"The short answer is that the results astounded me, as I think they will astound you. I must confess – it takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me".

Theodore Butler is a self-confessed "silver bug" and, to his fans, a silver guru. The study to which Butler refers is one he has conducted recently, and clearly has been moved by. Critics may scoff, but the reality there is a groundswell of belief that while there may be reasons to feel the gold price could see new highs, there is potential for the silver price to explode to levels never previously imagined.

Before turning to the fundamentals of Butler's study, it is necessary to look more closely at the "poor cousin" metal that is silver.

Silver has the highest electrical and thermal conductivity of any metal, the highest optical reflectivity, and the lowest contact resistance. Silver is classified as a precious metal, but it is the only metal with the chemical reactivity to act as a catalyst in several applications. While "precious", the vast majority of silver's usage today is in industrial applications.

"Silver is arguably the most versatile of metals", notes silver expert Richard Karn, "as is witnessed by more patents being filed for new uses of silver each year than for all other metals combined".

Karn notes that that there are two approaches to investing in silver – as an industrial metal (or "commodity"), or as a store of wealth in terms of monetary inflation in the same vein as "precious" cousin gold. This dichotomy has, in the past, resulted in a clash between both camps in the market.

In 2004, when the overwhelming success of the first US-based gold exchange traded funds led to talk of an equivalent silver product, the Silver Users Association was up in arms. An ETF must store the amount of metal it sells through the fund, and thus take it off the market. Silver has been in deficit for years, in terms of demand versus new production. "There isn't enough silver!" cried the SUA.

SUA represents those manufacturers, from jewellery-makers to industry, who buy physical silver. Their cries fell on deaf ears and in 2005 the first silver ETF was listed. The price of silver jumped almost overnight, from around US$7.50/oz to over US$12.00/oz. While ETF buyers were no doubt cognisant of silver's industrial profile, it was as a precious equivalent to gold that they sought investment.

In previous times, buyers of silver for industrial use had often met precious sellers coming back. While this often made for a chaotic market, everyone was happy. Now the two camps are aligned, and Richard Karn, in the latest Emerging Trends Report, suggests the two will have to live together. Not only do inflated commodity prices reflect increased demand out of the emerging world, but they also reflect the diminishing purchasing power of the US dollar.

"Make no mistake," says Karn, "at some point the dollar will inflate itself into oblivion as has every other fiat currency in history; when, however, is anyone's guess".

One of the arguments for a much higher gold price in the near future is that the US government has artificially propped up the US dollar through hedge fund and tech-wreck crises and recession. It has done this by selling gold under the radar, through leasing arrangements and derivative instruments. This means the amount of gold left in central bank vaults is becoming critical, and derivative obligations are covered by printing cash.

If gold runs, so will silver, but even without that consideration the bullish story for silver as an industrial metal is no less compelling.

The global slump in commodity prices began after the boom in capacity following World War II and bottomed in the recent technology boom. As is often cited, capacity expansion in recent times has been non-existent, given it's all miners have been able to do to survive, let alone expand. When China took off so did capacity development, but China had a very substantial start.

One way mining companies survived was by consolidating, such that any growth came from acquiring existing reserves rather than developing new ones. This is why the "super-cycle" theory was born, and why resources analysts took a long time to shake off long-held belief in the cycle of supply rising to meet demand. China has kept growing, but mining capacity has lagged significantly.

It has also meant that costs have increased substantially, as there is now an undersupply of technicians, workers, equipment and mining supplies. But while costs can harm profit margins, Karn suggests it's naïve to think producers will not pass cost increases on to consumers. This has largely played out.

There is a groundswell of feeling that the Chinese economy simply cannot keep growing at current levels, and look out when it slows down. One argument is that the massive infrastructure boom underway will end as soon as the Olympic cauldron is doused in Beijing 2008. But in the 1950s the US consumed half the world's commodities. Karn suggests that if (the much more populous) China can do the same, we still have a long way to go.

Silver is used in a surprising array of industrial applications, albeit usually in small quantities. One of the traditionally extensive uses is in photography. But silver use in photography has declined by 22% since 1999 when the digital camera became commercially accessible to all and sundry. This is one reason silver followers have been unenthusiastic about the metal as the new century unfolded.

However, the flipside is that photographic plates – once the major source of scrap silver – will eventually disappear. Moreover, another factor that has yet to take effect is that unless today's photos are printed out on silver-backed paper, they will quickly deteriorate. Nor are CDs and DVDs indestructible. In fact, we all now realise that an audio CD will develop a "scratch" just as quickly as an old vinyl LP. Some pundits actually believe that while the typewriter may have been superseded, the old 35mm camera will not be.

Photography may or may not be a victim of technological development as far as silver is concerned, but technology has also opened up a whole range of new uses for silver. Since 2000, silver's industrial use has only slipped 5%. At the same time, usage of silver in computer chips has increased 3%, 50 million ounces were used last year alone in the development of superconductors, and sales of plasma television screens are expected to triple by 2008. A 42 inch screen uses as much as an ounce of silver. This has all occurred while the silver price has increased by 10%.

Silver is also used in solar energy systems and water filtration systems. Think of the upside there.

Growing demand is all well and good, but the fallout from a growing price in any metal is usually substitution. Part of the current drop in the copper price is attributed to the search for different, cheaper alternatives. Indeed, already silver has been replaced in various applications by stainless steel, aluminium, rhodium, tantalum, and antimony. Such substitution will be a factor of price, but on the flipside silver has also been used as a substitute itself, for gold and platinum.

That's the demand side. Let's now consider the supply side.

For the last thirty years, the consumption of silver has exceeded the production of silver. The difference has been made up from scrap (principally photography) and inventory sell-down. Photographic sources are running out, and it is estimated only about one to two years of global silver inventory remains.

The deficit still exists despite silver production increasing by 8% in 2005. But the other factor, peculiar to silver, is that only 29% of the new metal actually came from silver mines. The remainder was extracted as a by-product from copper, lead, zinc or gold mines. Notes Karn:

"Ironically, 450 years of advances in extraction technology have relegated silver mining to a secondary source of silver ore."

There would thus have to be a significant increase in the development of new silver mines to make any dent in the deficit, and the Emerging Trends Report knows of none planned. So low has silver fallen in reputation, that miners of base metals have in the past been selling their silver by-product forward at bargain basement rates in order to assist in mine funding.

Karn notes that silver is actually tipped to go into surplus in 2006, but only because silver bought by ETFs is counted as non-consumed, and thus it eventually must be sold. While the US government alone held 2 billion ounces of silver in the 1950s, today's estimates suggest only 88 million ounces are held by governments world-wide (most of it by India). There is thus no real lender of the last resort in the silver market, other than that which is held in private hands.

Calculations suggest 42.5 billion ounces of silver have been mined in the history of mankind, and that about half of that has been consumed. Of the remaining 22 billion ounces, only 5% is held as bullion or coins. The rest of it is in Granma's cutlery drawer.

Yes – 95% of the world's silver has been fashioned into forks or trays or trophies or jewellery or religious icons. While most doubt religious icons would ever be sold just because of a high silver price, there has always been much debate as to at just what price the average citizen might be prepared to part with Granma's cutlery. If everyone sold their silverware, that's a lot of silver.

The rule of thumb used to be US$7/oz, but here we are at US$13/oz. This suggests that very little silverware is being melted down. In the meantime, newfound investor interest is surging. At the end of July, silver funds held 120 million ounces of metal. This supply is not allowed to be lent back to the market, so it is effectively removed from the market (until the time to sell out is reached).

No one knows the answer to the silverware sale price question, so let's go back to bullion. There is about one million ounces of silver held as bullion or coin. By comparison, there are 5 billion ounces of gold held "above ground" in the world according to the World Gold Council. Most of this is jewellery.

On that basis, Theodore Butler suggests that the "market capitalisation" of gold is US$3 trillion (5 billion x $600), and the market capitalisation of silver is $12 billion (1 billion x $12). In other words, gold is capitalised at 250 times silver.

Here we arrive at the beginnings of Butler's study – that which so astounded him.

Butler set out to further investigate the "gold/silver ratio". This price ratio has been a determining force for the price of silver over the last centuries. The mid-point is held to be around 50 times, and in over a hundred years it has moved only between 15 and 100.

Now, before we proceed there is one obvious flaw in Butler's logic. He counts gold jewellery as part of all gold held, but dismisses silverware, silver jewellery etc. This assumes gold jewellery will be "traded" but Granma's silverware will not be. This is not too farfetched, as gold is bought in jewellery from as much for investment as for adornment, while Granma once actually used her cutlery. Butler argues there is little evidence of silverware being sold in any great amount to date, and if it is it would probably be snapped up by investors. Says Butler:

"To conclude that silver is not a good investment at current prices, strictly because more supply may come on to the market at higher prices, is strictly absurd".

So there. We will proceed on the basis that Butler's logic is accepted.

By multiplying the amount of known gold by its price in 1900, 1950, 1975 and 2006 we get a growing market cap – from US$20 billion in 1900 to US$3 trillion now. The same exercise with silver sees only a growth from US$8 billion to US$12 billion. The peak was US$20 billion in 1975, but known metal has rapidly diminished.

The gold/silver price ratio has moved from 30 to 44, 38, 50 across those years. But (and this is the big but) the market capitalisation ratio has moved from 2.5 to 9, to 23, and now to 250.

Apply the same figures, and throw in world population growth, the value of gold held per capita in the world has grown from US$13 to $28, to $113 and on to $462 now. Silver's equivalent value has changed from US$5 to $3, to $5, to $2 now.

Now you know why Butler was astounded. If the market capitalisation had remained static since 1900 silver would be worth US$1000/oz. Taking only the per capita valuation ratio gives a silver value of US$175/oz. However you play with the numbers, Butler muses, you still end up with a silver price much, much higher than it is now.

(Add back the other 21 billion ounces in unknown silverware – that which Butler has dismissed - and those numbers become US$45/oz and US$8/oz.)

So there you have it. Two arguments, coming in from different angles, predict a major surge in the silver price. Both have an unknown factor – silverware. The question is thus: at what price will this hit the market? One thing is for sure – we won't see 21 billion ounces worth on eBay at US$15/oz.

And US$15/oz is the figure that Goldfields Mineral Services is targeting for silver. GFMS is a lot more bullish on gold, suggesting it should reach US$750/oz, even though it dismisses all arguments of price manipulation and overstated central bank inventories (these arguments have gold as high as US$2000/oz or more). But GFMS has actually warned against getting too bullish on silver.

Its main argument is that despite growing investor demand, the fall-off in industrial demand at higher prices will ensure the silver price has only limited upside. Production is also increasing. Silver will follow along with gold, GFMS suggests, until slowing global growth will undermine the price just as it does base metals.

GFMS recommends a short term silver investment will most likely be profitable. Butler and Karn believe there is a lot more upside in silver than in gold. If the silver price bursts through US$15/oz then maybe we'll have a clue who's right.

Richard Karn's Emerging Trends Report is a US based "predictive Business Intelligence service". Free ETR reports as well as reports to purchase are available on www.emergingtrendsreport.com.

A collection of Theodore Butler interviews and analyses can be found at http://news.silverseek.com/TedButler/ and at http://www.investmentrarities.com/tb-archives.html. Or simply visit www.butlerresearch.com.

The government-commissioned report into a possible nuclear energy program for Australia, handed down last week, suggested the first nuclear power plants could be up and running in ten to fifteen years, and that by 2020, 25 reactors could be providing 30% of Australia’s electricity needs.

The report, handed down by task force leader Ziggy Switkowski, was only ever intended to be a thought piece. It did not make any specific recommendations to the government, but rather laid out the possibilities. The stock prices of Australian uranium producers have shot up since, but this can be attributed as much to a surging uranium price as to anything else.

While everything seemed rather go, go, go last week, the realities are different. ABN Amro analysts suggest it will be at least ten years before the first nuclear power plant commences construction in Australia, let alone fires up. Australians are suspicious of nuclear power, and despite having more land per capita than just about anyone else, would fight hard to prevent a reactor, or a waste dump, being built within a 1000 kilometre radius of their abode.

Nevertheless, Australians have indicated in recent polls that climate change was of greater concern to them than terrorism. In response, the government decided that while climate change was clearly a myth pre-poll, it has been manifestly confirmed post-poll. So the fact that Australians are greatly concerned with greenhouse gas emissions suggests there should be room for negotiation with the people on nuclear power.

But ABN believes the only way Australians would agree to nuclear power was if electricity bills became much more expensive. Australia has close to the cheapest electricity in the OECD, given its abundance of coal, so this would leave room for a carbon tax on coal-fired power producers to be passed on to consumers. Then, and only then, would Australians begin to change their tune on nuclear power, ABN believes.

Given the sort of argy-bargy that would transpire in order for the government to implement a carbon tax system, and carbon trading market, it is no great surprise that ABN sees little happening on the nuclear power front for another ten years. In the interim however, the door is open for a number of uranium exploration properties to begin moving into the development phase.

The Switkowski report noted that there are many small known deposits of uranium spread across the country that could be developed reasonably quickly, however these are being restricted by state Labor government policy in states other than South Australia. ABN believes the federal Labor party will vote to open up uranium mining, come its annual conference in April, but this does not necessarily ensure state governments will fall into line.

At the moment, the odds appear that Queensland may fall but Western Australia will remain resolutely opposed.

At the moment, any increase in Australian forecast uranium production is made up almost entirely from the proposed tripling of the existing Olympic Dam site. The report suggests production could be increased by 20,000t at approved mines, but 25,000t if new mines at known resource locations are included.

Further hampering an Australian nuclear push is the dearth of nuclear power experts in this country. They would have to be shipped in, and the latest nuclear technology would have to be purchased, before anything might happen. Not only would this cost the government a good deal of money at the start-up end, but it would also have to join a likely global queue.

ABN offers that the “key takeaway” from the Switkowski report is that “without a change in emissions policy, Australian base load generation will continue to be dominated by conventional fossil fuel, albeit with progressive technology advances”. The main reasons for this, notes ABN, are the capital cost (for the plant and the risk of financing) and life-cycle management (spent-fuel storage and closure costs).

So the upshot is: don’t hold your breath for a nuclear Australia. However, discreet positioning into investment in the right Australian uranium mining hopeful would not be a foolish move.

Ex-Telstra boss Ziggy Switkowski has just handed down a draft report, commissioned by the Howard government, assessing the pros and cons of nuclear power in Australia. The committee behind the report had been seriously criticised before the project even began, based on accusations each member was already pro-nuclear.

It was no great shock, therefore, that Ziggy decided Australia should consider a nuclear future. The first reactors could be up and running possibly in ten years, but more realistically fifteen, he suggests. By 2050, Australia could be generating 30% of its electricity needs from 20 reactors.

Reactions across the political spectrum were predictable. The government has embraced the nuclear question right from mining through to power generation. The Opposition is opposed to building nuclear reactors in this country, but might endorse further uranium mining so others can. The Greens are opposed to anything nuclear.

There are some sobering realities in the Switkowski report, however, for radioactive fans. Nuclear power station building is an expensive exercise, costing some 20-50% more than fossil fuel plants. The only way nuclear energy could be economically viable is if there were an offsetting penalty imposed on carbon emitters, such as a carbon credit scheme. Even then, the government would likely still need to subsidise a nuclear industry in the start up stages (meaning for a very long time yet).

The issue of waste is still a stumbling block, although the report noted the cost of dealing with waste would only be 1% of the cost of electricity produced. Fossil fuel waste is still a comparable problem, it’s just that it doesn’t glow. The question of where a nuclear dump might be situated was not addressed.

Nor were any specific locations offered for reactor sites. One of the biggest challenges the government faces is exactly where it can put reactors without evoking the usual NIMBY hostilities. One important consideration is water – nuclear power generation requires substantial amounts. It has been noted previously that reactors would likely have to be in easy reach of seawater for cooling systems. Bondi?

Nuclear power generation aside, the report did note that the government should at least consider a nuclear enrichment industry. All of the uranium leaving our shores is in yellow cake form, which requires enrichment to take it to the power station (and weapons-grade) level. The report estimates an enrichment industry would be worth $1.8 billion to Australia, four times more than the current export industry.

There is further upside in an enrichment industry, in that it would make Australian uranium and its uses far easier to trace. There has even been talk of a system whereby customers must hand back the spent fuel for disposal.In June the head of the Government's nuclear organisation, Dr Ian Smith, said four or five nuclear power stations would be needed to make a nuclear industry viable. This renders Ziggy’s suggestion of 20 reactors quite ambitious. However, the Howard government has made climate change its number one issue in a screaming about face recently, when polls showed more Australians were concerned about this issue than they were about terrorists. Suddenly the Stern report is gospel, and that warns that action must be taken in the next ten years.

The report makes no specific recommendations. It is basically food for thought.

There has been some concern to date in the world of metallurgy and uranium production over the process adopted at Paladin Resources’ (PDN) much heralded Langer Heinrich mine in Namibia. In order to dispel those concerns, Paladin organised a tele-conference presentation by Langer MD Garnett Halliday and group metallurgist Dave Marsh.

The concern lies in the alkaline leach circuit extraction process being ramped up at Langer. Uranium is more often extracted through an acid leach process. Will the process work? A lot hangs in the balance.

The uranium at Langer is only of a low grade. Much lower, for example, than that at Canada’s massive Cigar Lake project. But there is a lot of it. Paladin believes at least 40Mt. The good news is that while Cigar Lake requires underground excavation, Langer Heinrich is an open-pit operation. Hence the cost of extraction is much lower.

Cigar Lake is now underwater, and it may take a year before the mine is back on track to provide the 10% plus of world uranium demand it was hoped. As a result, the uranium price has shot up again recently, to a “spot” price of US$60.25/lb.

While Langer Heinrich does not come close to the reserve estimates of Cigar Lake, Olympic Dam or Ranger, it is still a globally significant reserve. Of further significance is that current uranium producers are selling their product for as little as US$16.50/lb, and may have to do so for some time yet. This is due to the previously established practice of selling uranium on a long term contract basis.

Paladin does not have that restriction. The timing of the Langer Heinrich commencement, due at the beginning of 2007, is as good as winning the lottery. Paladin will be in a position to sell its uranium at today’s prices, and could already be talking forward sales. It is unclear when, for example, Energy Resources Australia (ERA) will be free of its existing contracts. It’s not telling.

UBS analysts believe Paladin could achieve uranium forward sales at as much as US$10/lb over the current spot. That’s US$70.25 – a long way from US$16.50/lb. That’s why Paladin has caused so much excitement on bourses around the world.

But back to alkaline leaching. Dave Marsh has explained that the reason why acid leaching was dismissed at Langer is because the ore contains high quantities of carbonate which would require the use of 5-6 times more acid than in traditional processes.

The company from whom Paladin bought Langer Heinrich – Gencor – had started developing the alkaline leach process way back in 1975. Paladin has since improved that process. You would probably need to hold a degree in metallurgy to understand how, but suffice to say the presentation was enough for the UBS analysts to become a lot more confident in the Langer project. All is on track for ramp-up completion by next month, as forecast.

UBS is assuming that Langer will begin producing uranium next month, and will reach full production potential in the third quarter of next year. By the analysts’ calculation, a share price of $6.37 implies a discounted long term uranium price of US$68.50/lb. UBS is projecting a 2007 price for uranium of US$71/lb in 2007 and US$75/lb in 2008.

Nevertheless, UBS retains a Neutral rating on Paladin with a target price of $6.00 – 13% below yesterday’s close. Only three brokers in the FNArena database cover Paladin, and both ABN Amro and Deutsche Bank rate the stock a Buy. The average target is $6.18, with ABN the high-marker at $6.47. That is still below today’s (lunchtime) price of $6.64.

Both Paladin and ERA have seen stellar stock price runs of late. These are the only pure-play uranium stocks on the Australian market which can actually produce uranium. It now remains to be seen whether the other two brokers will downgrade on the basis of the share price rally or rethink uranium price forecasts. It also remains to be seen whether other brokers will initiate coverage of a resource stock that is dominating the headlines.

Macquarie made a call to dump Rio Tinto (RIO) on September 12 this year as the strategists became alarmed with the possibility of a recession in the US. It was time to reduce resources, they said, and Rio should be the one to go. The stock price has done nothing but go up ever since. (The Macquarie resources analyst held Outperform).

UBS notes today that Rio has also outperformed its major competitor, BHP Billiton (BHP), over the last five months – mainly due to the fall in the price of oil (Rio is not into oil) but also because of better operational performance, as revealed in the quarterly production reports, and capital management announcements.

Nevertheless, UBS sees Rio continuing to outperform BHP as Rio has a greater weighting to the tightening iron ore market and BHP leans to the easing copper market. There is also a chance Rio will announce a special dividend, although other brokers disagree.

Credit Suisse suggests special dividends have "lost their appeal", and expects Rio to look after its shareholders by growing its ordinary dividends and continuing the buyback strategy.

Rio management is very positive about the company's outlook as well, and said as much at its investor briefing on Friday – resources analyst attendance was obligatory.

Twelve months ago Rio management resigned itself that the glory days may well be over, and that commodity prices would begin their much-anticipated reversion back to more realistic levels. Last week management explained its change of heart, suggesting that not only would mean reversion take some time yet, peak prices are yet to be seen. This is based on expected 4% global economic growth next year, and particularly 10% growth in China.

Merrill Lynch noted that Rio's customer base is much more diversified now than it has been in the past, but there's no denying the story is still all about China.

Management also highlighted its expectation that further supply disruptions would occur, and that cost pressures would be maintained. This has a lot to do with driving prices higher before reversion sets in, and the current time frame expectation – five years for iron ore and two years for copper – will likely be tested.

Those brokers expecting flat or lower iron ore prices at the next round of negotiations are now rethinking their estimates, and will likely join the band expecting price increases (See "Iron Ore Prices Expected To Increase", 01/11/06). Copper looks likely to hit surplus in 2007, however, but the future still looks bright given Rio's involvement in new start-up projects.

Management also made note of its expectations for big things in uranium, to which it is exposed through its majority holding of Energy Resources Australia (ERA).

There's not much positive opinion management could have provided to make brokers rethink their recommendations anyway. All in the FN Arena database hold a Buy rating, with the exception of advisor Aspect Huntley, which pulled back to Hold on the share price run last month.

The share price closed yesterday at $79.45, but the FN Arena average target price stands at $97.74, or 23% higher. JP Morgan is top of the pops with a $105.00 (32% upside) target.

Market observers are polarised between believing the global economic slowdown, driven by the US, but including a pullback in China, will have the long-awaited effect on commodity prices (mean reversion) just as new capacity is coming on line, and between seeing little end to the China/India story, and a dearth of base metals supply in inventories and a lack of quality of new supply in bulks.

With nearly every broker in town calling Rio a Buy, there seems little upside in Rio management – those at the coal face, as it were – talking up its book for the sole purpose of exciting resources analysts.

Since the May correction, zinc prices have found it difficult to rebound, but the tide may be turning. Chinese production of galvanised steel has rebounded strongly, notes National Australia Bank, and China is expected to account for 30% of global zinc demand in 2007.

UBS reports zinc stockpiles at the LME have plummeted from 393kt at the beginning of the year to a 15-year low of 134kt now. This equates to less than one week of current consumption and is below the "critical" level.

 There are few zinc mines on the drawing board, notes UBS, as high costs are rendering returns hard to justify. In the meantime, existing operations are working "flat out" which increases the risk of supply disruptions through breakdown.

 NAB expects the zinc market to remain in deficit in 2007, and for prices to rise some 20%. The only dampener on the horizon is increased construction of Chinese smelting capacity, suggests UBS. China is currently a net importer, but plans are on the drawing board which would possibly signal a return to the 90s era of depressed prices through Chinese overcapacity.

 Given the Chinese government is now far more wary of such developments, such a result is not guaranteed. Either way the suggestion is that zinc prices may go a lot higher before they go lower again.

 To invest in a zinc pure-play in Australia, one turns to Zinifex (ZFX). Arguably one of the most volatile stocks on the market (trading in line with zinc price assumptions) brokers are split between the likes of Credit Suisse – the analysts are positive on zinc and rate Outperform with a $15.08 target – and Merrill Lynch – the analysts believe sustained high zinc prices are already priced in and recommend sell down to at least $9.00.

 JP Morgan is even more bearish with an Underweight call and a target of $8.30. UBS is a Buy with $13.50. Zinifex last closed at $13.08. Investment in Zinifex is for the risk-thirsty punter with a strong view on the zinc price.