Dear Reader,
Everyone is familiar with the myth that booms can last forever. But another, less noticeable myth takes hold right when the boom begins to weaken. It’s the idea that the central bank can slowly unwind apparent problems on the horizon.
The U.S. experienced this during the 2006-2008 period. Bernanke tried to raise rates to avert inflation. As soon as the rates rose, there were problems with adjustable-rate mortgages. It’s hard to argue that the MBS crisis was a complete surprise. But investors thought that this was no big deal – just a speed bump in the road. If anything, the MBS problem would keep the market flat. Or we might be eased downward into a mild slump. But a crash? Of course not.
China and Europe today somewhat remind me of this period. China’s balancing act with higher rates appears to be working. And in Europe, everything is fine at the moment; the PIIGS aren’t in the headlines lately. Most imagine that the worst is over – and Europe can slowly ease out of trouble. But I think both areas will be extremely lucky to pull off their plans without rocking the boat.
We’ve seen this mood before – it usually precedes a crisis by a year or two. A problem in the market is recognized, but for some reason, everyone closes their eyes and hopes for the best. Looking back through history, there are few episodes where the economy gently unwinds major problems. The more common reaction is a giant and sudden correction. While China and Europe may be holding up for now, they’ll have a reckoning day somewhere down the road.
How Much More Demand Can Silver Handle?
By Jeff Clark, BIG GOLD
The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply.
That is some very hungry demand. Which raises the question, how long can this pace continue?
This is important for various reasons, starting with how demand contributes to price. If demand falls off, our investments could, too.
While I’ve discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let’s focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?
There are a number of ways to measure this – the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. – but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.
So how do the world’s largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?
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The largest silver ETF, iShares Silver Trust, has net assets of $9.6 billion (as of February 4). This pales in comparison to the more popular stocks trading in the U.S. In fact, SLV has roughly 12% the market cap of McDonald’s. It would have to grow over 20 times to match Walmart.
Pan American Silver, the largest pure silver producer trading on a major U.S. exchange, has a market cap of $16.3 billion. This is about 7% the size of Microsoft. The market cap would have to increase more than 19 times to match Apple. It is over 25 times smaller than Exxon Mobil.
This isn’t to say SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver’s investment vehicles.
So how much more demand can silver handle? As much as it takes to make it the household name I’m convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street’s top pick for the year.
Imagine what those bars on the right will look like when most everyone you know is talking about poor man’s gold. The rise could be breathtaking.
Remember that silver rose over 3,464% from trough to peak in the last precious metals bull market; it’s up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak.
When you look at the potential growth in market cap of the world’s biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do.
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