A Call for Silver

The long-term fundamental case for silver has never been better. The above ground available inventory of silver is rapidly declining while at the same time the demand for silver has never been more robust. Over 46 billion ounces of silver has been mined throughout history. Yet, in 1950, just 10 billion ounces of above ground inventory existed. By 1980, that number dwindled to 3.5 billion ounces of available inventory. Today, the above ground available inventory of silver has diminished to a scant 700 million ounces or so while demand is going through the roof.

For an investor, this is an especially exciting time to own silver over the long-term when one considers the two-sided dynamics that accounts for the vast demand of silver. On one side, next to oil, silver has more industrial applications than any other element in the world, while new uses for silver continues to grow in technology, medical devices, and alternative energy. On the other side of the equation is the investment demand for silver. With countries debasing their paper currencies around the world, investors more than ever are looking toward stores of value for diversification against fiat currency risk.

On the manufacturing side, silver is an indispensable cost component in a myriad of industrial applications with its superior characteristics. No other base element has the conductivity, light reflexivity, or heat transfer qualities that silver possesses; the irreplaceable elements of silver makes the bullion a prerequisite in manufacturing computers, medical equipment, solar energy panels, the auto industry, insulation and energy, water filtration systems, cell phones (including iPhones and all other iProducts), and so on. There are currently 10,000 total uses for silver and they are expanding.

To get an idea how little 700 million ounces is in above ground available inventory, at $33.7 dollars per ounce all it would take to wipe out the inventory completely is a mere $23 billion dollars. That’s peanuts when you consider that the U.S. government spends $23 billion in unfunded deficit spending in less than eight days. It’s also less than the amount consumers spent to buy iProducts in Apple’s most recent quarter. And if one took a look at silver’s input into solar panels, ten years ago only trace amounts of silver were used in the embryonic solar industry. Today, almost 80 million ounces of silver is consumed annually from solar panels alone—estimated to grow to well over 100 million ounces by just 2014.

On the investment demand side, more than anytime is our lifetimes, there is also a strong case to diversify one’s assets out of paper currencies into precious metals. Silver was first considered a precious element over 6000 years ago and has stood the test of time, so we’re not looking at a new fad here. During this 6,000 year time frame, 3,946 paper currencies have become worthless.

In today’s environment of endless currency printing, exploding derivative exposure, mounting worldwide debts, and that no paper currency has ever lasted over the long term before becoming worthless, the question really isn’t why own real assets like silver, the question really is why not?

The way to satisfy the enormous demand for silver with such limited supply over time can be met in two ways—higher prices over time or sudden, huge production coming online.

For years, as can be witnessed by the dwindling above ground inventory, miners reserves have been depleting and finding new reserves have been difficult at best. It's no wonder that miners are starting to hoard the silver instead of selling their inventory at prices estimated to be too low given the supply/demand side economics.

With the average cash cost to mine new ore at roughly $5.39 per ounce, and with silver currently selling above $30 per ounce, it would make for a great investment endeavor to strike for new silver. Yet, reserves continue to deplete along with the available above ground supply of silver.

This leaves the price of the bullion to satisfy the necessary demand for silver. The price needs to rise materially over time to either slow industrial consumption of silver down or to pry silver away from silver investors. For us, that price is far higher than where silver sits today.

At some point, silver could go parabolic. Should the Federal Reserve start printing money again, which Bernanke alluded to many times this week that he probably will, the case for storing real assets like silver will only become stronger.

I have countless more data on silver, and if you want more on silver or any other holdings just contact me anytime. I am always available to discuss our portfolios. For now, I hope you’ve enjoyed this quick take.

Yours,

Nicholas Green

Dancing Along the Bottom

As the country dances along the zero bound, I wonder how many market participants have bothered to do the math. Yesterday, the Federal Reserve extended their zero percent interest rate policy until late 2014. It’s no surprise, at least to me, the Fed keeps announcing that rates will remain low for years. This policy tool has become all too predictable and a real hoot for anyone paying attention.

It was just last summer when Bernanke announced he would keep interest rates at near zero until mid 2013….so now the zero bound policy has been extended another year and a half from that. In the FOMC statements and Q & A yesterday, it’s what they didn’t tell the viewers that matter.

The truth is that the Federal Reserve has boxed itself into a corner with the zero percent interest rate policy and cannot move them much higher, if at all, due to the sheer size and scope of our national deficits, which have surpassed 100% of gross domestic product quite handily. Simply,the debt America owes is greater than our economy.

The reason why the Federal Reserve is boxed in with interest rate policy is if interest rates rise our country’s huge and growing debts become more expensive to fund, exasperating the net deficit problem, something we can ill afford.

Yet Federal Reserve board members stated that they believe by the end of 2014 their zero percent interest policy will be able to normalize to 4 – 4 ½ percent from the near zero percent we sit at now. This is a joke. The Federal Reserve sending the prime rate to 4 or 4 ½ percent by 2014 is very unlikely to materialize, ever.

As it stands today, for every 1% increase in interest rates our national interest payments would increase by $140 billion dollars annually. By the end of 2014, according to the Congressional Budget office, the United States will have accumulated another $3-5 trillion in total debt, so our interest expense costs will be even higher by then for every 1% increase in interest rates.

Back of the envelope math tells us that if the Federal Reserve were to truly raise interest rates to a mean reversion of 4% or so by the end of 2014, our interest expense alone will add another $560 billion a year at a minimum to our annual deficits. In other words, the Federal Reserve cannot truly move rates in a meaningful way without bankrupting our country anytime soon.

The Federal Reserve is in a zero bound trap. Anyone believing they’d be raising rates anytime is off their rocker.

The more significant news out of the Fed was the chairman communicating at least 7 times yesterday he’ll do more rounds of money printing at the drop of a dime for almost any reason at all. With interest rates at near zero for several years, if not forever, and with the Federal Reserve chairman communicating many times yesterday he’ll pump money at will, it’s no wonder Gold and Silver went on a tear with every passing Bernanke sentence. Following is an intraday chart of Gold during yesterdays Federal Reserve Q & A session, it's not hard to guess at what point Bernanke was speaking, eh?

The markets certainly understand that all this jaw boning is nothing more than pure U.S. dollar debasement. Our Federal Reserve is committed to the race to the bottom in the currency wars to try to spur enormous growth, and should Europe stumble badly, which they very well could, I won’t be surprised to see the mother of money pumping as current leadership is steadfast on trying to grow our way of our debt and credit situation.

When the Federal Reserve pumps confetti paper money into the system, there are two assets that are the most favorable to preserving absolute and real wealth. I'll share my favorite of the two in another e-mail.

Stay tuned, I will also send out another e-mail in another week or so explaining to you what is keeping the Fed up at nights—it’s not what you may think, after all corporate profits are just fine thanks to record unfunded transfer payments entering the economy from our profligate fiscal policy.

Expect us to begin to get far more constructive as we get close to more money pumping.

Yours,

Nicholas Green