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June 01, 2007

Silver: The Long Term View
by Roland Watson

Back in the depression year of 1932 silver was suffering. It had hit a low price of 24 cents per troy ounce as the forces of deflation assaulted commodities across the board. Could things get any worse as no end seemed in sight to the widespread massacre of assets across America and the world?

As it turned out, this was the nadir year for silver as prices began an upturn that led to a zenith as yet unparalleled. Between 1932 and 1980 silver advanced from 24 cents to 50 dollars an ounce. That is a 200-fold increase over 48 years!

Let us compare that to other areas of investment over the same time period. The S&P-500 hit a low of 4.40 in 1932 as well and advanced to a high of 114 the day silver peaked in 1980. That is a 26-fold increase or about one eighth what silver achieved. The Dow Jones 30 Index hit rock bottom at 43 in 1932 and advanced to 924 in January 1980 to give a 21-fold performance.

Meanwhile gold was at $20 an ounce in 1932. With a high of $875 in 1980 that gives a 44-fold increase, about one quarter of silver's stunning performance. I have to say this is a bit unfair since gold was fixed in price by government decree in 1932. If it had been allowed float freely in price, it would certainly have dropped to a single digit price and given silver a good challenge I believe.

But what about other commodities? Taking copper as a base metal example, it bottomed out at about 5 cents a pound in 1932 before participating in the 1980 commodity blow off at $1.30 for a 26-fold increase (copper is now $3.35 a pound).

Finally, cotton on the exchanges hit a monthly low of 6.27 cents per pound in June 1932 and advanced to 87 cents in 1980 for roughly a 14-fold advance (it is now priced at 51 cents).

Perhaps readers can enlighten me to other asset classes which may have beaten the performance silver put in between 1932 and 1980 but for now silver takes the award as the best performing asset in that cycle between one deflation low and one inflation high.

So why am I saying this now? Silver hit another major low back in 1993 when it reached $3.50. These two numbers are interesting. If we go to the standard CPI inflation calculator at http://data.bls.gov/cgi-bin/cpicalc.pl and type in the years 1932 and 1993 for one dollar, you get the answer that one dollar in 1932 had $10.55 purchasing power in 1993. Multiply our rock bottom silver price of 24 cents by 10.55 and you get a 1993 price of $2.56, which is not too far off our major low in 1993 and makes one wonder whether we had witnessed two similar events but in different cycles.

That cycle I am referring to is the Kondratyev cycle, which on average last about 54 years and cycles between deflationary and inflationary highs across history. The time between 1932 and 1993 is 61 years, which make me suspect we have witnessed the same deflationary event for silver but in different Kondratyev phases. Silver reached a post-war inflationary high in 1920 of $1.38. Twelve years later it had dropped to our deflationary low. One Kondratyev cycle later silver hit another inflationary high in 1980. Thirteen years later another deflationary low was reached in 1993.

Now we may say history rhymes rather than repeats. The period of 1932 to 1980 had its own unique events to help lift silver to those highs such as World War II, the beginning of welfare deficit spending and the dropping of the gold standard.

This period we are now in will have its own inflation causing events that will see silver grow and grow in price until another 1980 style crisis greets the world. Those events will be the welfare deficit crisis brought on by the mass retirals of the Baby Boomers. It will also be exacerbated by the unfolding energy supply brought on by the expanding economies of the Far East as well as Peak Oil. Finally, continuing depletion of resources and lower ore grades will be the final straw for a world already struggling to cope with one monetary woe after another.

In 48 years silver gained 200 fold over its competing assets. In the next 48 years between 1993 and some time around 2040 we may see silver grow 200 fold again to spike at $700 an ounce ($3.50 multiplied by 200).

You may object on two points here. The first is that 2040 is rather a long way off. I say that doesn't matter. Unlike 1932 onwards until 1964 when silver was effectively fixed in price, in this period silver will respond more readily to inflation concerned markets. In other words, we won't need to wait for most of the price action to be unleashed near the end as in the 1970s. The price of silver will experience price surges in our lifetimes that will exceed 1979-1980 for extreme pricing.

Secondly, you may say that $700 silver sounds off the wall. Well, if you had gone up to someone in 1932 when you could get an ounce of silver for a quarter and said that it would hit $50 in their lifetime, they would probably laugh you out of court as well.

I would also point out that $700 value is not inflation adjusted just like $50 in 1980 was not worth $50 in 1932. Using our CPI calculator again, one dollar in 1932 was worth $6 in 1980 which gives an inflation adjusted figure of $8.33 for 1980 silver in 1932 prices. That's a lot of wealth preservation as well as wealth appreciation in the price of silver!

Are we on track at this point in time? Yes, we certainly are! We are in 2007, 14 years on from 1993 and the price of silver has increased by a factor of 4.3 ($3.50 to $15). Fourteen years on from 1932 brought us to 1946, which saw a high price of 90 cents or an increase by a factor of 3.75. Looking good so far!

So, the long-term future of silver is very rosy in my opinion. As the various inflationary forces we anticipate hit the shores of the Western world, the best performing asset between 1932 and 1980 will once prove its worth as millions flock to it in their droves.

Further comments can be had by going to my silver blog at http://silveranalyst.blogspot.com where readers can obtain a free issue of The Silver Analyst and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk.

Roland Watson
http://silveranalyst.blogspot.com

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