-- Posted 25 July, 2006 | |

The Wallace Street Journal

By David Bond, Editor

The Silver Valley Mining Journal

Wallace, Idaho – Even in the midst of the summer doldrums, silver continues to be talked about here in the Silver Valley, and around the world. Most recently, the gold website LeMetropole Café published a fahhhhscinating article by Adrian Douglas posing the question: “Is A Comex Silver Default Imminent?” (reprinted with Bill Murphy’s kind permission in the Silver Valley Mining Journal here).

The nut of Douglas’ case is that warehouse stocks of silver sharply declined during the recent price run-up, even as open interest on the Comex silver contract has fallen, too, and wonders, “Is it that investors do not wish to hold futures contracts for silver when there is a good chance that the silver will not be delivered?” Couple this news with the great possibility that the metals exchange will no longer issue its weekly commitment of traders (COT) reports on gold and silver, and the Fed’s decision last year to keep us in the dark about the M3 money supply, and one really does begin to wonder what’s up.

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Douglas’ 24^th July article sent us scurrying to some notes we took on a presentation by, and subsequent interview with, Dr. Frank Lucas of the London house of Loeb, Aaron & Co. in Zurich last month. Because 95 percent of new silver produced every year is consumed by industry (including photo, coins, cell phones, computers, reflective glass, etc.) only 5 percent of all that new silver, or about $378 million worth, is available to satisfy investor demand. “This is very small and so the price can fluctuate wildly with investor sentiment. The comparable value of gold investor demand is 14 percent of 80 million oz/year, or $7.28 billion, about 20 times as much as in silver,” Lucas said.

Think about it: for $378 million, you could set the price of silver just about anywhere you wanted to. That’s a little beyond what we’ve got in petty cash at the moment, but chump change to a Bill Gates, Warren Buffett (should he decide to get back in, after admitting selling too soon) or an Asian or South American government.

Some other points Dr. Lucas made about silver bear repeating here: “Over the last 450 years, silver has moved from being produced largely in primary mines to being a by- or co-product from ores beneficiated through advanced smelting, hydro-metallurgy and electro-winning. Nowadays, 70% of silver production is considered by be a by-product of zinc, lead, copper and gold mines, where the financing decisions are made independently of the silver price extant at the time of the decision or indeed the forward price set by the financial markets.”

“Today, but the nature of the industry, a 10% increase in primary silver supply will lead only to a 3% increase in total newly mined silver,” he said. Only large-scale new mine projects in lead, zinc, copper and gold will change the supply equation, he said. “These have been few and far between in the last 10 years and there is an undoubted death of world-class deposits coming on stream to pace the copper and zinc price – which says it all.”

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Gerhard Spitzer, who listens to Bunker Hill Mine owner Robert Hopper’s daily Mining & Money Report webcast on silverminers.com (KWAL’s twice-daily broadcast of the program being a bit out of reception range) from his Montego Bay home near Capetown, S.A., dropped in on the King of Bunker Hill the other morning to meet the man behind the microphone. A native of Austria, Spitzer sadly reports that Capetown is going the way of Johannesburg, which like the rest of South Africa is slowly going the way of Rhodesia. People down there are stocking up on silver and gold, and planning an exit strategy. Spitzer, his nephew and niece-in-law (?) toured SRLM’s Sunshine Mine operations and NJMC’s New Jersey concentrator. He feels better holding North Idaho silver and gold stocks than South African mining stocks. Go figure.

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Speaking of foreign interest in the Silver Valley, a Canadian company, Silver Fields Resources (TSXV:SF), is ramping up activity on the Beacon Light Mine up the old Ford Hill Road east of Mullan. The company’s primary focus is silver with current properties located in Idaho, Montana, and Zacatecas Mexico. SF has hired geologist Herb Bradshaw of Spokane to carry out an initial exploration program on this past producer.

“The program is required to define the local geology of the property to verify the condition of surface access to various adits and shafts; to verify underground access to the existing mineral zones; and to propose a budget for these purposes. Upon completion of such a program, management would be in a position to finalize a realistic Phase I budget for the opening up and studying of the property's mineralized zones and to evaluate the feasibility of defining a potential mineral resource at the mine,” the company said in a press release.

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So as the Dog Days slide by, silver and gold, only slightly punchy from the midsummer doldrums, are building nice bases for the launch of their Fall rally. The 50 or so silver stocks we track are all in the tank at the moment, trading at 30 to 50 percent or so off their recent 52-week highs. That, as much as the Comex and Fed shenanigans, signals the bottom of this bull-market correction. We’d start loading up already, but in this 90-degree Wallace summer heat, there just ain’t enough energy to pick up the phone.