The speculative bubble that sent silver prices soaring earlier this year has burst, but the fundamentals for silver continue to strengthen.
Demand for industrial applications, photography, jewelry, silverware and official coins exceeded supply by 198 million ounces last year according to World Silver Survey 1998, a report just released by The Silver Institute, a Washington-based industry group.
In early February, Warren Buffet triggered a silver rally by disclosing that his investment company, Berkshire Hathaway Inc., had purchased about one quarter of the world’s annual mine output. The price reached a 10-year high of US$7.82 per oz. on February 5.
Since then, the precious metal has slid to the US$5-$6 range as refiners boosted production and buyers in India, the world’s largest consumer of silver for jewelry fabrication, balked at the higher prices.
We’re in the midst of a normal correction at the moment,” says Victor Flores, an analyst for HBSC Securities Inc. “Over the long term, the fundamentals will assert themselves and we’re looking for a longer-term price at the US$6 level.”
The stock market rally that sent shares of silver companies skyward has also eroded. Apex Silver Mines Inc. (SIL/AMEX), Pacific Rim Mining Corp. (PFG/TSE) and Pan American Silver Corp. (PAA/TSE) and, which all hold significant silver assets, have fallen 15-40% from their February peaks.
Analysts say the market will remain choppy for the remainder of 1998 as speculators continue to manipulate the market and price spikes trigger scrap sales and reduced jewelry demand.
“So long as people who have accumulated hoards of silver do not decide to dispose of it, I think we will see high volatility with prices ranging from US$5.75-7.75,” said a Toronto analyst who follows the silver market closely but asked not to be named.
To the disappointment of investors who treasure Buffet’s gems of market insight, the American mogul has been tight-lipped about his reasons for accumulating some 130 million ounces of silver in the six months leading up to the February rally. In a brief statement to shareholders, he did concede that he believed “a higher price would be needed to establish equilibrium between supply and demand.”
Silver fundamentals have been out of whack for years. From 1990-1996, consumption exceeded mine supply by an average of 104 million oz. per year. This gap is widening because while demand is accelerating, especially in the industrial sector, there are only a few large silver producers coming on stream.
“The future for silver lies with new industrial demand that is relatively price-insensitive and does not have any obvious substitutes,” says John Kaiser, editor of the Kaiser Bottom Fishing Report. For example, the metal is finding new applications in superconductor technology and water purification.
On the supply side, Apex and Pan American have been accumulating a portfolio of assets that contain hundreds of millions of ounces of silver resources. However, Kaiser says most of these deposits are uneconomic at prices of less than US$8 per oz.
Kaiser adds that although he is not recommending any stocks based solely on his rosy outlook for silver, he is looking more favorably upon junior companies that could benefit from a rally.
One of these juniors is Yamana Resources Inc., which recently made a high-grade silver discovery on its Lejano property in Argentina. The company is currently drilling the prospect and expanding its land position in the area. Another is United Keno Hill Mines Ltd., which has a high-grade silver-lead-zinc deposit in the Yukon. United Keno is trying to raise $15 million to put the mine back into production.