Strong gains forecast for silver
By David Morgan
The Morgan Report
Our overall gains in The Morgan Report were good, having bested the HUI. And our uranium stock actually outperformed everything else in the speculative portfolio, which is not surprising from the standpoint that uranium continues to make new highs without experiencing any corrections so far.
Again we were a bit surprised at how well silver performed when compared to other precious metals investments. Last year, we reported that silver had increased by 26% for the year 2005, equal to both the HUI and XAU, without the added risk that stock investing entails. This year, silver is up over 45%, the HUI is up 22.6%, and the XAU is up 11.6%. So for two years now, buying physical silver has been a superior investment choice to buying either the HUI or the XAU.
There are two important points to understand here. First, physical silver is the cornerstone of any serious precious metals portfolio, and second, the smaller, more aggressive companies represented by the HUI outperformed the stalwarts in the XAU by 2 to 1. But silver outperformed the HUI by 2 to 1 and outperformed the conservative XAU by a factor of 4!
Silver was able to achieve a price of $15, but it lasted a very short time. However, a solid base has built above the $12 level, and we think that any move below 12 will be an aberration and not last long. Looking at a longer-term time frame, though, the most solid support level is at $11.50. Gold moved to the mid-$700 level in 2006 and has some more work to do before it will be able to climb above that level again.
Price Projections
for This Year
First, silver can achieve another 30%-50% gain during 2007 rather easily in our view, which would propel the metal to the $18 dollar level at a minimum. All eyes are on the U.S. dollar, as they should be, and we think the "buck" may oppose the primary trend on a temporary basis and keep the metals somewhat cooler than they would be otherwise.
Most of the physical gold buying takes place in the fall, getting ready for the holiday season. However, we have noticed that silver seems to have good physical demand in the first quarter, which was particularly strong last year due to the anticipation of the silver ETF debut. We stated that once the silver ETF was launched, the price of silver would retreat, and it did.
During the Christmas holiday, the silver ETF obtained approximately 20 million ounces more of physical silver. This increased the holdings of the silver ETF by about 20% and took many analysts by surprise. As we have explained in earlier reports, it is very difficult to simply drop that much silver on a doorstep and have it moved into the vault. This may have been a large amount of silver that was encumbered by some type of paper contract that was already in the vault and was reassigned to the silver ETF. The original limit of physical silver for the ETF is 130 million ounces and we are approaching that limit rapidly. Barclay's has applied for additional amounts of silver, but the S-1 has not been approved at this time.
GFMS forecast that industrial demand for silver would slip by 3% in 2007. These types of forecasts are difficult at best and this one may be possible, but our focus and yours should be on the increase or potential increase in investment demand as well as industrial demand. CPM Group forecast early in 2006 that silver would go into a surplus in 2006, and we will not know statistics until April or May of 2007. Again, it must be remembered that silver prices went to $50 on a spike, but, more importantly, held an average of over $20 per ounce in 1980 for a full year. This was at a time when the money supply was significantly less than what it is today; in other words, $20 silver in 1980 is over $50 silver today if we adjust for inflation.
In 1980 there was 1.5 billion ounces more silver available, and the problems with the oil market and the U.S. dollar were miniscule when compared with today's problems. This logic implies that silver still has significant upside, even if the supply begins to increase slightly (about which, by the way, we have some serious doubts).
Moving into the first quarter of 2007 we still expect to see good physical demand and are expecting silver to get to the $18 level by April 1, 2007. This is not a forecast that is guaranteed, but it is our price projection. Our previous look at gold (year 2006 forecast) stated that we saw the $640 level being achieved, and obviously gold did better than that, but on an average weighted basis, that projection looks pretty solid.
Basically we see 2007 as a transition year where money is flowing around the globe looking for opportunity in an unstable world and thus more buying pressure will come into the precious metals sector. We also are fairly confident that much of the money will flow into the shares, and we are looking to see the shares outperform the metal in 2007. This is a rather bold statement based upon our introductory paragraph, but we strongly believe it to be valid.
One of the problems with the mining equities that we have hinted at previously is that they are all being diluted. First, many of the companies themselves are issuing more shares, which dilute the current shareholders-but more importantly, more and more new mining issues are hitting the market all the time. So as investors, we have more choices, but trying to sort out the winners in all the new issues is very cumbersome. Because more companies are being added continually, this dilutes the whole sector. This is similar to what took place in the technology sector as it became the "in" investment class, right at the top.
Truly, we think we are far from a top, and further strength will come into the sector through 2007 with a significant top in 2008, according to our analysis. Then we will have a high-level consolidation similar to what took place after the first major leg up, and many will get discouraged and leave the sector. This could take several months and we are preparing ourselves for the proper action our readership should anticipate, but our current feeling is that we are quite some time from that day.
Finally, once the second leg hits the top, probably near $1200 gold and $30 silver in 2008, be prepared for our analysis at that time. It may be prudent to build cash and lighten positions, waiting for the final blow-off phase. In this phase, the gains will be spectacular and gold will be jumping thirty to fifty dollars per day. Again, this is the long-term projection, but we want to put our readers into the proper mind-set because these major bull markets will shake off all but the most ardent of bulls and most people will simply not have the discipline to get back into the saddle (on the bull's back!).
We have noticed a few interesting facts about the silver market this year. First, both the silver ETF and the Comex holdings have increased. The amount of silver held between these two transparent sources is roughly 225 million ounces of silver. If we account for what Central Fund of Canada holds and a few others, such as the TOCOM and Bullion Management Services, we can build a case for more than 270 million ounces of Comex-acceptable silver.
The question becomes, Are the silver inventories really building, as suggested by CPM Group in the Silver Yearbook 2006? Frankly, we highly doubt it, but more mining activity is present now than it has been for quite some time. Even if silver bullion inventories were building, they would have to increase by sixfold or so to match the amount of gold bullion inventories.
So the real silver story comes back to our original premise that first, silver needs to develop a following as a viable investment. Gold basically has the intrigue and word-of-mouth appeal that investment demand has held sway with the public. This has taken place in the silver market now and we can watch the momentum build. Our verifiable facts are the creation of the silver ETF and the number of silver companies such as Silver Wheaton, Silver Standard, Silvercorp, and Pan American Silver, which have become household words among silver investors. Before this market tops, those names will also have become well known to the general investing public, believe it or not.
Editor's Note: David Morgan is editor of The Morgan Report, 21307 Buckeye Lake Ln., Colbert, WA 99005, 1 year, 12 issues, $129.99. The E-mail newsletter, provides economic news, overall financial health of the global economy, currency problems ahead. Morgan reviews current trends, long term fundamentals, and specific information required for any investor, especially the serious silver or precious metal investor.
David Morgan has authored the book, Get The Skinny On Silver Investing, covering important aspects of investing in silver, available for $9.95, E-version or hard copy at www.Silver-Investor.com. Considered a must for silver investors.
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