand grew in 2005 and 2006, it still accounted for less than 10% of total physical demand. One should take such figure from World Silver Survey with a grain of salt. As no one truly knows how much physical silver changed hand privately.

Conclusion

In today's world, where paper money far out-supplies of any metal at current prices, fundamental physical supply and demand of the metal itself is really irrelevant. Simply put, people will be voting with their papers.

The case applies to silver, gold, grain, oil, and any commodity. After all, how can one blame the tripling of wheat prices in the past 12 months on China? Did all of 1.3 billion Chinese changed their diet habit and switched to bread overnight?

People vote with their papers. The Commitment of Traders Report shows today's positions have grown by 20%+ for silver (200 million oz) since 2004. There was a strong investment demand to counter the dealer shorts. 200 million oz is merely $4 billion with present invest-able dollars, measured at tens of $trillion (if not over $100 trillion). Any micro-analysis based on today's silver stats does not carry much significance.

Since August of 2004, Gold has gone up 250% from $380/oz to $950/oz, while silver has gone up 300% from $6 to $18.5. As the 4 pro-silver reasons I outlined in the article begin to further manifest themselves, the percentage of performance difference to date will be seen as negligible compared to what's to come

John Lee, CFA
johnlee@maucapital.com

http://www.goldmau.com

John Lee is a portfolio manager at Mau Capital Management. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. He previously studied under Mr. James Turk, a renowned authority on the gold market, and is specialized in investing in junior gold and resource companies. Mr. Lee's articles are frequently cited at major resource websites and a esteemed speaker at several major resource conferences.

John Lee Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules