"Stay away from silver" has often been sound advice in the past few years. But hold on to your hats! From a number of indicators, it looks like the coming attraction is silver: the superinvestment of the decade ahead. So here, by way of preview, are some flashbacks, current coverage, and projections.
Silver has the distinction of being the only commodity known that, year in and year out, is showing a production-consumption gap. For example, during this decade, we have experienced yearly consumption exceeding yearly production by as much as 245.4 million ounces—in 1973—and the gap has never been smaller than 113.9 million ounces, and that was in 1970. With such bullish statistics, one may wonder why silver has not gone continuously up in price but instead has traded in a very volatile fashion—moving from its 1971 low of $1.28 (based on the Handy & Harman spot price) to $6.70 in 1974, then ranging from $3.94 to $5.22 in 1975, starting off 1976 at $3.81, and so on.
There are various reasons for the wide fluctuations in the price of silver in recent years. One is the fact that the silver bulls are mostly confined to miners and the general public, whereas the professional traders usually trade this market from the short side. Then, of course, the Silver Users Association, since its inception, has been devoted to keeping the price of silver as low as possible. So there is a continuing tug of war between the bulls and the bears in silver.
Basically, in order to be able to profit from those very wide trading ranges, one has to follow certain statistics that give a good indication of which way the price of silver will go. For example, the open interest disclosed daily by both the Commodity Exchange (Comex) in New York and the Chicago Board of Trade (CBT) can be compared with price action. If prices are going higher while open interest increases over a period of time, it can be assumed that the market is in a sustained uptrend. On the other hand, when prices are going down and open interest increases, this has a bearish connotation, and further declining prices can be expected.
An excellent example of a bull move in silver can be found in the statistics for silver prices during 1977. When the price of silver reached $4.96 on March 18, open interest on Comex stood at 290,918 contracts. At that time, the nearby December delivery reached a high of $5.19. On August 23, December delivery was down to a low of $4.3830 intraday, and open interest had declined to 132,782 contracts. Then a bull move brought that price to $4.9670 intraday on November 4. Open interest again ran parallel, standing at 218,067 contracts on November 4.
Another excellent gauge is provided by the statistics of visible silver stocks—the silver stocks reported by the London Metal Exchange (LME), Comex, and the CBT as being stored in special warehouses approved by those exchanges. In 1977, from January to June, silver stocks in the United States increased at a clip of about 5 million ounces a month, for a total increase of 29.8 million by the end of June. In July, for the first time in 1977, total stocks of refined silver in the United States declined by 293,485 ounces. In August, the decline accelerated further, and by the end of October the stocks in Comex, CBT, and LME warehouses had all declined by a total of 22.4 million ounces, or 13.6 percent.
The decline in these stocks has to be a forerunner of higher prices, because nobody would withdraw silver stocks from exchange-approved warehouses unless there were simply no other silver available—those stocks represent the most expensive silver around. Added to the cost of transportation with elaborate security protection, there is a handling fee both for putting silver into or for taking it out of those warehouses; furthermore, in order to be good for delivery on the exchanges, silver bullion must be verified by exchange-approved assayers, which also adds to costs. Finally, the storage charges in exchange-approved warehouses are higher than anywhere else. Therefore, when those silver stocks decline simultaneously and steadily, the best indication is at hand that prices will soon be on an uptrend.
The withdrawals of silver from exchange-approved warehouses in 1977 were due to the fact that Asarco and Amax, two companies that in 1976 delivered 61 million ounces of refined silver to their customers, suffered strikes of over two months at their refineries, so that their entire production during that period was lost and their customers had to turn to the exchanges to get silver. Also, exports of silver from India were markedly lower, which was more particularly reflected in declining stocks in LME warehouses.
Besides those visible supplies of silver, there are other stocks of silver around the world, the most important one being the famous Indian hoard. Over the last four decades, India has been a constant exporter of silver, to the tune of about 40 million ounces a year recently. In addition, it consumes 15-20 million ounces domestically. During 1977, however, exports of silver from India declined precipitously—by 70 percent, according to the Silver Users Association. Whether or not Indian exports of silver will increase again soon is difficult to evaluate, but one thing is sure: during 1976 and 1977 India's foreign exchange reserves increased substantially and exceeded $4 billion by late '77—an all-time record indicating that India does not have any immediate need to acquire additional amounts of foreign currencies and therefore may prefer to keep its silver within its boundaries. Of course, should the price of silver rise dramatically, India might return to or even surpass its average sales of 40 million ounces per year or even more. But one has to bear in mind that if the Indian hoard were not available at all, the price of silver would be at much higher levels today, because part of the gap between new production and consumption has been covered for years by exports of silver from India.
Of course, even the Indian hoard is not inexhaustible, and during the next decade this will be noticeable for the first time. Over the years, there has been talk of three-five billion ounces of silver being stored in India. This amount obviously does not overhang the market, however, since part of it is in art and religious objects and in jewelry, which represent a much greater value in their current form than if they were melted down for their silver content. Knowing that, let's consider the statistics that can give us some idea of how much silver there really is left in India.
Between 1874 and 1932, India was a net importer of silver. During those 58 years, the net imports of silver amounted to about 2.9 billion ounces of commercial-grade (see Green's Commodity Market Comments, 1970). Since we can safely assume that whatever was imported into India before 1874 is not available to the market, the 2.9 billion figure represents a starting point for calculating how much silver may still be in India in one form or another.
Between 1933 and 1969 the net exports of silver from India can be calculated at 900 million ounces, and during the same period the domestic consumption of silver for purposes other than jewelry amounted to about 50 million. In the 1960's, the industrial use in India grew rapidly, and in that decade India consumed between 100 and 150 million ounces of silver for its photographic, electric, and electronic industries. In the 1960's the silver smuggled out of India—so-called invisible exports—was estimated at 20-25 million ounces per year, with the exception of 1968, in which year exports exceeded 60 million. Taking all those figures into account, one can calculate that, as of the beginning of 1970, the amount of silver remaining in India was about 1.7 billion ounces.
From 1970 to 1977, India's domestic consumption accounted for about 110 million ounces, and exports, which are now taking place legally, amounted to about 215 million. So the net amount of silver in India should be about 1.3 billion ounces—a far cry from what some people consider to be a monumental overhang of above-ground silver in India.
Now it is very difficult to evaluate how much out of the silver remaining in India is in silver bangles or other objects that have no greater value than their silver content. It is safe to say, however, that out of that 1.3 billion ounces, no more than 300 million could be counted as a potential supply to the West. At the export rate of 40 million a year (the rate at which India was recently filling part of the gap between silver production and consumption in the free world), plus meeting its own domestic demand at the rate of about 20 million ounces a year, the 300 million ounces probably available for export and domestic consumption in India will be gone in about five years. That in itself explains why silver can be referred to as the superinvestment of the next decade. But there are even more reasons that augur well for an upside move in silver prices.
THE U.S. STOCKPILE
Until a few years ago, several governments had plenty of silver to offer to users. No longer. As late as last year, the German government was still melting a large amount of silver coins and delivering the bullion to consumers, but that was apparently the last hoard of silver in government hands, other than the United States, that could have been made available to the market. In the United States, less than 20 years ago the Treasury had a hoard of silver of over 2.3 billion ounces. That hoard is gone; all that remains is about 40 million ounces in the US Mint and 139.5 million in the national strategic stockpile. The latter has often been used by silver bears to predict declining prices whenever congressional hearings are held to try to determine whether to release this silver into the market and whenever administration experts are evaluating how much silver should be in the national stockpile.
On September 9, 1977, at congressional subcommittee hearings on the subject of the stockpile, the Carter administration was supposed to release its assessment of what amount of silver should be in the stockpile. In anticipation, the price of silver dropped precipitously in August, but the hearings were anticlimactic; no new proposal was made, and it was only on October 7 that it was announced that President Carter had approved the basic principles of the stockpile policy adopted by the Ford administration. That meant that the silver stockpile objective was again equal to zero and that the 139.5 million ounces of silver in the stockpile could be considered a surplus to be sold over a period of years, contingent upon congressional approval. By that time, however, silver prices were already on the rise, and the market did not pay any attention to this new potential threat of silver sales, because the chairman of the Senate Armed Services Subcommittee, which handles stockpile legislation, announced that there would be no hearing on the subject of the stockpile until 1978.
Even if the subcommittee should come up with a recommendation to sell the silver from the national stockpile, it is doubtful that Congress will approve it. In 1976, when the Ford administration announced its zero objective for silver in the stockpile and a bill on that subject was introduced in the House, it was defeated; and in the Senate the bill never even received the approval of the committee. The chances for a release of silver from the stockpile are probably minimal. The United States is a net importer of silver and has been for many years. For example, in 1976 the net imports amounted to 73.8 million ounces. The 1976 consumption of silver in the United States was 171.8 million ounces, while domestic production amounted to 34 million. The fact that the United States has to import about 43 percent of its consumption each year is the best reason to maintain the national stockpile at the current level or to increase it slightly in order to have on hand the equivalent of two years of imports. As a matter of fact, a bill has been introduced calling for the addition of slightly more than 27 million ounces of silver to the national stockpile in order to maintain a two-year net import reserve.
There is another argument against the release of any silver from the stockpile. In the summer of 1977 the Air Force advised the administration that it would need 163 million ounces of silver for its MX missile program, to be used for batteries on trucks from which missiles, including cruise missiles, would be launched. Despite the fact that technical considerations were in favor of using silver-zinc batteries (which delivered more energy per weight than any other battery known at the time), the procurement people for the MX program were persuaded that there is not enough silver around to assure them of a supply of 163 million ounces even if delivery were scattered over a period of years and only 40 million ounces used in the first year of full production. At present, two contracts have been given by the Air Force to develop nickel-based batteries rather than the silver-zinc batteries, but that may be changed yet, in which case this potential new demand for silver could add to the upside pressure on prices and deplete above-ground silver inventories.
As a matter of fact, at the end of October Westinghouse Electric announced that it intends to start commercial production of a new silver-iron battery that would offer the highest energy density per pound of any battery on the market. The new battery is considered suitable for light and mobile propulsion power sources on land and under water, and Westinghouse called it to the attention of the Navy for possible use in its submarine programs. The new battery contains 347 ounces of silver and weighs less than 87 pounds. It is already used in telecommunications equipment in several countries. Its energy capacity is five times as great as that of lead-acid batteries of the same weight and twice as much as that of nickel batteries. Westinghouse approached the Air Force recently and suggested that its silver-iron battery be considered as the power source for the ground backup system of the mobile MX missile unit.
Now let us have a look at the consumption of silver in the United States, which is the largest user of silver in the world. In 1976 total consumption amounted to 171.8 million ounces, out of which the photographic industry consumed 55.5 million; electrical and electronic industries, 32.3 million; sterling ware, 19.8 million. The rest was used by miscellaneous industries, including 8.2 million ounces for commemorative coins and medallions. Incidentally, the use of silver in coinage, which for a number of years had been on the decline, has begun to perk up again, and in 1976 the worldwide use of silver in coinage was in excess of 30 million ounces—12 percent of the free-world production. Canada, France, and Austria led the list of 72 countries minting 180 types of coins containing silver.
(Silver coins as an investment vehicle is another whole subject, but it might be mentioned in passing that bags of pre-1964 US silver dimes and quarters were quoted at about $3,500 for a bag of $1,000 face value coins on the New York Mercantile Exchange in November 1977—which means that the coins were actually selling at a discount to their melt value. Obviously, they represent a better value than bullion, and in addition, because so many of them have already been melted, with the passage of time they should command a premium over their silver content. Probably the best and safest leverage in silver coins is to acquire the half-dollar 40 percent silver coins; they are selling fairly close to face value; so the downside risk is limited, because the coins can always be spent as money.)
The second-largest consumer of silver is Japan, and the third largest is Germany. Neither has any stocks of silver worth mentioning, and both will probably be substantial buyers in the near future; both countries are interested in reducing their balance-of-trade surpluses, and purchasing commodities like silver would serve that purpose and at the same time assure them of silver supplies acquired at reasonable prices.
Based on currently known uses, the annual growth of silver consumption in the Western world can be pegged at about five percent for a number of years. There is the potential, however, for an additional, very large demand for silver if and when solar energy comes into widespread use, since silver would be needed for the production of mirrors to collect the sun's rays. One facility using silver mirrors for that purpose has been in operation for about a year in France, and in the United States the Energy Research and Development Administration announced in August that a design had been chosen for a $100 million solar power mirror system to be built near Barstow, California. This experimental project will collect sunlight onto 1,500 40-square-meter mirrors. Of course, it will take years for the widespread use of solar energy in the production of electricity to become a reality, but it is encouraging for long-term silver investors to know about this potential demand for silver.
In another field, a potentially large market for silver may be created by a new silver-coated light bulb that lasts three times as long as a conventional bulb and uses 60 percent less electrical energy. The bulb is coated with a layer of silver between two layers of titanium oxide; it transmits light but conserves heat by reflecting infrared radiation back onto the filament. The new bulb will cost more than ordinary ones but will offer savings in electricity. One company expects to put the bulb on the market in 1978. Of course, the amount of silver used in each bulb is very small, but should consumers prefer the new bulb, the total demand for silver for that purpose may be significant.
It is not unreasonable to project that the use of silver in batteries will also increase substantially and that three-five years from now many automobiles for city traveling will use silver-iron or silver-zinc batteries to save on the consumption of oil. Other potential uses for silver are currently being developed, but those already mentioned are substantial enough to create a real shortage of silver some time in the 1980s. Nowadays, new mine production covers only about 62 percent of the current silver consumption. Once new applications of silver become a reality, that gap will widen further and put an upside pressure on the price. (Those interested in new applications for silver can obtain the Silver Institute's monthly Letter (free) or quarterly New Silver Technology. The Silver Institute located in Washington, D.C., studies reports of worldwide research on silver and silver products and publishes those most likely to affect silver and the silver industry in the near future.)
PRODUCTION AND PRICES
A reasonable estimate is that world silver production will increase by about five percent in 1978 and by only two percent per year in 1979 and 1980. Those figures, of course, do not include Communist-world production. Whatever silver is produced in the Soviet Union and other Communist countries is consumed domestically, however, so that it does not affect the total supply picture of the West. As a matter of fact, it was rumored at the beginning of last year that the Soviet Union had purchased some silver from Peru. Incidentally, by the beginning of next year, the Soviet Union will have to enter the free-world market to purchase substantial quantities of silver, which it will need for the silver coins commemorating the Olympic Games in Moscow in 1980. It is difficult to evaluate how much silver would be required for that purpose, but judging by the previous demand for Olympic silver coins in Canada, West Germany, and Japan, it will probably not be less than 25 million ounces.
So the projections are for silver consumption in the Western world to increase by at least five percent annually in the near future and for production to match that percentage in 1978, then drop to a two percent annual increase. In the years to come we will probably see a growing need for silver by current users, and new uses are likely to find worldwide acceptance. With supplies increasing at a slower pace, prices have got to move upward.
When considering current silver production, it should be remembered that only those deposits are mined for which production is economically justifiable at current prices. But once the price of silver is firmly established in the $6-$8 range, the costlier mining of low-grade silver deposits will be considered. The sooner the price of silver exceeds $6 and stabilizes in that range, the sooner we can expect capital investments for the purpose of mining low-grade silver deposits. But there is a four-to-seven year lag between the time a project is started and the time actual mining operations can begin, so that one can already visualize now that in the early 1980's there will be a period of actual shortage of silver—Indian exports will have ceased and the new mines will not yet be in production.
So where will this bring the price of silver? There are, of course, many predictions of how high the price of silver will go. Perhaps the most reliable is that of the World Bank, an affiliate of the International Monetary Fund, based in Washington, which expects the price of silver to be $9.35 by 1980 and $16 by 1985. The reason this forecast can be believed is that the World Bank is neither a producer of silver nor a user, nor does it have any hoard of silver; one can therefore assume that its opinion is unbiased. As for shorter-term price predictions, it is safe to say that during 1978 we will again see silver around $6 per ounce, with gradually higher prices until the World Bank's prediction is reached.
But—the silver market is very volatile; so if one intends to enter this market, one must have enough means to survive the daily ups and downs. In other words, managing your margin will be your most important business, and your results will be much better if you try, not to play it smart, but to play it rich—which means that whatever your capital available for speculation, you should use only part of it on any one trade and not trade anything else until the first trade is completed. Also, probably the best signal that the customer of a brokerage house can obtain is a margin call. If you get a margin call, that means that you are on the wrong side of the market, and you'd do better to get out of the market temporarily and try again at a later date.
As to the liquidity of the silver market, it is extraordinary. Silver is traded on several exchanges in the United States, on the London Metal Exchange, and in the London bullion market. For several years it has been the most active or second most active commodity in the world. In 1976, in the United States alone, the total value of silver contracts traded amounted to $123.9 billion. During the first 10 months of 1977, the volume of silver contracts traded on the CBT exceeded 1.6 million, and on Comex it was almost 2.8 million—a record for both exchanges. The high liquidity of this market is an aid for individual investors, because anybody can enter the market or get out of it without as much as an additional ripple in the normal pattern of trading.
All this, of course, is of interest only to those inclined to trade silver in the futures market. Those who buy silver outright and hold bullion for a number of years should reap substantial profits irrespective of temporary fluctuations. In either case, the near future promises to be a superinvestment era for silver.
Mr. Stahl is president of Economic News Agency in Princeton, New Jersey. This article is adapted from his speech at the recent Gold, Monetary, and Economic Conference in New Orleans.
This article originally appeared in print under the headline "Why Silver Will Soar".