Look what’s creeping back up: Precious Metals! And, we’re a breath away from $31 an ounce for silver. Silver promises to become the next big buzzword among investors in 2011 and beyond, according to one of the investment industry’s most prescient and successful experts on precious metals. Sprott Hedge Fund LP, is heavily weighted in precious metals and has generated an estimated 23% annualized return over the past decade. Other similarly oriented funds under his stewardship have also been stellar performers in recent years. He’s now so bullish on silver that he launched the $575 million Sprott Physical Silver Trust in November of last year as he believes that: “Silver will be the investment of the decade.” “I think that silver could easily get to $50 this year,” This all bodes especially well for publicly traded companies that are already mining silver, he says. Likewise for ones that are developing primary silver deposits or gold deposits with plenty of silver as a byproduct. “If the price of silver continues to go up, silver is going to perform even better,” Sprott adds. One company that’s on the front lines of the drive to ramp-up the world’s silver supply is Vancouver-based Extorre Gold Mines. This high flier benefits from a resource base of 27 million ounces of silver and 550,000 ounces of gold at its development-stage Cerro Morro property in southern Argentina.
Extorre Chairman Yale Simpson says that the investment appeal of his company’s gold assets are beginning to take a back seat to the value of its silver inventory. “We’re continuing to find bonanza grade (very high grade) silver sites, including the Escondida Vein, which averages over 23 ounces per ton of silver. So if silver prices rise further, as so many industry observers forecast, the economics are in favor of this becoming a very low cost mine are enhanced very dramatically,” he says.
“This means that companies like ours no longer have to think of silver as a mere by-product to our gold mining. Instead, the silver component becomes the dominant economic driver and we could well begin quoting silver equivalent valuations, instead of the converse.”
Meanwhile, Sprott says the big catalyst for surging silver prices in the coming years will be exponentially increasing investment demand, which is already beginning to overwhelm existing silver supplies. The mining industry only produces around 800 tonnes of silver per annum. This is a relatively inelastic supply, regardless of silver prices, he adds.
Meanwhile, Sprott says the big catalyst for surging silver prices in the coming years will be exponentially increasing investment demand, which is already beginning to overwhelm existing silver supplies. The mining industry only produces around 800 tonnes of silver per annum. This is a relatively inelastic supply, regardless of silver prices, he adds.
As household investors are becoming increasingly jittery about the debasement of the U.S. dollar and other major currencies, they are loading up in record numbers on silver bars, coins and silver-denominated exchange traded funds, Sprott says.
However, there’s also a quantum shift in investment demand taking place among big players in the precious metals market, including India (which is aiming to increase its imports by about 77 million ounces per annum), and of course China, Sprott says. China’s net imports of silver were 112 million ounces last year. In 2005, they were net exporters of 100 million ounces. That’s a 200 million ounce shift in an 800 million ounce annual market that seldom ever grows because production hardly ever goes up. So where’s it all going to come from? We don’t know.
In fact, silver promises to outshine gold over the coming years, according to Sprott. Silver is the poor man’s gold. Industrial demand for silver, excluding photography, will rise 18 percent to 478 million ounces this year, according to UBS, Switzerland’s biggest bank. Investors will buy 450 tons of gold through ETPs this year, the Zurich-based bank forecasts. One-ounce silver coin sales from the U.S. Mint jumped to a record last month. Ex Oriente Lux AG, based in Reutlingen, Germany, will start adding the metal to its U.S. ATMs that sell gold in banks, shopping centers and jewelry stores this month.
But with photography alone utilizing 128 million ounces of silver yearly, and other industrial operations accounting for another 312 million ounces, the world’s total obtainable silver (both produced and hypothetical) is steadily – and irretrievably decreasing. Thus while gold is continuously being transferred based on price imbalances and demand alone, silver, as an element, is really vanishing. Gold has had a great run for the past 11 years, and now it seems to be silver that is out performing gold. Currently, there’s more investment dollars going into silver than into gold.
Such a game-changing scenario should recalibrate the gold to silver pricing ratio in silver’s favor, thereby eventually restoring it to its traditional level of about 16 to 1, he says. “It’s the easiest call of all time.”
Sprott adds: Silver as a currency always traded in a ratio of around 16 to 1 compared to gold, when it was a currency in the U.S. and the U.K. The current ratio is 48 to 1. If we go back to a 16 to 1 ratio, the implied price for silver would be $85.62 (per ounce).
On that basis, if gold goes to $1,600, then that would value silver at $100. And we certainly think that gold is going to $1,600. In fact, I’m willing to bet that this ratio will overshoot on the downside. It might even get to 10 to one. The only reason why silver is still trading at a 48 to 1 ratio to bullion’s spot price is that its price is being “manipulated” by big banks, Sprott says. That’s because they don’t want precious metals to become a popular alternative currency to Fiat money (currencies that are not backed by hard assets). Ron Fricke president of Regal Assets says “Silver is the most undervalued metal as gold is breaking through its high from the early 1980’s of $850.00 an ounce silver still has not caught up to its high which is $50 an ounce.”
But time is on silver’s side, he says, as the sovereignty debt crisis deepens in Europe and a continued policy of quantitative easing in the U.S. continues to undermine the value of the greenback. Finally, while silver had a tumultuous January after hitting highs in late December of over $31 per ounce; the market has since undergone a correction. The price of silver at closing on Feb. 1 was $28.620 per ounce, up $0.570 on the day, in New York. The strength of the dollar may have been a factor in the slide over the last month but that is changing. The US Dollar Index is at a 12 week low, which has helped the upward bounce in the overall correction pattern.
The most positive factor for the increased demand for silver going forward is still the Chinese. Looking to increase the relative value of the Yuan, reports show the desire of China to increase it holdings of precious metals. The Chinese central bank, the People’s Bank of China, is chalking out plans to buy gold and silver reserves these days. While the exact figures of China’s silver reserves are hard to come by, reports indicate China is the number one producer and consumer of silver, and any increase in demand from the central bank will surely influence prices of metals going north worldwide.
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