Most investors are well aware of gold’s glittering price climb since last summer. What’s less discussed, however, is that silver has risen right alongside it.
Gold surged to more than $320 an ounce in July from a high of about $270 in July 2001, though it has since settled back to about $312. Silver has followed suit, climbing to more than $5 an ounce in July from a high of $4.31 a year ago before slipping back to about $4.63 an ounce.
For investors intrigued by the prospects for the metal termed “the poor man’s gold,” that raises a question: Will silver continue to sparkle as an investment opportunity in the months ahead?
Precious metals experts say good arguments exist for silver going higher, but also point to factors that could weigh against increases in its price. Among those fairly upbeat about the prospects for silver is Michael Clark, managing director of FideliTrade, a precious metals trading firm based in Wilmington, Del.
One reason Clark recommends that investors hold silver is that there’s little chance of an overabundance of it flooding the market.
Investors know enormous reserves of gold are held by central banks around the world, and to some extent concerns about central banks selling their gold have had a negative effect on the price of gold in the past.
But with silver, no such overhang shadows the market, Clark said. Virtually all the silver produced each year is consumed that year. Either investors purchase it or it’s used up in a wide array of industrial manufacturing applications.
“So investors interested in silver need not have the same concern about a glut developing in the marketplace, as could conceivably happen in the gold market,” Clark noted.
While some have voiced concerns about the growing popularity of digital photography eroding the market for silver used in traditional photography, Clark maintains that’s not likely to prove a drag on prices. Digital photography for large-scale commercial applications like movies and large-format graphics hasn’t yet been perfected.
“From what I hear, until those technologies are developed to the point where they can be used in large-scale commercial applications, the use of silver in the photographic industry should continue at roughly the same pace,” he said.
In fact, the enormous numbers of consumers around the globe just becoming affluent enough to afford traditional photography could spur demand, said Brien Lundin, editor of New Orleans-based Gold Newsletter, a publication reporting on precious metals and mining share markets.
Photography using silver-based processes is forecast to grow significantly over the next few years in China, more than offsetting any drop in silver-based photography elsewhere, he said.
Also worth considering is the simple coattail effect, according to Dan Ascani, editor of Profits Without Borders, a Palm Beach Gardens, Fla. investment newsletter.
“Silver is rallying on the coattails of gold,” Ascani said. “So let’s say gold continues to go up to $400 an ounce, silver will go up along with it. I’ve recommended gold more than silver, but I don’t want to say silver won’t rally. I believe silver is rallying and will rally along with gold.”
Jim Steel, precious metals market analyst at New York City-based Refco Inc., a large brokerage house specializing in commodities and risk management, agrees with that theory. In the minds of many investors, Steel said, silver is a kind of substitute for gold, or at least a related good.
“If you’ve seen one thing go up, you may buy some of the related good anticipating it will go up as well,” he observed. “Experts in gold and silver tend not to think that way, but consumers do. So far the gold market has been very strong, and this may lend an unquantifiable, but nevertheless real, source of support for silver.”
Steel also noted it’s important to consider last year’s worldwide decline in industrial production, and the corresponding drop in demand for silver. Forty percent of world silver consumption goes toward industrial production, and in 2001 that production was down 2.9 percent in the U.S., 3.3 percent in Europe and 10 percent in Japan, which accounts for 15 percent of the world market for silver.
Though this year promises to deliver a recovery, it isn’t expected to be that big of a rebound. “That would argue for higher prices of silver, but not sharply higher,” he added.
Claiming he’s “not outright bearish on silver,” Steel thinks the potential upside for silver is more limited than do some of his more bullish counterparts. For instance, he’s not as certain as Clark that unreported above-ground stocks of silver won’t be placed on the worldwide market.
In some countries, particularly former communist countries, the amount of silver held is a state secret, he noted. How much silver is held by individuals privately and by governments that don’t report their stocks is anyone’s guess. One of the reasons silver fell below $5 an ounce a couple of years ago was that the Chinese government, which had built substantial stocks of silver during the Cold War, emerged as a major seller. And one of the issues for the market today is how much selling by the Chinese remains to take place, Steel explained.
The Chinese government still issues sales quotas that specify the amount allowed to be sold, and the quotas announced earlier this year were for an amount greater than all the quotas last year, he noted. Two more quotas will be issued later this year, and it’s likely more silver will be sold. All this tends to argue against silver going up in price, Steel said.
He sees a rise in silver
One observer who believes a rise in silver isn’t unlikely is rare coin dealer Harlan J. Berk, president of both Chicago’s Harlan J. Berk Ltd. and of the Professional Numismatists Guild, an organization of hundreds of dealers in the U.S., Europe and South America.
For gold to double in price, Berk said, “the world would have to change.” But for silver to go to $10 an ounce, roughly twice its current price, wouldn’t bring tremendous economic ramifications. “So you might have a better chance of making money with silver,” he added.
For those interested in investing in silver, Berk recommends 100-ounce bars and one-ounce silver coin-like “rounds,” both of which offer advantages and disadvantages.
The bars are the most economical way to buy silver, but don’t allow investors to trade in amounts less than 100 ounces. Though more expensive per ounce, the rounds allow investors to buy and sell in smaller quantities. They also represent a fairly cost-effective means of acquiring silver, because they sell for about $6.50, as opposed to $10 for the one-ounce Silver Eagle coin put out by the U.S. Mint, Berk said.
For some investors, a better option may be American silver dollars minted from 1878 to 1935, which Berk sells for $7 to $15. These coins contain .77 ounce of silver.
“So you can buy a piece of Americana for just a little premium over what a silver round would cost,” Berk said.
Ultimately, one of the reasons for owning silver itself is that silver, like gold, is inherently valuable, Clark pointed out. Silver relies on no outside third party, such as a company, corporation or government, as is the case with a stock or bond.
“Its value is in the stuff itself,” he said. “That’s why people flee to precious metals in a time of instability or insecurity. Both gold and silver are money, they’re monetary instruments, they’re industrial commodities, and they’re investment vehicles whose value is inherent. Gold and silver as money are nature’s currency. They’re currency without country.”
Pricing precious metals
Some experts say silver could be a good deal for some investors if the price of gold keeps rising during these volatile market times, because the two tend to rise and fall in tandem. Prices are annual averages per ounce on the London market. Prices for 2002 are through Aug. 9.
YEAR GOLD SILVER
1990 $383.51 $4.83
1991 362.11 4.05
1992 343.82 3.95
1993 359.77 4.31
1994 384.00 5.28
1995 383.79 5.20
1996 387.81 5.20
1997 331.02 4.90
1998 294.24 5.55
1999 278.98 5.22
2000 279.11 4.95
2001 271.04 4.37
2002 303.47 4.65
Source: Kitco.com
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