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Originally Posted by Danr Strong momentum in gold, silver is riding golds coat tails. The nature of commodities is such that if the price rises new supply appears and drives down price. Demand for gold will remain strong for the rest of the decade but new supply will keep prices sane. New supplies will come from advanced mining techniques and (more importantly) European countries dumping huge quantities on the market, high prices will bring much long held gold into the market. Gold will pass $500 before 2010 and in fact may go up from there but will not top $750. Gold may dip into the $300's during the same time frame though (late 2006 early 2007?) if massive new supply comes on the market. Silver really is not rare but may top $10 before 2010 but digital photography may bring it down. |
Danr. It's a multi-dimensional issue, and I'll try to keep it "short," starting at the end and working toward the beginning. I won't comment on any prices you mentioned because future prices are flat-out guesses by anyone who makes them. But as you know I think the direction is up.
Regarding silver, an interesting but little noticed fact is that above ground supplies of silver are actually smaller than those for gold. Silver is actually more rare than gold. Why is the prices so low? I don't know. When will this change? I don't know that either. Sometimes it's easier to know what will happen than when. Silver coins look good to me. There is more silver in the ground than gold, but few active primary silver mines [I think only 42 world-wide]. Most silver is mined as a byproduct and is therefore not subject to normal supply/demand reactions to price changes. It takes an average of 7 years to open a mine from a standing start, so any price increase is likely to stick for a long time before new supply supresses the price. Higher prices will bring a lot of silver out of hiding like it did in 1980, but the key words are "higher prices." In my opinion, $7 silver is going the way of the 7 cent Coca Cola I drank as a kid [with a 2 cent deposit on the bottle].
Digital photography might actually increase silver usage over time, or at least have no impact. There is a 90%+ recovery rate for silver used in normal film development, so it is a source as well as a use of the metal -- almost a wash. But there is no recovery of silver from the prints made from high quality digital photo prints. This leads to the counterintuitive observation that all things considered, digital probably has a small impact on silver supply. However, unlike gold, silver is actually consumed by industry so that there is less above-ground silver in the world every year, unlike gold supplies which continually increase at the rate of about 2% annually.
Regarding the use of the word "gold" in connection with "massive new supply," there is no evidence that this can occur. Gold reserves for the major producers is declining each year, and this will continue at least until a new exploration cycle gets further along. It is extraordinarily difficult to increase the annual 2% rate of increase in world gold stockpiles mentioned above regardless of price or technology. When you talk about European countries 'dumping huge quantities' you must be talking about central bank sales. There is no evidence that they will increase the current sale rate of about 500T per year, and less evidence that they can sustain this rate for long. About half of their gold is said to be already sold or leased and presumably they are unwilling to go to zero. The central bank in Argentina has publically announced their intention to buy large quantities of gold. Other central banks are less forthcoming with information, but some are no doubt buying. Anyway, none of this is new gold. It's just changing ownership.
Also, when making statements about higher prices increasing supply, keep in mind that it is only half the story. Prices decrease only when new supply comes to market faster than new demand. Look at oil. The amount produced increases every year, but prices go up anyway because demand rises faster than production. There is a very good chance that the same thing is underway right now with gold and silver, but is still in the early stages. This is good news for gold and silver coin buyers [if it is true].
Regarding new gold supplies and advanced mining techniques, check out Newmont Mining and some other large companies. Their reserves and production are declining every year despite the use of technology. The gold just isn't there in the quantities it used to be. Some of these companies mine as much as 5million ounces per year, but nobody is finding and opening 5million ounce mines every year. Newmont has made large investments in Canadian oil sands as a hedge against a future shortage of gold production. Other companies are branching into the mining of diamonds and base metals. I doubt they would do this if they could easily increase gold production.
Regarding coins, I've read that higher grade numismatic coins may actually underperform bullion coins in a rising gold market. I don't know if this is true. I'll leave that to the experts here. Higher gold prices in the past seems to have brought many St Gaudens and Liberties to the market, and may do so again. This might hold down the price a bit. Bullion gold and silver coins will track the prices of the metals, so they are more of a 'sure thing' even if they don't maximize profits. All things considered, I wouldn't be too concerned about losing money on gold and silver coins. There is no such thing as a sure thing, but it seems like a reasonably high probability bet that they will be worth more, maybe substantially more, ten years from now. In the meantime, collecting silver and gold coins is fun regardless of price action. Future higher prices will just be a bonus. The US government used to have a stockpile of silver, but it's gone now. They buy their silver on the open market like anyone else. Wouldn't it be ironic if the Mint had to buy older silver eagle coins and melt them to produce new silver eagle coins? I think that happened in the distant past with silver dollars. What would that do to price of SAEs?
Anyway, this is too long so I'll stop, and promise never to do this again. None of this is intended to be investment advice, or even collecting advice. It is worth exactly what you paid for it. It's a mixture of analysis and opinion. I know which is which, but you and others may not so please don't treat this as anything more than the opinion of someone with 'weird economic' views and strong opinions. Never take any action based on anything you read on the internet. I could be writing this from inside of an insane asylum for all you know.
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