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Silver: The Next Bull Market

Monetary Digest, May 2000

In 1999, for the 10th consecutive year, industrial demand for silver exceeded newly refined supplies. Although the deficit narrowed from 179.4 million ounces in 1998 to 120.4 million ounces last year, it remains high. According to CPM Group’s Silver Survey 20001, the deficit will be 92.4 million ounces this year. Note these deficits are for industrial demand. Add in silver used for coinage, such as the U.S. Mint’s Silver Eagles, and last year’s total deficit swells to 149.7 million ounces. With coinage included, this year’s total is projected to be 117.4 million ounces.

Two things helped narrow the deficit. Industrial demand declined in 1999 for the first time since 1987, with the shrinkage coming in the jewelry and silverware industries, the only two demand sectors that are sensitive to price, especially in countries such as India and Pakistan, where consumer prices of jewelry and silverware often are pegged closely to silver prices. Other silver-using sectors are less responsive to price increases because the low silver content of their products adds insignificant costs.

For example, it would not be economic for electronic manufacturers to incur the costs of engineering reductions in silver usage unless silver prices climbed well over $10. Photographic industry executives have indicated that silver would have to exceed $20 before any significant efforts to reduce silver usage could be cost effective.

The second reason for a narrowing of the deficit centers around transitional economies, which imported a net 11 million ounces in 1999, compared with 31.2 million in 1998. Much of the reduction came as a result of expanded exports from Red China. However, January 1, 2000, rules in China regarding domestic transactions in silver were relaxed.

Previously, all silver purchases and sales were supposed to have been made through China’s central bank. Sellers got less than the world silver price, and buyers paid more than the world price. Consequently, large amounts of silver were smuggled to India, where silver is in such demand that 90%-95% purity is sold at the price of good delivery metal of 99.9% purity.

The new rules allow more private silver transactions at prices closer to world prices. This change made it more attractive to sell silver within China. It also has made silver cheaper there, which is expected to lead to an increase in domestic silver use, especially in jewelry and decorative objects. The net effect is expected to be increased domestic silver use and reduced exports.

Silver’s Production Deficit and Prices

That ten years of production deficits, which have eaten up some 1.26 billion ounces of silver, have not pushed silver prices higher surprises most metals analysts. This is especially the case because silver stocks have been reduced to only a few years at the present deficit rate. (More on this later.) However, silver has to compete with other investments. For example, the bull stock market, which CMi believes has ended, was the greatest in the history of the world.

Never have so many people made so much money with so little investment knowledge. In 1999, stocks, as measured by the S&P 500, posted its fifth consecutive year of returns of 20% or more. Richard Russell, editor of Dow Theory Letters and a fifty-year stock market veteran, says the bull market started in 1974. Other analysts say it started in the early 1980s. Regardless, it was a great bull market, which began topping out two years ago when the advance/decline line turned down.

During the great bull market, profits were so big, plentiful, and easy that investors who normally would have invested in the metals were drawn to stocks. Furthermore, the principle of diversification, such as owning some gold or silver against potential calamities, was abandoned. Regardless of silver’s fundamentals, investors ignored it.

The metals do better during periods of anxiety, such as during bear stock markets. Now, with the bear having taken control of the stock market and as losses mount up, more investors will turn to the metals. After a few months, investors will look for other investments, and they will turn to gold and silver, two investments that have stood the test of time. It is difficult to say how many months, but over time investors will come to admit that the bull market has ended. And, in the near future, silver’s production deficit will be “discovered,” as investors push the price of silver higher.

Finally, silver’s production deficit has failed to push the price of silver higher because it has been like a tree falling in the forest with no one to hear it. Few investors even know about silver’s production deficit. Even for those who know about it, why buy silver when stocks are doing so well? That attitude is about to change.

Silver Inventories

CPM Group estimates that some 756.6 million ounces of above ground silver are available to meet the production deficit. However, CPM is quick to point out that much of that silver will be sold only at higher prices. There is a “shift of silver from the portfolios of disenchanted investors-people who bought silver at higher prices in the 1980s and now are selling it to move into other asset classes-to investors who have been buying at prices between $3.51 in 1991 and $7.00 or $8.00 in the late 1990s. These newer entrants to the market have a different opinion of silver than that held by the older ones, buying silver with the expectation of higher prices later. These are the ‘strong hands’-investors more willing to hold silver inventories and not sell at prices near recent levels.”

The most famous of these “strong hands” is Warren Buffet, who roiled the silver market two years ago with the purchase of 129.7 million ounces. Last year, it was reported that Microsoft founder Bill Gates had acquired a significant stake in Pan American Silver Corporation. Earlier in the 1990s, George Soros, most noted for his hedge funds, helped create Apex Silver Mines. And, shortly after news broke about Warren Buffet’s purchase, an unidentified investor reportedly took delivery of 30 million ounces.

Of the 756.6 million ounces that CPM estimates are available to meet the production deficit, 331.1 million ounces are held in precious metals warehouses and 425.5 million ounces by investors in the form of silver coins. However, of the 331.1 million ounces, 113.4 million ounces are held in reported and identifiable stocks, primarily registered against futures contracts. Which raises the question, “If 113.4 million ounces are held to make good futures contracts, how are they available to meet the production deficit, unless the futures exchanges go out of business? The balance, 217.7 million ounces, is estimated to be held in unreported stocks. Warren Buffett’s 129.7 million ounces are included here. So are the .999 fine 100-oz silver bars and 1-oz rounds CMi clients own.

At 1999’s production deficit rate of 120.2 million ounces, the 756.6 million ounces will be gone in 6.3 years. At year 2000’s projected deficit of 92.4 million ounces, the above ground inventories of silver will be used up in 8.2 years. Insomuch as many individual purchasers of silver, such as CMi clients, fall to the “strong hands” category because of their expectations of much higher prices, it is clear less silver is available to meet the production deficit unless the price rises much higher. CMi believes that it will take a move to $8 before many investors become sellers.

However, right now there are more sellers than buyers; consequently, circulated U.S. 90% silver coins can be bought below spot, and 100-oz .999 fine silver and 1-oz rounds bars carry premiums half what they did last year. This is because of selling by people who bought silver as insurance against anticipated Y2K disruptions. These people do not believe in holding a portion of their assets in “hard money,” nor do they know about silver’s exciting fundamentals. Many sellers have told us that they’re putting the proceeds back into stocks.

The graph on the previous page tells the story. Since the mid-1980s, warehouse inventories have fallen precipitously. It also shows that since the 1950s there have been ample supplies of silver to meet demand. Even in 1980, when silver topped $50, over a billion ounces were in warehouses. These huge inventory numbers have conditioned investors to accept the false notion that there will always be sufficient silver to meet demand. This is simply not the case.

In the late 1800s and early 1900s, several laws required the U.S. Treasury to buy huge quantities of silver at artificially high prices, resulting in a federal stockpile that reached 2.06 billion ounces in 1959. In the 1960s, the government sold off nearly all its holdings in efforts to keep silver from rising above $1.29, what the government deemed to be silver’s official price.

Ironically, what the government bought at artificially high prices, it sold at artificially low prices. As the government was selling in 1960s, astute investors were buying. And, over the following decades, those investors became sellers whenever the price of silver moved higher. Now, though, those investors have long since left the silver market, and a new group has replaced them.

Industrial Demand

But perhaps more important is the increased industrial demand for silver that has developed over the last fifty years. When the government began its attempts to suppress the price of silver in the late 1960s, industrial demand for silver averaged 387 million ounces annually. Last year, industrial usage consumed 804.7 million ounces.

The increased demand has come from not only increased population growth but also from new uses. It is not an exaggeration to say that silver is essential to today’s lifestyle. Silver has characteristics and traits for which there are no substitutes. Regardless how high its price goes, many industries will require silver to stay in business.

Finally, silver owners will be happy to learn that silver usage in the photographic industry continues to grow, despite the fears that digital photography will replace silver halide film. Last year, the photographic industry consumed 267.2 million ounces, versus 257.1 million ounces in 1998. That’s a solid 3.9% increase. CPM Group projects this year’s photographic usage to rise 12 million ounces for a 4.5% increase.

A decade ago, the arrival of office computers was supposed to have ushered in a paperless office. Instead, they led to an explosion in the use of paper. Now, digital photography is boosting the use of silver-bearing films and papers because much digital imaging uses conventional photographic materials, either to capture the original images or to reproduce high quality physical prints. Additionally, single use and APS cameras are growing in popularity, adding to demand for silver. And, it should be remembered that digital photography, although convenient, has a long way to go to match the quality of silver-halide photographs.

Silver remains a solid investment. It has little downside risk while holding great upside potential. Warren Buffett, Bill Gates, and George Soros are not investing in silver because they having nothing else to do. Obviously, they have looked at the silver situation, and they like what they see. With the stock market in the early stages of a bear market, silver could be the next great bull market.

Gold Dragons: Bullion Coins with Numismatic Potential

Gold coin investors should always, when the opportunity presents itself, invest in bullion coins that have the potential to attain collector status and, therefore, enjoy premium increases that will result in additional profits. The recently released Year 2000 Australian Gold Dragons are such coins, selling at only a few dollars more than the popular American Gold Eagles.

The Gold Dragons are part of Australia’s Perth Mint Lunar Series, which is based on the Chinese 12-year lunar calendar. This calendar dates back to 2600 BC, and each year is named after an animal. Additionally, each animal sign, in turn, is governed by the five elements of wood, fire, earth, metal, and water, with each element appearing with each animal only once every 60 years. All of this gets to be very important for the Year 2000 Gold Dragons.

The dragon is the only mythical animal in the lunar series, and it is the most auspicious. To the Chinese, the dragon is the ultimate symbol of wisdom, represents the Chinese people’s spirit for advancement, and is revered as the incarnation of power and authority. Dragon years are marked by celebrations, festivals, and rising birth rates in Chinese communities as parents attempt to confer their offspring with the dragon’s characteristics of success, happiness, and prosperity.

Additionally, the year 2000 marks the return of the metal dragon after 60 years. For the children born in the year of the metal dragon, life is beautiful and, supposedly, everything they touch “turns to gold.”

Also, this is the first time in 3000 years that the Year of the Dragon has coincided with the end of a millennium. The year 1600 was the last time the Year of the Dragon coincided with the end of a century.

All of the above means that the Year 2000 Gold Dragon will become highly sought after by Asians for years to come. But, the Year 2000 Gold Dragon has additional features that will attract coin collectors worldwide.

First, Gold Dragons are exquisitely struck, with near proof quality, and are now probably the most beautiful bullion coins being minted. The coins are encapsulated in perfect-fitting, clear, airtight plastic containers similar to those that protect proof coins.

Although the number of coins minted under the Lunar Series is limited, the Perth Mint never releases how many are actually sold. The table below shows the significance of restricted production.

Assuming $300 gold, a mere $9 million would buy all the 1-oz Gold Dragons. By comparison, Gold Eagles have unlimited production. In 1999, the U.S. Mint turned out 1,491,000 one-ounce Gold Eagles; in 1998, 1,518,500, and in 1995 (a bad year) 226,000. Additionally, Gold Dragons are .9999 fine gold, and Asians tend to prefer pure gold. CMI has been in touch with the Perth Mint and has been told that Gold Dragons are being very well received throughout Asia. The earlier coins set the stage, alerting collectors to the Lunar Series. But, the Year 2000 Dragon is going to be the big winner.

The premiums on the fractional-ounce Gold Dragons are only slightly higher than the premiums on comparably sized Gold Eagles, making them attractive to investors who like smaller coins. The 1/20-oz Gold Dragon is basically a jewelry item, carrying a premium of approximately 40% above spot.

The Perth Mint introduced the Lunar Series in 1996. The table below shows prices at which the earlier coins are now selling.

When a series of coins is well received by collectors, the earlier coins command the higher prices. However, because of the uniqueness of the Year 2000 Gold Dragons, CMI believes they will achieve premiums as soon as the Perth Mint stops minting them and starts turning out the 2001 Year of the Snake coins. Within 1-1/2 to 2 years, Gold Dragons could easily carry $150 premiums.

Many coin dealers promote old US gold coins or obscure European gold coins as having numismatic potential. CMI urges investors to stay away from both old U.S. and European gold coins. Old U.S. coins can attain high premiums; however, old U.S. gold coin premiums have shrunk over the last two years, some by as much as $200 each. CMI believes those premiums will fall further and that old U.S. coins are good investments only when they can be bought near spot. Generally, this means XF/AU grades within dollars of spot and MS62/MS63 coins within $30-$40 of spot.

Despite what the promoters say, European coins rarely attain genuine premiums. The coins being promoted are bullion coins and in Europe sell within a few dollars of the value of their gold content. Promoters bring them to the U.S., mark them up 20%-30%, and claim they have numismatic potential. Furthermore, promoters often compare the European coins with old U.S. gold coins, which, at times, do trade with big premiums. Equating old U.S. gold coins to European coins is misleading, and investors should avoid doing business with firms that do so.

Gold Dragons, on the other hand, are genuine bullion coins, which sell at bullion coin prices. Yet, they have tremendous numismatic potential. For as long as Gold Dragons can be bought at bullion coin prices, investors should make them their first choice.

Nobel Laureate Likes Gold

Gold will continue to play a significant role in the world’s central bank reserve systems for much of this century, according to Robert Mundell, the newly named Nobel Economics Laureate. Mundell, who is the C. Lowell Harris Professor of Economics at Columbia University, said that while the U.S. dollar is the world’s most important reserve asset, the growth in total reserves of central banks around the world is an endorsement of gold’s importance.

“There are $2,000 billion of reserves in the world’s monetary system and that amount will double over the next 12 years,” he said. He added that although most current reserves are in U.S. dollars, the bulk of the growth of reserves cannot be in dollars. Some of that growth will have to be from the increase in the price of gold.

“I think the total stock of gold in the reserve system in 12 years will be the same as now. Existing stocks may be redistributed around the system, but I do not see the physical stocks of gold getting larger. However, if gold maintains its position, its price will have to go up,” Mundell said in a speech in New York.

Mundell sees gold as a good investment for central banks. He estimated that if total central bank reserves (of which gold is only one component) were to continue to grow at 6%, the rate of growth of the past few years, and if the dollar and euro exchange rates remained constant, the price of gold could be expected to rise to around $600 an ounce by 2010.

“Gold provides a stabilizing effect in a world of entirely flexible currencies,” he said. “Countries will simply not risk just holding paper currencies, especially if there is any change in the international monetary system.” He said if there were an upsurge in inflation as in the 1970s, gold would have an important role as a hedge.

Mundell won the 1999 Nobel Prize for Economic Sciences for his analysis of monetary and fiscal policy under different exchange rate regimes and his studies of optimum currency areas. His work goes back more than 40 years. An article he wrote on currency in 1961 has been credited as establishing the theory behind the euro.

The above was excerpted from the Jan/Feb issue of Gold News, a publication of the Gold Institute.

Mr. Mundell’s significant position is not that gold may double in price over the next ten years but that gold is a stabilizer, that countries will not take the risk of paper currencies-especially if there is any change in the international monetary system. What are those risks, those changes? Renewed inflation, financial instability, and war.

If Red China were to move against Taiwan, or North Korea to attack South Korea, or India and Pakistan decided to nuke it out, central banks would scramble for gold. Instantly, the folly of paper money would be exposed to the world. The prudent are putting away their gold now.

Gold at a Discount

A telemarketer recently mailed a flyer that read, “If I offered you an opportunity to purchase gold at 25% off, how much would you buy?” The flyer went on to note, “While the price of gold has remained the same, the prices of U.S. $20 gold pieces have dropped nearly $200 each, which is well over 25%. It is as if they were ‘ON SALE’.” The graph below was prominently displayed on the flyer.

The approach is bold. After years of recommending coins that have collapsed in price, essentially this promoter is saying, “If you liked old U.S. gold coins at $600, you got to love them at $450.”

Since the mid-1990s, CMI has warned about the dangers of buying old U.S. gold coins with high premiums, and we continue that warning. Old U.S. gold coins are still too high. When XF/AU St. Gaudens and $20 Libertys can again be bought at a few dollars over spot-as in the early 1990s, they will be great investments.

When investing in gold or silver coins, keep in mind a few simple points. One, avoid premiums. Two, buy bullion coins that have numismatic potential. In other words, buy coins at bullion prices that have the potential to achieve premiums. And three, when premiums rise, swap those coins for other bullion products. A few examples are in order to illustrate these principles.

In the late 1980s, when VF/XF Double Eagles ($20 Libertys and St. Gaudens) traded at spot, a CMI client bought 192 VF $20 Libertys. In 1998, the client traded the 192 $20 Libs for 236 1-oz Gold Eagles, for an increase of 50 ounces.

For most of the 1990s, VG-grade old U.S. silver dollars traded in the $5.50-$6.50 range. But, in 1997, they started to climb, reaching the $9-$10 level in late 1998, early 1999. The December 1998 and March 1999 issues of Monetary Digest recommend that silver dollars be traded for other forms of bullion silver. One client swapped 1800 silver dollars (1386 ozs silver) for 2950 1-oz silver rounds. Now, silver dollars can again be sold at about $6.

This trade was particularly good because if silver spikes to the $8-$9 range, silver dollars may rise insignificantly, if at all. At $9 silver, a silver dollar contains only $6.93 worth of silver. In sharply rising markets, premiums tend to disappear.

The last example: about a year ago, during the heat of the Y2K buying, circulated 90% bags rose to the $5000-$5500 level. One client traded $2200 face (approximately 1573 ozs silver) for 2000 ozs in 100-oz bars. Today, under the best of conditions, $2200 face 90% would trade for 1400 ozs.

Move quickly when the opportunity to trade premium items for bullion items that result in an increase in your metals holdings. However, to get in the position to take advantage of those opportunities, first you have to put your money in coins that have numismatic (collector) potential. As noted, this means avoiding buying high premium coins.

Currently, the best premium potential silver investments are circulated 90% silver coins, which can be bought below spot. As for old U.S. gold coins, the premiums are still too high. We know there are a lot of dealers constantly hyping Double Eagles, but be patient. Those premiums should fall further. Monetary Digest readers will be alerted when its time to buy old U.S. gold coins. Right now, we believe Australia’s Gold Dragons to be the best gold coin investments. They sell at bullion prices and have tremendous numismatic potential. See page three for more information about these exciting coins.


CMI continues to believe that silver holds the greatest upside potential; however, gold is vastly undervalued because of central bank sales, forward sales, and the misconception that there is a seemingly unlimited supply of it. There also is the possibility that the price of gold is being kept down by a cabal that has made billions of dollars by suppressing the price of gold. Readers with Internet access will want to visit for fascinating material on this theory.

Yet, CMI maintains that gold is poised to make big upside moves this year. Already, the market has sent signals. Last year, on the announcement that 15 European central banks had agreed to limit future gold sales, gold soared from the $250 level to $335. Then, in early February, gold leaped $22 in one day on news that Placer Dome, a major Canadian gold mining company, had reversed its policy on forward sales and was unwinding some of its short positions.

Although silver holds greater upside potential, CMI recognizes that silver’s bulk and weight make it unacceptable for many investors. Therefore, the new Australian Gold Dragons put investors who prefer gold coins on a nearly even keel with silver investors. While the silver will probably enjoy a greater percentage move, the premium potential that Gold Dragons offer could match a silver move over the next few years.

CMI believes platinum to be vulnerable at present levels and advises investors to avoid platinum until prices return to more traditional levels, somewhere near a 10%-20% premium over gold. Admittedly, the price of platinum may stay up for a while because of supply problems; however, there remains the possibility that platinum prices could collapse. So, why take chances with platinum when Gold Dragons and silver offer great upside potential with little downside?


Circulated bags of pre-1965 90% silver coins can now be bought below spot. Last year, during the Y2K buying, circulated bags carried huge premiums, and we attempted to steer investors away from them. Now, circulated coins are favorably priced. It should be pointed out that historically 90% coins have carried premiums. In long bull markets, such as in the 1970s, 90% bags can carry premiums as high as $2.50 an ounce. CMI believes the coming bull market could again put such premiums on pre-1965 coins. Still, 1-oz silver rounds and 100-oz bars are now selling at small premiums over spot and also make excellent investments with silver in the $5.00 range.


People who bought gold as insurance for fears of Y2K disruptions continue to sell. This has resulted in a two-tier gold coin market where Gold Eagles, Maple Leafs, and Krugerrands dated before Year 2000 sell $6.00-$8.00 below coins dated 2000. The Year 2000 coins have the Mints’ markups in them. Investors wanting cheap gold coins can now just about take their picks, as long as they don’t care what dates the coins are. However, CMI believes that gold coin investors should invest in Gold Dragons and pay their small premiums.


As noted above, CMI believes that platinum is vulnerable to significant price declines. With silver and gold at rock bottom prices, why take the platinum risk? Investors still holding platinum should trade it for silver or Gold Dragons.