Market Force-Silver

In this week's missive I decided to take a clip from the August issue of The Morgan Report and share with readers what others have to say about the silver market.

Begin excerpt…

As some of you know, I associate with many of the well known and not so well known people in this industry and sometimes forget that some of them are as bullish as I about silver; one of them is Adrian Douglas.

Adrian Douglas, the proprietor of Market Force Analysis and also a director of GATA (the Gold Anti-Trust Action Committee), did a recent interview about the silver market, and he is as bullish as we are, if not more so. Here are some of the highlights of that interview.

The MFA for silver until recently was showing that it was going to outperform gold, which it has. Right now we're at a point where the Market Force Analysis has to bust through a particular resistance level, and it's right there at it, and it hasn't broken through, whereas gold has actually moved off and started to show significant strengths.

• Silver is way below its equilibrium price. From my analysis, the equilibrium price right now for silver is almost $16.00. And as the buying interest increases, that equilibrium price moves up. So the real price actually tries to chase it.
• So from that point of view, silver is ready to move better and stronger than gold. It's just having a bit of headwind right now. Once it overcomes that, I think we'll see silver will outperform gold quite dramatically.
• I would say that it will probably start to outperform gold before gold goes for 1000. I think this bit of headwind is only very short term. It may be over by the end of next week. And so I don't see it being a major lag on silver for very long.
• There's very little left on the planet. The U.S. Geological Society said just a couple years ago that silver would be the first element in the periodic table that would become extinct. It's incredibly bullish. The USGS said that would happen by 2020. So if we're in the situation where we can run out of silver, the price clearly has to go up, because you can't obviously run out of silver. What will happen is, the price will have to go to a price level where it's economic to recycle it.
• We recycle almost all the gold we use in any industrial application, but we throw silver away in our cell phone batteries and solder connections and that sort of thing, in landfills. So the price has to go to a price probably close to the price of gold right now for it to be economic to not throw another gram of silver away in a landfill. We don't throw any gold away. And so I see silver probably eventually reaching a price that is higher than gold, based on the fact that it's rarer than gold right now because we've consumed it.

Editor's comment: Adrian is NOT the only one to make this type of statement. Jerome Smith, author of Silver Profits in the '80s and several other books on silver and the economy, thought gold and silver would trade at the same price at some point. Personally, I want to let the market speak and am looking for a ten to one ratio where silver trades at 1/10 the price of gold at the high. Regardless, silver has much stronger fundamentals than even gold, but the market demand for gold is stronger in dollar terms by far. However, just a small shift in thinking and/or new money can send silver very high, very fast.

• The traditional ratio of 16 to 1 that you find is fine while there's still plenty of it around. But as it starts to become extinct then silver becomes very rare and will become rarer than gold is. It's difficult for us to get our minds around it right now, but that's what's going to happen.
• Look what happened to rhodium two years ago; it went from $300 to $10,000 an ounce, and most people probably don't even know that. It certainly didn't get on the front page of The Wall Street Journal.
• But that was a move that could be made in a metal and not even make any news. So, you know, silver can do something that's a lot more dramatic. Gold almost has no industrial applications; this is what the bears throw at us that is negative about gold: apparently it has no use. It has no use that consumes it; its sole use essentially is to store value. And that's what it does perfectly, and obviously does it very well, because we still have pretty much all the gold that's ever been mined in history, and it is still above ground somewhere.
• So it's perfectly stored well for 6000 years and has never been consumed. So this notion that there's something negative about gold because it has no industrial use is rubbish. It has one use, which is to store value, which is why governments hate it so much . . . if gold is going up, there is only one reason it's going up, and that's because people are using it to store value.
• With any other commodity that has more than one use, like silver, like copper, like oil, you can always point to, "Oh, the economy is recovering, that's why that quantity is going up." But gold you can't make excuses for. So that's why the price is suppressed.
• Silver, on the other hand, does have industrial uses that compete with its use as a store of value. The industrial use has been so big, compared to investment demand, that it's the industrial application that has suppressed the price.

End of excerpt…

Adrian Douglas had more to say however, this is sufficient to give the reader something to ponder on the medium to long term price potential of the silver market. The potential of silver being depleted by 2020 is a point I made at the February Silver Summit in Phoenix Arizona. Perhaps some of you may think about attending in 2010. One of the largest and best Silver Summit's is the original in Spokane Washington see the Silver Summit for more details.

It is an honor to be.

David Morgan

Mr. Morgan has followed the silver market for more than thirty years. He wrote the book, Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals, it is both a free site and does have a members only section. To receive full access to The Morgan Report click the hyperlink.