Excerpts from Weekly Report #35

Silver Stock Report

by Jason Hommel, May 22, 2004

    The silver bull is definitely back! As I produced this report this Friday evening, I see that most of the silver stocks are up significantly from last week. Many are up by 20% or more, all in one week. This week was definitely a turning point for the entire silver stock sector.

    Speaking of silver's potential value, how will it actually be valued if the whole world returns to using gold and silver as I expect? Sure, it may go up a lot in terms of dollars, but won't everything else just cost that much more, too? No. No! I expect silver's rise in value to far outpace every other asset, and every other commodity you can buy.

    As proof, let's look at the historic value for silver. And given the ongoing supply/demand deficit, and shortage, as reported by the two industry reports above, I expect silver's value to far exceed the historic value.

    There are several ways to evaluate silver's historic value. The first is to look at what silver could buy, and to look at what wages were in terms of silver.

    I have written that a day's wage, in silver, for skilled labor, about 100 years ago, ranged from being a silver dime as one man reported, a silver quarter during the great depression in the 1930's, or as much as a silver dollar. Henry Ford paid his workers, what was considered a very excessive $5.00 a day. In silver, at .72 oz. per silver dollar, that was 3.6 oz. of silver per day. But remember, that was an extremely high and very unusual wage. It was made possible by the very high productivity of the assembly line, and little government regulations or taxes. If silver returns to historic norms, it will be an ounce of silver, or less, for a day's wage. Due to scarcity of silver, it may well be more like less than a 1/10th of an ounce of silver per day. Or perhaps, a silver dime for two weeks of labor!

    The reason is that the U.S. has well over 100 million workers, yet the world has about 250 million oz. of silver in known inventories! If 1/10th of an ounce of silver is a day's wage of $100, then an ounce of silver would be $1000/oz.

    The other historic value was the gold to silver ratio. One ounce of gold was the same value as about 10 to 15 ounces of silver. Again, due to silver's scarcity today, that ratio will certainly deserve to be exceeded, to at least 5 ounces of silver to one ounce of gold. Thus, silver will be valued at about 1/5th of $400, or $80, assuming that gold is fairly valued at $400. But, if gold should really be valued at about $5,000 per ounce, then silver will be about $1000/oz.

    In both of these examples, this does not mean the price of a gallon of milk would shoot up to $400 per gallon. I would expect that milk prices would remain the same, at $4.00 per gallon.

    If milk rises to $40/gallon, and if consumer prices rise by a factor of ten, then increase the "future value" price for silver also by a factor of ten, so that silver would be $10,000/oz, and 1/10th of an ounce of silver would be $1000, so that a 1/10 of an ounce of silver would be able to buy the things you'd buy today with a day's wage.

    And if you truly believe that an economy would be run more efficiently, as I do, without all the fraud of the dollar negatively affecting things, then you should assume, as I do, that a day's wage of silver (however small of an amount that would be) should help the average consumer to be able to buy more than a day's wage of fiat money can buy today.

    Further proof: Monetary demand during inflation will go into all tangible things, yes. However, nobody can buy and store a billion dollars worth of "milk". Milk spoils. It's simply too inconvenient to use as money. And so are nearly all other goods. Silver does not spoil, and people will realize that no other commodity has the peculiarly unique properties that the precious metals have, that make them the only tangible things that qualify as money.

    This combination of factors then, forms my view of silver as an investment. I expect the future value of silver to be at least $1000 per ounce, in terms of today's money and today's value and today's purchasing power. Let me rephrase so everyone is clear. I believe that an ounce of silver will buy what $1000 of today's money will buy. Today, with $1000, I can buy a month's rent. Yes, a month's rent may cost an ounce of silver in the future. Today, with $10,000, I can buy a nice used car a few years old. Yes, I expect to be able to buy a similar car, or better, with about 10 ounces of silver, in the future.

    I expect that most readers will either not understand, or not believe, my point of view. That's fine. But ask yourself: Could it really be any other way? There is going to come a time when the silver price moves up so sharply, so violently, it will be something which the world has never, ever seen. There is no experience that any human has experienced that can prepare anyone for what is coming. This will happen because the world has never totally abandoned using silver as money, until this generation. The world has never seen such a low price for silver as today, and the world has never seen such low inventory levels for silver as today, and the world has never seen such a high industrial demand for silver as today. The world has never seen such a deficit and scarcity of real money. And the world has never seen such a huge build up of false wealth, as represented by the enormous amounts of paper money that exist in the form of bonds and M3.

    Therefore, I'm not scared, troubled, or concerned after having seen silver move from $8.40/oz. to $5.50/oz. Today's price movements in silver are but tiny wiggles, and are insignificant in the long run, in the grand scheme of things. Silver will remain a screaming good buy even at $50 to $100 per ounce. And at that price, there will be billionaires lining up and begging to get it, because there will be little else for them to buy to protect their bonds and money from going up in smoke as inflation wipes out the paper fraud and dollar debts accumulated by generations.

    Today is not a "once-in-a-lifetime" opportunity in silver. It's not a "once-in-100 years" event. It is an event that has never before occurred in all of human history. When in human history has anyone had the opportunity to earn $100 as a day's wage, and be able to buy nearly 17 ounces of silver with that? When in human history has anyone has the opportunity to do this while silver was as scarce as it is today?

    From Jan, 2004 to April 2004, over those three months, the increase in M3 ($222 billion) (the money in the U.S. banking system) is over twice as much as the value of the official U.S. gold hoard. ($104 billion at $400/oz.)

    For a while I was using M3 and dividing that by the US gold (261 million ounces), which implies the us dollar is 84 times more valuable than it should be, and that gold should hit $34,000/oz. after the fraud is destroyed. Today, I realize I need to add in the Bond market, because bonds are an asset class designed to siphon away and replace real money, which is to say, gold. This gives a price of about $111,111/oz. for gold. At $ 430/oz, this implies that US bonds and paper currency are 258 times more overvalued than gold.

    Gold is overvalued relative to silver, because at current prices, it takes 68 ounces of silver to buy 1 ounce of gold. Historically, this ratio was 15 or 16. Given the silver shortage, this ratio will hit 10:1 or 5:1, or even 1:1. Thus, gold is perhaps 68 times more overvalued than silver.

    Silver is overvalued relative to certain select silver stocks, perhaps by a factor of 3 or 10 or 20 to one.

    Thus, if you multiply all those numbers, 258 x 68 x 10, You will see that bonds and currency are overvalued relative to select silver stocks by a factor of 139,000 to one. In other words, if silver stocks reach their true value, and paper currency disappears as it always does, then you might expect certain silver stocks to go up in relative value by a factor of 139,000 times more than they are worth today. By that time, you should definitely sell the silver stocks, and buy gold.

    Can silver stocks really appreciate so much? Is there historical evidence for such a crazy thing? Yes.

    "CDE rose from penny stock status (.02 in 1967) to an NYSE-listed, $60 per share stock in 1980. In fact, the average share on the Spokane Stock Exchange rose in value nearly 16000% (yes, sixteen THOUSAND percent), as America could not get enough of silver and silver stocks."

    CDE rose by a factor of 3000, or 300,000%, and by 1980, the metals boom was stopped short, and paper money's death was postponed. If paper money dies a death that lasts a generation world-wide, then even greater gains should have been expected.

    For this reason, a wise silver stock investor should NEVER sell silver stocks for paper cash. A wise silver stock investor who looks for value would never sell a fairly valued silver stock for an overvalued silver stock that traded for hundreds of thousands of times more value than it should be. Likewise, there is no excuse for a silver stock investor to have any cash or money market or bonds in his portfolio for any reasonable length of time, except for when selling one silver stock to raise the cash for another silver stock, or for when you need to raise the cash to buy silver, or a private placement in another silver stock.

    The sheer stupidity of big money not recognizing the value of the world's remaining silver is utterly shocking to the rational mind. Clearly, bond holders are utterly deceived, and totally unaware of the situation. All my readers should understand and know that bonds were originally invented to suck the capital and money (gold and silver) away from the people. Bonds today are a paper promise to repay paper. What a con game! Are bond holders conservative and safe? No, they are fools! There is nothing safe about holding a paper promise to receive more paper when we have been experiencing hyperinflation for the past two and a half years!

    Jason Hommel

    Final Disclaimer: I have not received any compensation from any public silver stock company for writing up my weekly report on "Silver Stocks--Comparative Valuations". I own shares of the following 17 silver stocks: CMA.V, PLE.V, PDO.V, AUN.V, EDR.V, IMR.V, KG.V, MGN, CBE.V, NPG.V, SVL.V, MMGG.OB, TM.V, OTMN.PK, FCO.TO, KRE.V, FR.V. These are required disclaimers by the SEC: whether I've been paid, and what I own. I believe the SEC intended this to be a cautionary note that I own these shares, not as a recommendation or endorsement. I reserve the right to buy or sell any stock at any time. I believe the SEC does not require a disclosure regarding finder's fees. Nevertheless, I have begun to receive "finder's fees" from a few companies.