The Case For Silver

James Grant

Gold may well be a better monetary asset, but the white metal has many more practical uses, from the arts to medicine.  And its consumption exceeds its output.

James Grant is the editor of Grant's Interest Rate Observer. Visit his homepage at

James Grant

Silver, No. 47 in the periodic table, is the Boston Red Sox of precious metals. Many are its winning attributes, and loyal are its fans. It ought to win, and it will win, but it hasn't won in a long time. Following is the thumbnail bullish case for the commodity variously known as the "white metal," the "poor man's gold" and--with a nod to its storied volatility--the "restless metal."

Silver is strong, malleable and ductile. It is a superb conductor of electricity. It is endlessly useful, with applications in industry, medicine, photography, the arts and, yes, speculation. It seems to do everything but enrich its long-suffering holders (of which, to declare an interest, I am one).

What is the bearish case for silver? That was delivered in the form of a Sept. 25 announcement by Eastman Kodak. Henceforth, the film-and-camera giant said, it will invest much less in conventional photography and much more in the digital kind. The silver price, around $5.30 an ounce at the time of the news, crumpled. Two weeks later the quote was $4.81.

As there is a Red Sox Nation, so there is a Planet Silver. Upon hearing the Kodak news, the inhabitants of this small spheroid sighed. Defeat was snatched from the jaws of victory--again.

But wait: The apparently devastating bearish news was absorbed and brushed aside. True, 200 million ounces of silver are earmarked for photographic film every year, about 24% of estimated world consumption in 2002. But the market knows all about digital imaging. The market knows that conventional photography, although it will not be tomorrow's technology, will not just disappear tomorrow, either. It will dwindle, even as new applications for silver come to the fore. As a result the silver price has turned back up. The metal trades today at about where it did when Kodak unloaded its news.

What are these new applications? "Invisible silver," a transparent coating of silver on double-pane thermal windows, is one. But the major looming use for silver is the ancient monetary one. The metal that used to be money will serve as a store of value once again.

The dominant global monetary asset is, of course, the dollar. But what is a dollar? It is a piece of paper (or an electronic impulse) of no intrinsic value. The dollar is money by dint of government fiat. The eminent monetary theorist Ben S. Bernanke, now a governor of the Federal Reserve Board, has observed that the cost of producing a dollar is trifling and that the government can produce as many dollars as it wants. He so stated in his official capacity during the recent deflation fright. So saying, Bernanke has lent the establishment's prestige to the fringe-dwelling gold and silver bugs.

We nonestablishmentarians have watched as more and more dollars have poured into the world's payments stream. We have tried to imagine ourselves at the helm of one of the dollar-collecting Asian central banks. And we have decided that, if we were running the operation, we might do a little discreet dollar selling. As a hedge against the Fed's doing, if pressed, exactly what Bernanke said it could--and would--do, we would buy a little gold and silver.

Gold is a better monetary asset than silver, but silver has better supply-and-demand characteristics than gold. Since the Silver Institute began keeping track in 1990, silver consumption has annually outpaced silver production, and not by a little. The cumulative 13-year difference adds up to 1 billion ounces.

You can't just print silver: You have to dig it up. And you don't just dig it up, either. You have to find it. And without the necessary prerequisites (land, labor, capital, environmental permits) you can't just find it. Hence, relative to the great and growing supply of dollar bills, there isn't a lot of silver to go around.

William A. Fleckenstein, a silver bull from way back and a director of Pan American Silver Corp., a mining company, says that a reasonable estimate of the total aboveground silver stock would be 20 billion ounces. Perhaps two-thirds of that 20 billion are unavailable to the market, at least at prevailing prices. Best estimates of "liquid" silver--bullion and nonnumismatic coins--run to no more than 400 million to 1 billion ounces, at the high end, only a little more than $5 billion worth.

In 1980, in an epic miscalculation by the Hunt brothers, the price of silver peaked at $49 an ounce. I am counting on the serial epic miscalculations of the Fed and the Treasury to push the price, if not back to $49, at least a little closer to it.