Silver Unmasked

Includes: CDE, HL, SLV, SLW, SSRI
by: Hyperinflation

Most individuals have no clue about the dynamics of silver, thinking there is an infinite supply of it both above and below ground. But those savvy investors who incorporate commodity based stocks in their portfolios likely own the silver ETF (NYSEARCA:SLV) or silver miners with a high degree of leverage to the price of silver. The largest of this group include Silver Wheaton (NYSE:SLW), Pan American Silver (NASDAQ:PAAS), Coeur d'Alene Mines (NYSE:CDE), Silver Standard Resources (NASDAQ:SSRI), Hecla Mining (NYSE:HL). There are also numerous junior and exploration companies that will provide extraordinary returns over the long term.

Silver is often thought to be a metal and little else. It is often assumed that silver is rather cheap due to the lack of scarcity. But both of these assumptions don't reflect the true underlying dynamics.

It is true that silver was mainly used for industrial purposes as well as jewelry, but that fact doesn't hold true today as silver is being used in numerous electronic devices, water filters, piping, batteries, solar panels and more, as this metal has been proven to be extremely versatile. It is highly unlikely it will stop with these uses as more technological uses for silver are discovered. Many of Silver's newly discovered uses are in the preliminary stages of eventually becoming "the gold standard" in such things as the longer lasting and recyclable silver-oxide batteries that are slowly gaining traction in the industry. This should make a huge splash in the battery industry.

Duracell has already developed basic everyday batteries while companies such as Intel (NASDAQ:INTC) capital have developed first generation silver-oxide laptop batteries. They obviously recognized the shortcoming of the lithium-ion batteries, as the silver-oxide batteries have a 40% longer battery life, hold their charge (as opposed to lithium-ion batteries which begin to lose their charge after just a few months of use). This will likely be wholeheartedly embraced by big businesses, causing computer manufacturers to replace lithium-ions with silver oxide. Silver is also used as a pipe cleaner as it prevents the bacteria that forms legionnaires' disease from forming. This is and will be increasingly used in water purification systems and pools due to the superior safety profile and the lack of harsh reactions to the skin (as chlorine and bromine have).

Silver lenses have also gained popularity for uses in lenses though that is still in its preliminary phase. It is superior in fighting harmful rays and conducts light in such a way that people don't need to take off their glasses when going into a house. We have the continuously expanding use of silver in semi conductors and alternative energy units such as solar panels. Then of course there are the uses in photography, coinage, etc. This alone warrants a much higher silver price, especially when the supply-demand dynamics are taken into account.

Of all the studies I've read, from the conservative to the extreme, they all had one thing in common: Silver is much more scarce than everyone thinks. A finding from the world gold council two years ago concluded that silver would definitely be the first element on the periodic table to become extinct. They also said this would happen in the year 2020. This is not as crazy as it sounds as it refers to the above ground silver and that which can be mined relatively close to the earth's service. It has been proven that a significant quantity of silver lies deeper in the earth's crust, but due to the uncertainty of this amount, this study only counted above ground and easily accessible silver to be mined.

After reading over half a dozen studies from such groups as those mentioned previously, another conclusion was universally reached. It is that the silver above ground and which can be mined easily is unsustainable, making it necessary to change the way modern mining operates. Mines that require the producer to dig far below the earth's crust will be commonplace in the industry. This holds vast implications to the market prices in the future. It is intuitive that the capital requirements will be many times larger, only making it feasible to engage in these operations with a much higher market price for silver. These estimates range from $30/oz on the conservative side and up to $60/oz for the more aggressive estimates.

Aside from the world inflation that is occurring (as the largest central banks in the world are very active in the race to debase), I don't want to make any forecasts about the future price, but I can say with a reasonable amount of certainty silver will surpass its record high of $50 oz sometime in the coming decade. I can also say the current market price (around $16.75/oz) does not reflect the intrinsic value of this metal. My conservative estimate would be a long term silver price between $25/oz-$30/oz. On one last note, I would weight silver and silver miners more heavily than gold and gold miners in my portfolio as silver has many more catalysts driving the price aside from being an inflationary hedge. Gold has nearly no industrial uses and much of it can and has been recycled, at least in relation to silver which is more often thrown out.

Silver mining is a great unexploited industry (due to the current lack of institutional money and common misunderstanding of this industry by retails investors), that I think will provide incredible returns. Of course this requires patience, but the supply-demand disconnect coupled with an impending wave of inflation, should slingshot this metal to record highs. Silver lacks portability, but silver miners are liquid, leveraged to the price of silver and will likely become income producing assets (Silver Wheaton must start paying a dividend when they can't reinvest cash flows on an economic level).

Disclosure: Long SLW, CDE, SSRI CALLS