Silver is unique among assets in many ways. Its cousin, gold, is widely recognized as an “immutable store of value,” and has been for millennia. Although some fiat-money enthusiasts in academia might turn their noses up at gold. By and large, gold gets its due respect. Silver, on the other hand, is sort of like the Rodney Dangerfield of precious metals; No one knows what’s going to happen next.
Most people are at least somewhat familiar with the Hunt brothers and their attempts to “corner the market” in silver in the 1970s and 1980s. During this time, the price of silver went from $1.50 an ounce in 1974, all the way to $50 an ounce just six years later, before falling precipitously to $4, where it stayed for many years. Perhaps this wild roller-coaster ride is one of the reasons mainstream financial analysts and economists tend to give silver less respect than others think silver deserves. Regardless, silver certainly does have its cheerleaders, and to these individuals, silver’s future is very bright indeed.
Bullish: Manipulation, Industrial Demand, and Central Banks
Chief among the perpetual bulls on silver is Ted Butler, an independent commodity analyst who writes for his own Web site, butlerresearch.com. Mr. Butler has been consistent in his assertion the silver market is being illegally manipulated, and he cites voluminous data to back up this contention.
One thing is a matter of record is silver has an enormously large concentrated short position. Four or fewer traders hold a net short position of 228 million ounces of silver — the equivalent of more than 130 days worth of global silver production. Butler says this “paper selling” of silver has kept prices artificially low. And, eventually, the realities of supply and demand will drown out the “shorts” who have been suppressing the real price of silver. This is the key to his bullish thinking.
After all, Mr. Butler and other silver bulls point out that industrial demand for silver has never been higher, and this alone should be bullish for the commodity. Israel Friedman, another silver bull, says that “silver has come to be used so much by industry over the past fifty or sixty years that most of the inventories in silver have been used up,” and he points out the world now has more gold above ground than silver. “We have sixty-two years of gold production above ground,” Mr. Friedman says, but “in silver, we have less than two years of mining production.”
Gold currently trades for around $650 and silver for just $13 an ounce — but Mr. Israel thinks the two will reverse in time. “The rarer and more industrially needed item should be $650 and the more plentiful and less used item should be $13.”
Another element supporting the bullish case is the decreasing role that central banks play in the silver market. Analysts like Ted Butler point out that, in the past, many central banks held vast amounts of silver and they “leased” it to investment banks to meet industrial and investment demand.
Years ago, supplies ran low enough that, for all intents and purposes, silver leasing came to an end. This should have resulted in an immediate spike in the silver price, but Butler and others like him insist — the spike in price didn’t — only because of the “manipulation” being perpetrated by the concentrated shorts.
But even disregarding the leasing issue, the fact remains central banks hold an enormous amount of gold, and the threat of these institutions dumping the banks holdings on the market always looms on the horizon. Silver, on the other hand, is largely absent from the vaults of central banks and government treasuries, and thus, this threat does not exist.
Bearish: Lower Procurement Costs, The Shorts Aren’t Stupid
Despite all of this evidence, most analysts from the major Wall Street investment houses remain bearish on silver. For example, in a recent report on Silver Wheaton Corp., Merrill Lynch analyst, Michael Jalonen, was bullish on the silver mining company, but not silver as a commodity. He saw the price of silver going lower, predicting it would be $13 an ounce in 2008, and $12 an ounce in 2009. His long-term price target for silver was just $10 an ounce. Could it be the shorts are right?
Mr. Jalonen’s reasoning is, thanks to technological advancements, the mining of silver is becoming less expensive by the day. Silver Wheaton, for example, has a procurement cost of just $4 per ounce. To silver bulls like Ted Butler, the concentrated short position has to resolve itself at some point, and when it does, the price of silver will skyrocket. But if the shorts are right, and silver becomes less expensive due to more cost-effective mining methods, then supply and demand may intersect much lower than the $650 price target cited by Israel Friedman.
David Morgan, a pseudo-bull on silver, has this to say: “I just do not see silver prices rising until the actual physical bullion supplies reach critically low levels.” This is not happening now, and thus, the shorts are able to re-initiate their positions with relatively minor losses. Bearish investors bet procurement costs will dip to a level at which demand can be met for less than the current $12-13 per ounce — say, Michael Jalonen’s price target of $10, in which case, bearish investors will have the last laugh.
So, Who Wins — Bulls or Bears?
At first glance, there certainly seems to be an overwhelmingly strong case for being bullish on silver. Industrial demand is growing, central banks are not a threat, and a high short ratio is traditionally a bullish sign in all financial markets. But there is certainly a case to be made for the bears, as well. After all, these four large short sellers are not likely to be stupid people — the traders shorting, are undoubtedly well aware of all the bullish signs and yet they go against the grain; so this should give all bulls at least some pause.
Ultimately, owning physical silver is probably a safe and intelligent investment. As the recent study from Ibbotson Associates suggested, holding at least a portion of your assets in precious metals enhances returns while limiting risk. After weighing the evidence, it seems more likely that silver is poised for a bullish future — small groups of even the most intelligent investors can only rarely outsmart the “wisdom of crowds.” But, silver bulls shouldn’t get too carried away. There are always two sides to every coin, especially when that coin is made of the surprisingly volatile precious metal, silver.