BEST OF JIM COOK

February 12, 2007

IN DEMAND

It’s pretty simple as to why the price of an asset falls in value. Demand diminishes. Recently, prices have fallen for residential real estate because demand slowed way down while inventories of homes for sale continued to grow. While visiting Florida recently the newspapers were full of stories about falling prices for condos and houses. A few builders were in trouble, and speculators who were multiple buyers of condos were taking their lumps.

The formula for consistent profits in any asset is unrelenting demand. Investment demand can be fickle. We saw that in the 2000 NASDAQ decline, the 1980 farmland crash and periodic busts in commercial real estate. Industrial demand, which differs from investment demand, can be steadier and more reliable. However, industrial demand can fall off too and commodities such as copper and zinc can decline and languish. The demand for silver can also decline if industrial production becomes impacted by a major recession.

However, the demand for silver appears to be the steadiest and strongest of any industrial commodity. There are several principal reasons.

1. Multiple new uses for silver.
2. Widespread use in hundreds of crucially important applications.
3. Overall growth in worldwide applications.
4. Phenomenal growth in Asian demand for appliances, autos, photography, plastics and construction causing silver demand to explode.
5. Used in such small amounts per industrial application that it won’t be readily replaced at higher prices.
6. Production increases from mining have long lead times. Higher prices won’t change this.
7. Increased awareness of a potential silver shortage causes all interested parties to hold more closely.
8. Awareness of potential shortage causes industries to hoard the metal.

You can’t get many more solid demand factors piled on top of one another than this. Demand should be strong for years to come, with no let up. A depression could diminish demand, but in that environment everything loses value. Silver would likely lose less than other assets because demand is worldwide and basic to modern civilization.

Not long ago I discussed this powerful demand with analyst Ted Butler. I asked what he thought the price of silver should really be, taking all these demand factors into consideration. He didn’t want to answer. I kept at him and asked, "What if the market was totally free of the paper transactions that hold down silver and traded solely on the supply and demand for physical silver, what would the price be?" He replied, "It would be over $100 an ounce, but don’t quote me."