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speedybure (< 20)

Understanding The Dynamics Of The Paradigm Shift In Silver (ABSENT INFLATION)



June 30, 2009 – Comments (6) | RELATED TICKERS: SLW , SLV

The majority of people including myself didn;t understand the vast implications of buying silver or silver miners as an investment. Most people think it's the poor man's gold and used as a hedge against inflation. So let's start with the supply side.

 Supply Side - Although Silver Mined hit a record in 2007, it has been marginally increasing year over year. Even over the last 7 years there as only been an increase of 20-30 Billion ounces. This was obviously a result of the high demand for base metals in emerging countries, silver production increased as it is mined for the most part with base metals. Even an increase of that magnitude was insufficient as the market has seen silver rise in price during that period. But the supply side is more or less unimportant as it will likely have influence on the price. Instead one must look into the demand side, or more specifically the future demand. 

Old Demand Side - The old demand paradigm currently in transition had 53% of silver mined used in industrial production, 20% for jewelry, Photography 13%, Coins 7.8% & 7% for silverware. This was the breakdown for 2008. 

 New/ Future Demand - Assuming Photography and Silverware stay at 8 & 7%, 20% for Jewelry, it comes down to the industrial side. But technically the following can be split up into Industrial and consumer goods. As the U.S are becoming environmentally friendly, they found silver it their choice for metal. For all of you who havn't heard of lithium-ion batteries, they are the ones used in semiconductors, laptops, cellphones, etc. Here is a breif article discussing the future of batteries

"Everyone who uses laptops or cell-phones these days is at least partially aware of the battery technology everybody uses in those devices. Lithium-ion and lithium-polymer batteries have literally changed the world of portable devices, making them lighter, while also extending useful battery life. They have become the most common type of battery used in consumer rechargeable devices. The alternative comes in the form of silver-oxide or silver-zinc technology. Silver-zinc batteries can run up to 40% longer than the equivalent lithium-ion battery. Over 95% of the primary elements in the battery can be recycled. There are no heavy metals or toxic chemicals in modern silver-zinc batteries. Plus, their water-based chemistry make them free from the risk of thermal runaway, fire, and explosion. 

There is little doubt that these batteries are a safer, greener, longer-running choice for laptops and cell-phones. With a little more development, their future looks very bright. The technology has the backing of some heavy hitters, as well. For example, Intel Capital has invested in a silver-zinc battery manufacturer named Zinc Matrix Power (ZMP). 

  Laptop manufacturers are in the process of examining silver-zinc batteries for use. ZMP claims at least one laptop maker already has designs in the queue with an eye toward introduction in their high-end laptops in mid 2009. Eventually, we may even see after-market, drop-in replacement batteries engineered to retrofit older laptops with this safer technology. Expect advertising to tout extended run times and the "green" aspects as major selling points." 

Staying on the subject of going green, silver will also play a significant role in solar panels along with other forms of green energy production. If that isn't enough remember the current industrial production for which silver is used is likely to catch up for the following reasons: More and more countries be industrialized along with the BRIC countries. But when this happens they will also demand more consumer goods such as laptops and cellphones. Remember they have starting producing electric cars (TATA MOTORS), which just adds to the bullish case. 

Conclusion; With a supply that is falling further and further behind demand, the price of silver will be forced up. Also as the transition begins from lithium ion batteries to Silver-Zinc, will increase demand at a moderate pace for a long period of time. 

6 Comments – Post Your Own

#1) On June 30, 2009 at 11:51 PM, checklist34 (99.09) wrote:

interesting post.

this increase in supply is adequate to increase demand by 5x in 5 years or is that an inflation scenario?

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#2) On July 01, 2009 at 12:08 AM, speedybure (< 20) wrote:

My point was their won;t be an adequate supply at the prices. The price of Silver will have to be bid up by the market to a point tending toward the intrinsic value of equilibrium price. I'm not getting into specific numbers, I was just trying to point out demand will be increasing much faster than supply thus driving up the price. Sorry if I wasn't clear enough.

This post assumes their is no inflation - which i know will not be the case, but using extremes helps prove a point more efficiently. Supposing we have moderate inflation mid-high single digits for the next decade (which is likely to be conservative), I expect a long term silver price ranging from 22-30$/oz.

If your interested i have posted valuation models for silver wheaton, coeur D'alene mine and two others. They are open to anyone so you can change the price of silver and see the influence it has on the intrinsic value of companies.

I would look at silver wheaton, i think it is far and away the best way to play silver. It does no mining, as it has 12 roytalty streams averging 20 years for each one. The will grow from 8m oz produced last year to 18m this year, 25m in 2010, 31m in 2011 , 33 in 2012 and 35-36 by 2013. By 2015 it should have reached peak production (in terms of all the streams at full capacity) of 40m/oz a year. Plus they government has given them tax exempt status as long as the reinvest in or pay it out to shareholders. It is my largest holding, as I was able to put on about 75% of total position on under $4.4 candian or $4 US back in Nov. 

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#3) On July 01, 2009 at 12:09 AM, streetflame (29.27) wrote:

You seem to gloss over the significant drop in industrial and retail demand which has already occurred.  A lot of inventories need to be worked off all over the world.  For example Indian silver imports have dropped over 90% off their high.

You also don't mention that the fastest growing segments of the gold and silver markets are financial vehicles.  Some people even claim ETF demand is responsible for most of gold and silver's price appreciation in the last decade.

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#4) On July 01, 2009 at 12:23 AM, speedybure (< 20) wrote:

Yes I did, but I guess i wasn't clear enough. I was giving the long term i.e 3-5 years out case for an increase in the price of Silver. 

I also forgot to mention the fact that inventories aren;t a problem because mining of base metals has come almost to a complete stop, thus the supply of silver has dropped dramatically. I actually tried to post, the significane in oz, the next generation batteries will have on the use of silver. It's quite amazing. I also read (although i don;t know the validity of this), but there is currently more gold than silver above ground. I've also read there is about the same and slightly less. You also have to remember nearly 12% of silver is scrap which can't be used for certain things. 

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#5) On July 01, 2009 at 12:26 AM, checklist34 (99.09) wrote:

streetflame, I'd wager that a whole lot of the inventory work-off that we need to do has been done, and that we're closer to an inventory replenishment bounce, or at least an output bounce due to inventories stabilizing at hte minimum, than we are to further depletion.

i speak in general terms, not about silver in specific.  

i can't comment on the ETF thing, but thats interesting.

Thanks a bunch for the input, speedy, your posts this evening are very interesting.

I absolutely agree that as a broad general rule the closer to actual production of wealth (farming, mining > base manufacturing (as in making monomer, not paint, as in making fiber, not shirts) > secondary manufacturing > all else.)  Farming > all, that is true production of wealth as its in essence the sun that provides the wealth and we aren't depleting something from the earth (no environmentalism in that comment, just a chain-of-value thought).

I grew up on a farm so poor it'd make probably all of you blush to have ever complained about anything.  We sure ate well, though.  :) I hope farming hits a bull market as some predict will happen in the next 50 years.  

but I digress, thanks again speedy

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#6) On July 01, 2009 at 12:44 AM, speedybure (< 20) wrote:

I'm with Jim Rogers on Farming: It will be the Farmers driving Ferari's. Here are some candian agricultural equities you might be interested after you do you own due dilligence. 

Potash: Potash of Saskatchewan followed by my favority Migao (traded on the pink sheets if you can;t purchase on the TSX)

Wheat Pooling/marketing,etc - Viterra - Great company which i got into or will be into because I owned ABB grain in Australia. It will have a worldwide reach with more consistent earninigs than its peers due to the weather not being as much of a factor.Graincorp is also worth a look.

Crop chemicals/protectants - Hangfeng Evergreen , Nufarm & Incitec Pivot.

i would def check out Migao and Viterra at least you would be surprised about the valuations. I have posted one for Migao in a previous post if your interested.  


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