January 28, 2007

Jason Hommel reports on silver

Silver Stock Report editor Jason Hommel reports on silver, particular silver mining companies, the Vancouver conference, and GATA's growing acceptance...

Review on Vancouver & Silver
Silver Stock Report,
by Jason Hommel, January 26, 2007

I just returned from the Vancouver Gold show, attended by about 8000 investors, and 380 resource companies, and 50 speakers. This was the biggest show by Cambridge House by far. I gave 2 speeches, was on a panel discussion, and did two interviews. Having taken a year off from attending most shows, I decided to revise my old speech, and focus on the most important, non-religious reasons to buy silver. In a nutshell, here's what I presented, and learned, from the show.

I write this free newsletter that goes out to 36,500 opt-in subscribers (increasing at a rate of about 100/day, or 100% per year), and I have about 850 subscribers who pay $40/month to look at my portfolio. I spend the subscription money on advertising, to get the word out. I carefully study the feedback from my readers to help me find the best investments in the industry. In 2003, my portfolio was up about 300% in silver stocks. In 2004, I was up another 100%. In 2005, I was up about 40%. In 2006, my portfolio grew another 100%. That track record is about the best in the world for that time period, on par with the best funds in the business of gold, silver, and resource stocks.

My overall view of silver has grown far more bullish since 1999, when I started investing in silver, and here is how my view has changed.

To really understand silver, you have to first understand gold. You don't understand gold unless you know what GATA knows. GATA has done the research to show that about 15,000 tonnes of about 30,000 tonnes of central bank gold has been lent into the gold market, and this has depressed prices. I'm a big GATA supporter, and for more information, you should see the following video, and order the DVD.

Order here:

I was attracted to silver, because I thought I could make more money in silver than in gold. I have.

At first, I thought silver was merely "cheap" at $5/oz., thinking that the downside was limited, and that we had a good shot at silver repeating the performance in 1980 of $50/oz. But now, I think $50/oz. will just be the start, and here's why.

In 1980, M3, the measure of money in the banks, was about $1.8 trillion, and today, it's closer to $11.5 trillion. So, a comparable price for silver would be 11.5 divided by 1.8 times $50/oz, which is $319/oz.

But that is just the beginning. The reason why is that the bear market for silver did not last 25 years, it was worse than that. In reality, we are still in the bottom of a 600-year bear market for the value of silver.

You can see the 600-year, inflation-adjusted trend in this graph:

The primary reason for this trend is the declining use of silver as money around the world. But silver is money, it has the properties of money, and the words for silver and money are the same in many languages. As paper money fails, the return of monetary demand for gold, and especially silver, will be astronomical, and will drive the value up tremendously. It's all about monetary demand.

Next, I used to think that the price of silver would rise a lot due to the excessive paper futures market contract short selling on the NYMEX, that would eventually result in runaway short covering. I do believe that selling paper contracts is manipulative in nature. However, today, I believe that paper money that is supposed to be "as good as gold", or "better than gold" is the far greater manipulation, perhaps 100 or even 1000 times greater. Paper money was originally a receipt for gold or silver on deposit at a bank that you could redeem at any time. Futures contracts for gold and silver, that expire, are, by definition, even less honorable. And if the first gold certificates were not honored, how can today's contracts remain honorable? The point is that it is all about monetary demand, and not futures contracts.

Finally, I used to think that silver would be a good investment because of the current supply and demand dynamics, whereby more silver than is mined each year is consumed by industry, jewelry, and photography, which leaves no room for investment demand. But the nuances of current supply and demand say nothing about the upcoming and future monetary demand. The vast portion of the price and value change of silver will mostly be moved by monetary demand.

So, in sum:

First, silver is not going to "spike again" to $50/oz. Instead, silver will roar past $300/oz. due to monetary demand.

Second, silver may well be manipulated due to the NYMEX futures contracts. However, silver is manipulated far more because of the existence of paper money, and as paper money continues to fail, and monetary demand for silver returns, silver's value will skyrocket.

Third, silver will skyrocket not due to current supply and demand fundamentals, but due to the overwhelming monetary demand in the future.

The trouble is that people have a difficulty in understanding how monetary demand for silver can or will return, and have a difficult time envisioning what that would look like, and what it would mean both in terms of prices, and values for silver.

To help explain, let me explain compound interest or exponential growth rates and decay rates; especially how they are often a function of size.

Small things can grow fast, but big things cannot grow as fast.

Acorns can grow to big oak trees, but oak trees cannot grow to the moon.

Babies grow fast, but adults stop growing, and will one day die.

Silver is the small market. If there are about 4 billion ounces of silver in the world, meaning that only 10% of the 40 billion ounces estimated to have been mined still remain, then the size of the market is about $50 billion.

The Fed often adds $50 billion to the money supply in one week!

So, in contrast, the world paper money market is about $50 trillion in size, about 1000 times bigger. The paper money market is like the mature oak tree that cannot significantly grow any further, but is dying, as branches rot, and fall off.

When paper money dies, the price of an ounce of silver, or gold, will be beyond infinity dollars per ounce. This does not mean that gold or silver will become infinitely valuable; but rather, the dollars become worthless.

It is impossible for any market to grow exponentially forever, but that is not what happens to the silver price as paper money dies. A very high dollar value for silver is really a reflection of the decay rate of paper money. After paper money fails, silver's value may be up to 100 times or even 1000 times greater than today, but probably not more than that, regardless of whether the last quoted price for silver was a million dollars an ounce or a billion, or a trillion.

And when paper money fails, society will need a substitute, such as gold and silver. Monetary demand will return, and force silver's value much higher.

As silver's dollar price continues to gain 30% to 60% to 100% per year, more and more investors will be forced to take a look at silver to see what they have been missing. They will greedily seek after such rates of return. For capital to survive, it must. And as more and more people invest in gold and especially silver, it will continue to push up the price more and more, until paper money fails completely. People cannot be satisfied with 5% returns in bonds if silver is paying 30% to 100% per year.

How can paper money compete? Will they raise bond rates to 50%? And what happens when 50% more money is being created each year to pay to bond holders, wouldn't that cause enormous inflation that would simply drive metal prices that much higher? High interest rates would also cause a high bankruptcy rate, and in such a time of deflation due to bank bankruptcies, gold and silver, which cannot default, would be highly sought after safe havens.

As silver goes up, people will discover most everything that I discovered about silver. That it hit $50/oz., and that the inflation adjusted price of $50/oz. in 1980 is really over $300/oz.

Is silver money? Can it be money again?

Money is at least three things: a medium of exchange, a unit of account, and a store of value.

Silver is my store of value; I'm storing my value in silver, and silver's been great to me. Not that silver cares about me, or even knows my name; silver is an inanimate object.

But silver has provided me with a good rate of return, and the returns are outside of the banking system, and are largely not really taxable, and not easily found or taken by government. By the time I sell my silver, who knows what government will be in power, and who knows what the capital gains tax rates may be?

So, which should one buy, stocks or silver? I currently have about 11% of my portfolio in silver, and about 85% in stocks; mostly silver stocks. I plan to increase my holdings of silver to about 20% very soon, within the next year, and up to 50% as time goes on. I don't like the thought of having to move and store several tonnes of silver, but I'm lazy, and I like to earn money the easy way.

Recently, silverstrategies.com posted the results and performance of many silver stocks. About half of the stocks under-performed silver, and about half over-performed. I've done better than most, and slightly outperformed silver in the last year.

I disagreed with 3 other panelists on the topic of whether we should buy the stocks of the major silver companies. Over a year ago, I predicted that the major silver companies would not outperform silver prices. I was mostly correct. I don't own any of the 6 major silver companies with market caps higher than $500 million: Silver Standard, Pan American, Apex Silver, Silver Wheaton, Hecla, Couer d'Alene. I think they are all overvalued.

I take profits in the form of silver bullion. Silver is my money; it's my unit of account. I feel I have gained only if the dollar value of my portfolio can buy me more ounces of silver, and I only truly gain if I actually go out and buy those extra ounces of silver.

Silver today is as cheap as it was at $5/oz. about 12 years ago. In 1995, M3 stood at about $4 trillion. Today, silver is at $13/oz., and M3 is at $11.5 trillion. So the silver price over the past 12 years, has, on average, kept up with inflation.

But today, we have price action. Today, silver's gains are outpacing the rate of money creation inflation. Silver gained about 40% in 2006, and M3 went up by about 10%. Silver's gains will likely accelerate even faster, with continued volatility, of course. I expect silver prices to hit $20-25/oz. in 2007. Afterwards, I'd expect maybe a drop to as low as $15, before soaring yet again to new highs past $30 to $50 perhaps in 2008.

I really don't think it matters much what kind of silver you buy. Silver is not produced by anyone in the form of the money of the future, which may be 2 gram coins or 1/10th ounce coins, who knows. Today, it may cost 10% to re-melt and refine silver into new forms. But when silver was money, 100 years ago, smelting and minting costs were 1/2 of 1%. This is not because energy costs more today, it's because the price of silver is at least about 1/20th of what it could be.

Just get silver cheap, get the most silver for your money, at the least price, which is typically 90% junk silver, or silver rounds, or 100 oz. bars, and take physical delivery of your silver, and store it in your own safe, the combination to which only you know. Only then, do you truly control, and own, your silver.

If you can afford to invest in silver, then you can afford to spend 1-10% on protection, whether a safe, or home security system.

To get started buying silver:

So, what did I learn at the Vancouver show? Many things.

As my email list has tripled in the past year, I'm more well known than I once was.

I spoke to many friends and company managers, too many to list them all here.

I ran after John McPherson of Canadian Zinc (CZN.TO). He's frustrated with the slow pace of permitting; and looking for acquisitions, since they have $35 million in cash, about half the market cap of the company.

I sought John Versfelt of Cabo, and International Millennium, a company that now has Cabo's Cobalt silver properties, and many other silver properties that may get a listing in February. He was wondering if I was going to sell my shares in International Millennium if it becomes free trading (I own about 3% of the company), and I told him that I originally bought Cabo because I was interested in the silver properties, and that it was up to him to convince me to hold on. (My way of encouraging him to provide value.)

I ran into Don P. the man who spent nearly 4 months convincing me to look into Canadian Zinc back in 2003. We sat to chat, but did not have nearly enough time.

I ran into Gene Larabie of Coronado, (CRD.V) market cap about $15 million. I learned that they have a mining permit, and they are dealing with water in their decline ramp to the high grade zone where they hit 60% copper, the highest grade copper in the world, and may have resources worth about $200 million.

I had dinner with Vance Loeber who has been promoting U.S. Silver, (USA.V) (CHRYSALIS CAPITAL III), market cap about $200 million, which recently acquired the Galena mine in Couer d'Alene, the former flagship mine of Couer d'Alene mining company (CDE).

I had dinner with the men of Arian Silver, (AGQ.V) market cap around $40 million, who are hoping to find up to 100 million ounces of high grade silver in Mexico.

I asked nearly every newsletter writer what they thought of Noront, (NOT.V) a $100 million market cap company, that hit 50-30 ounces per tonne of gold over 15 feet on December 4th, which is the highest grade intercept that I've ever heard of. Most had not heard of it. The two that did, did not yet buy shares.

I also asked my peers what they thought of Pacifica (PAX.V) a $100 million company, and their 100 billion dollars of zinc at 5% grade, which is the largest mining project on earth. Most had not heard of Pacifica either.

I was walking past Cathy Fong of Silvercorp, ($800 million market cap) who invited me to lunch on Tuesday. I learned of New Pacific ($50 million market cap) (NUX.V), another company in development by the same management team, but is not focused on silver.

I made a point to attend the workshop by Dennis Gartman, who appeared to have a free market perspective, yet he has scorned GATA's work. Dennis's main points in his speech were that investors ought to buy things moving up, and sell things moving down. I suppose he is a momentum trader then, and I'm a value trader. His other main point is that the trade deficit does not matter, since the Government measures exports by Microsoft in terms of the price per pound of plastic, and not by the value of the software. We export knowledge, was his theme. Dennis also does not trust the GDP growth numbers of 3%, saying that people pay taxes on what they have actually earned, which shows growth more like 10%. (He did not acknowledge or mention that money creation also stands at about 10%).

This was the first time that I heard John Embry speak at the Cambridge House shows. John Embry runs one of the best performing metals funds in the industry. He was very articulate, as he was at GATA's Gold Rush 21 conference, and endorsed GATA's work. I heard that his fund owns 10% of about 100 resource companies in the industry, a virtual monopoly on resource exploration and emerging production. He read a fact-filled well-organized speech that was well received. I noted that at this conference, there was far more awareness and respect for GATA's work than in prior years. John Embry also ended his speech by noting that he was more bullish on silver than on gold!

On a panel discussion, there was a bit of a debate on whether the China boom will continue, and whether it is sustainable. Frank Veneroso said that he has predicted that many third world booms would collapse, and that he feels that China's boom will collapse -- that China's banks are over extended. On the other hand, China's banks have seen fresh capital infusions from Wall Street, and can draw on China's 1 trillion in foreign reserves. Dennis Gartman, who charges $500/month for his newsletter, had the opposite view, and that the rising middle class in China will make many people millionaires. His view was that one should go to China to open up a plumbing distributorship in the 13th largest city in China, because those were the businesses that made the most money in America's boom times. (Even though he does not know what China's 13th largest city actually was!)

My own view is that China has returned economic freedom in a large degree to its people, who are more free than we in the U.S. in many respects. My view is that freedom is generally quite sustainable. Furthermore, when people are earning $300/year, they can grow such incomes at 10% per year for a long, long time, for far more years than the Dow could grow at such rates, and that this will fuel the commodities boom for perhaps decades to come.

I'm not a doom and gloomer. I believe that mankind is progressing through increased trade and increasing economic freedom, and increasing knowledge. More newsletter writers and investors seemed to understand the GATA story on gold lending, and the specific fundamentals that make silver a much better investment.

Although you now know far more than you need to know, many of you have not yet taken action. It is not the knowledge you have, it is whether you act on it, that is most important. Take action, and get some silver for yourself.

Disclaimer: I own silver, CZN.TO, International Millennium (not yet public), CRD.V, USA.V, AGQ.V, NOT.V, PAX.V, NUX.V, and no company has paid me to send out this article. Please do not email me for specific stock picking advice. Instead, if you would like to see which stocks I own the most of in relation to my holdings of silver, you may purchase the “look at my portfolio”. Thank you.

1 comment:

Anonymous said...

In his presentation to the central bankers at the World Bank, June 19, 2007, Frank Veneroso said -page 52 - that it is likely that silver will go into substantial "large surplus" and may already be in "huge surplus" given the world wide expansion of zinc and lead production. If true, it suggests that the silver price will go down and stay there a long time. The monetary factor identified by Jason Hommel would still act in the opposite direction, but what will the net effect on the price of silver be?