Why Silver Is The Best Investment Over The Next Decade

Buy Silver before it “DISAPPEARS DISAPPEARS” Vinit Bolinjkar

President Lyndon Johnson on SilverExcerpts of his speech: 23rd July 1965"Now, all of you know these changes are necessary for a very simple reason--silveris a scarce material. Our uses of silver are growing as our population and oureconomy grows.The hard fact is that silver consumption is now more than double new silverproduction each year. So, in the face of this worldwide shortage of silver, and ourrapidly growing need for coins, the only really prudent course was to reduce ourdependence upon silver for making our coins.If we had not done so, we would have risked chronic coin shortages in the verynear future.”

Silver Once in a CENTURY investment opportunity. Asymmetrically skewed Risk to Rewards Ratio, favoring value. More of an industrial metal than being a Precious. Modern Warfare - A Huge Guzzler Of Silver.

Silver- Shortest reserve life amongst all mineral resources. Only 14 boz of silver reserves remain at the end of 2008, we are already hitting “end silver’. The underground reserves will not last for more than 10-12 years at the present rate of mining and consumption. Profile of the reserves base is only good for another 26-27 years. World Metal (Under Ground Reserves) in billion ounce2005 Production Reserves Reserve Base Reserve Life Reserve Base Life Aluminium 0.03 Large Large >100 years >100 years Iron 0.04 2.3 5.3 52.2 >100 years Copper 482.3 13824.9 27328.4 28.70 56.70 Zinc 321.5 6430.2 13503.4 20 42 Lead 106.1 1961.2 4179.6 18.5 39.4 Nickel 45.0 1800.5 4179.6 40 92.9 Molybdenum 5.8 250.8 546.6 43.3 94.4 Tin 9.6 176.8 321.5 18.3 33.3 Silver 0.6 7.9 16.7 12.3 26.1Platinum & Palladium 0.0 2.1 2.3 >100 years >100 years Gold 0.1 1.2 2.6 15.1 32.6 *Silver Reserves in 2011 are ~4.9 bn ounce

Country wise break up of silver world reserves & Reserve Base along with market share 30% World Silver Reserves 25% 25% 21% 19% 19% 20%% share 14% 14% 14% 15% 13% 10% 10% 9% 10% 7% 7% 6% 6% 6% 5% 0% Poland Rest of Mexico Peru Australia China United Canada World States Reserves Reserve Base

Silver Usage 2010 6% 8% 19% 55% 12%Industrial Applications Coins & Metals JewelryPhotography Silverware

 World Silver holdings reduced to a mere 72 million ounces over the period. India & China reportedly had largest silver holdings which started getting depleted from 2001 with China selling in excess of 50 million ounces in 2001.

Silver Holdings of India 100 90 80 70 60Moz 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010

Above Ground Silver Reserve under severe strain Mined for over 500 years, but lost its status of being a store of monetary value subsequent to demonetization and now is increasingly used as an industrial metal. Has become an indispensable metal with its superior qualities of electrical and thermal conductivity, superior strength, malleability and ductility. Over a period of 65 years, since 1942, the demand for silver has been so strong that it has always out paced mining supply. The exception being the mini recession of the early 80’s.

Silver Scarcity: A Growing Reality Demand outstripping Supply: Deficit prevailing for 60+ years  Demand in the range of 750 - 900 moz and the deficit supply of 150-200 moz has been financed by the sale of national silver and above ground stocks.  As per US geologist only 9 billion ounces are remaining & At the present mining rate (500- 600 mn ounces p.a.), these reserves won’t last us for more than 12-13 years. Silver market : Too small for today’s billion dollar funds Market inventories thins while investment demand explodes

 Usage to rise exponentially as world embraces technology Silver: Rediscovered as a monetary store of value  Till 2007 the silver investment demand was not more than 7% of total demand.  Growth in the silver ETF and the coin demand issued by the State mints increases demand to the range of 12-25%. Currently, the ETFs are expected to add 150-180 moz representing a growth of over 50% yoy. Gold Silver Price Ratio : Upside down in consideration to the future silver shortages Historically, the silver gold ratio has been 1:15, due to the volume of mining. Demonetization has moved the ratio in favor of gold (price wise) to 1:73. In future the ratio will get more skewed in favor of silver as more gold mined increases the above ground reserves and silver being a wasting asset, becomes rarer. Over the next 6 to 7 years volume wise this ratio can be expected to come down to 1:2 and eventually equalize in 12 -13 years.

Deficit has overshot the mined silver by almost 100%.

On an average the deficit is 38%.

Cumulative Deficit 12000 10000 8000moz 6000 4000 2000 0 43 48 53 58 63 68 73 78 83 88 93 98 03 08 E E 13 18 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 yearsCumulative Deficit of 65 years at 8.18 boz has reduced theover ground accumulated silver reserve (of over 5000 years)by 36.8% to a mere 13.93 boz.

 We FORECAST that this DEFICIT IS ONLY GOING TO GET ACUTE. Availability of silver from the above ground resources of silver is facing competition from the investment demand for bullion and coinage and diminishing silver scrap recycling. Silver Deficit mainly funded by –  Government Sales  Scrap Sales Almost 65% of silver produced is mined as a by product of base metal mining like copper (28%), zinc and lead (30%). Both Lead and Zinc reserves are in a terminal stage like silver and their reserves are estimated to last not more than 20 – 22 years

Silver Demand Grew at a robust clip of 6% CAGR from 370 moz in 1984 to 904 moz in 2000. Since 2000, the demand has been stagnant in a range of 850-950 moz. Since 1999, the photography segment (demand of 228 moz or 26% of total demand) has fallen by almost half to 113 moz in 2008. As digital photography becomes ubiquitous, we forecast that the demand from this segment (which has been subjected to a de-growth of 6.7% CAGR during the last decade) is further expected to implode to 10 moz by 2013, at a de-growth of 17% -19% CAGR.

Demand Matrix

Shift in demand pattern

We FORECAST that total silver demand will grow at a CAGR of 5% till 2013. The overall demand contraction is expected to be balanced out by the growth in newer initiatives in the industrial segments (which should reach 150 moz by 2013) and surge in demand for coins (which is expected to grow from 65 moz in 2008 to 169 moz by 2013, CAGR of 16%).

Silver Usage Moved from being an investment commodity to an industrial metal. Traditionally silver usage was more than 54% in photography. With the advent of digital technology, the usage has diminished sharply & this demand is further expected to crash sharply as traditional photography becomes obsolete. Silver Dem and vs World GDP ex US 30% 7% 25% 6% 20% 15% 5% 10% % growth 5% 4% 0% 3% -5% 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 -10% 2% -15% 1% -20% -25% 0% years World Silver Demand World GDP ex US

Silver Usage 2010 6% 8% 19% 55% 12%Industrial Applications Coins & Metals JewelryPhotography Silverware

Supply Silver limited; demand unlimited Total Supply 2010 4% 6% 20% 70%Mine Production Scrap Hedging Government Sales

 Primary Sources- 1. Pure Silver Mining 2. Copper Mining 3. Zinc-Lead Mining 4. Gold Mining Pure silver mines contribute only 28% of the total supply while the majority of the silver (59%) is mined as a by product of polymetallic mining (lead, zinc and copper). 11% comes from gold mines and the balance is from other sources like producer hedging, etc. Mining production : Grown from 542 moz in 1998 to 681 moz in 2008 ,a CAGR of 2.3%.

Silver Production-2010 1.00% 11% 30% 22% 36%Primary Lead/zinc Copper Gold Other

25 Metal Mining Growth 20 15 10growth % 5 0 2004 2005 2006 2007 2008 2009 2010 -5 -10 -15 Primary Lead/zinc Copper Gold

 Silver scrap recycling has shown flat to negative growth since 1998. D Digital photography is killing photo films. The recycling from photography has been averaging 80 moz (or 50%) of total scrap supply of 184 moz over the last 10 years. We FORECAST that post 2013, the total old silver scrap sales will fall to 100 moz of his source, with incremental availability ranging from 10 – 30 moz at the outside.

Above Ground sources – ProvidingSanity to the unbalances Over ground silver reserves of 14 boz is a source of potential supply. But, only 11 boz (comprising of silver jewelry, silver ware, sculpted silver and artwork) can be counted upon. Of this 11 billion, we ESTIMATE that 45% (4.95 boz) is owned by Indians. We do not expect more than 10 moz sales per annum from India (which represents 15% of total India holdings and that too over a period of 10 years). We ESTIMATE that balance 55% (6.05 boz) of overhead reserves has a run rate of approximately 120 moz p.a. considering current pricing of silver. We estimate that this could go up by another 40% if prices were to appreciate considerably. Since silver scrap already constitutes 100 -110 moz from this source, the incremental availability varies between 15-65 moz and depends very highly on the market price of silver.

Summing up we forecast that cumulatively the over groundreserves of silver can add only between 25 - 65 moz perannum incrementally.The seemingly endless supply of 14 boz is but a giantmirage in the desert.

Supply Trends

Factors affecting Supply Top 20 Silver Producing Countries in 2010 (millions of ounces) 1. Geographic Spread 1 Mexico 128.6 18% 2 Peru 116.1 16% 3 China 99.2 14%  Political stability and 4 Australia 59.9 8% government interventions 5 Chile 41 6% remain the key concerns. 6 Bolivia 41 6% 7 United States 38.6 5% 8 Poland 37.7 5%  World government stocks 9 Russia 36.8 5% are almost depleted. The US 10 Argentina 20.6 3% government reserves are 11 Canada 18 3% near zero. 12 Kazakhstan 17.6 2% 13 Turkey 12.3 2% 14 Morocco 9.7 1% Silver is a vital constituent 15 India 9.7 1% of modern warfare and 16 Sweden 9.2 1% industrialization, which 17 Indonesia 6.9 1% would force countries to buy 18 Guatemala 6.3 1% in bulk leading to skewed 19 Iran 3.4 0% demand and higher prices. 20 South Africa 2.8 0% Total 715.4 100%

Worlds Leading Primary Silver Mines in 2010 (millions of ounces)Rank Mine/Country Operating Company Prod. 1 Cannington, Australia BHP Billiton 38.6 22% 2 Fresnillo, Mexico Fresnillo plc. 35.91 21% 3 Gümüsköy, Turkey Eti Gümüş A.Ş. 11.46 7% 4 Dukat, Russia JSC Polymetal 11.1 6% 5 Pallancata, Peru Hochschild Mining / International Minerals 10.14 6% 6 Uchucchacua, Peru Compañia de Minas Buenaventura 9.27 5% 7 Arcata, Peru Hochschild Mining 8.1 5% 8 Greens Creek, U.S. Hecla Mining 7.21 4% 9 Imiter, Morocco Société Métallurgique dImiter 7.2 4% 10 San Bartolomé, Bolivia Coeur dAlene Mines 6.71 4% 11 Alamo Dorado, Mexico Pan American Silver Corp. 6.68 4% 12 Pirquitas, Argentina Silver Standard 6.3 4% 13 Palmarejo, Mexico Coeur dAlene Mines 5.89 3% 14 San José, Argentina Hochschild Mining / Minera Andes 5.32 3% 15 Ying, China Silvercorp Metals 4.32 2% Total 174.21 100%

2. Stagnant Prices  Prices of Silver kept lower by way of Government pumping silver coins in the market. 40 35 30 25 20 15 10 5 0 1945 1951 1957 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 1942 1948 1954 1960 Average Silver Price World Silver Price

3. Mining Issues  Mining: Subject to under investment for over 20 years.  M&A curtailed the money available for new exploration effecting the availability of “specialized” manpower and modern machinery for cost efficient mining.  Economies of scale may not work in favor of Silver miners, till the prices rise, as the volume of silver being mined and sold is reasonably less as compared to other base metals.  60-70% of Silver comes from Base metal mines  A threat of Silver hoarding by miners to artificially increase the prices.  With rising power costs, labor issues and lower ore grades the mining business is only going to get difficult going ahead.  Further large minors have been indulging in “forward sales” and arranging finances against the same. This could lead to further shrinkage of supply in an already deficit scenario.

4. Inventory Levels • Silver ETFs, a double edged sword. Silver Stock held with Comex and CBT 160 40 140 35 120 30 • Plummeting Scrap sales create supply million oZ 100 25 shortage. $/oz 80 20 60 15 40 10 20 5 0 0 Stock held with comex and CBT Silver price

5. Silverware  A potential but secondary source of supply.  Cumulative demand for silverware since 1998 is around 900 Moz.

Silver Valuation History  Silver always valued in relation to gold.  Volume ratio of 15:1.

 Demonetization of silver in 1873 led to its value loose favor. During 1900 - 1942, silver prices remained abysmally low, not only in absolute terms, but also relative to gold. Gold silver price ratio kept climbing before it peaked at close to 100. During this period the ratio ranged between 20-100 with an average value of 50.3. Total Supply 2010 4% 6% 20% 70% Mine Production Scrap Hedging Government Sales

 Post World War II Reconstruction increased its demand. Silver scaled to an all time peak of $ 50 and gold silver price ratio touched its historical value of 20.

 Current Scenario  Since 1980, silver prices went bearish.  Gold silver price ratio remained in 31-97 range.  Of the 14 boz (22.11 boz estimated in 1942) silver, only about 25 – 65 moz is available (incremental year on year) at the current suppressed prices.  Discouraged investor demand and Encouraged industrial depletion.

Valuing future silver Current mining production (625-675 moz) cannot satisfy demand. Silver mining reserves are only good for another 10 -12 years. Valuing silver by the centuries old yardstick of gold silver price ratio, we believe the theoretical fair value of this ratio should be inverse the gold silver volume ratio available over ground. Assuming a linear rate of decay, the gold silver price ratio of the above ground reserves shows that the ratio reaches equality at 2025. Further the increased investment demand is a source of negative demand.

 True curve will change due to -  Supply constraints from mining (as the production profile follows the production tails of the Gaussian distribution) lowering the availability of above ground reserves.  The existing above ground reserves are fractional and an erratic source, hence the “adjusted” curve shows lower apparent silver reserves. Further we believe that conservatively more than 40% of these reserves will not be available for consumption.

Key drivers for re rating of the price of Silver Entry of momentum players. Silver users adjust their low inventory base.  Only 15 days of supplies We ESTIMATE that the current fabrication inventories run at 17 moz. Cumulatively the industry will have to purchase between 112.5 to 225 moz as they adjust their inventory levels from the present 15 days to 90 -120 days (varying between 12.5% to 25% of total annual industry demand). New demand initiatives to spur industrial demand for silver.

 Silver de hedging will accelerate and mining slow downs will be the order of the day. Silver investment as an Inflation hedge and safe haven from the specter of the falling dollar and economic doom has already started. World wide rebuilding of silver stock piles of central banks, governments building up strategic reserves, hoarding by speculators and private individuals also to keep prices high. The second leg of the commodity bull market has begun.

Commodity Bull markets of the past twocenturies have rallied on an average 15-40years. The present bull market started in 2002and hence has a long way to go. In ouropinion this commodity Bull Run haslegs to run beyond 40 years.The increasing global population, developmentof the BRIC nations and other Asian countriesand the peaking of global production in most ofthe commodities will ensure that the price risewill be astronomical and will sustain for long.

the time to buy silver is now

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Why Silver Is The Best Investment Over The Next Decade

by Vinit Bolinjkar on Jan 09, 2012

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