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A while ago I mentioned to my good friend David Morgan author of the website www.silver-investor.com that every time silver gets anywhere near $5.00 Kodak immediately issues a press release, something to the effect that digital photography is killing conventional photography. Silver turns around usually intra-day and by the close ends down around 10 cents or over 2% on the trading session. Something very interesting happened last Wednesday morning in silver's latest attempt at the $5.00 area. Kodak had it's usual end of the world for conventional photography press release announcing it was laying off 6,000 workers because again digital photography was killing conventional photography. However, Kodak crushed analyst estimates of 29 cents/share more than doubling the estimates by earning 60 cents/share! "We are pleased to report quarterly earnings that are stronger than we had previously expected," said Kodak Chairman and Chief Executive Officer Daniel A. Carp. Not bad for a company whose wheels are coming off because it's core business of photography is being destroyed (smile). Kodak CEO added, "Our traditional consumer film and processing operations continue to face challenges associated with the increasing popularity of digital photography...Consumer adoption of digital photography is growing at a more rapid pace than a year ago, and this is trimming demand for consumer film. At the same time, we are seeing evidence that more consumers want to print their digital photos at retail and at home." Getting back to last Wednesday morning with silver approaching $5.00 once again, Kodak comes out with the usual "bad news" for conventional photography press release, but this time as I said something interesting happened in the silver market. From Midas, "The silver move was nothing less than sensational...Among the biggest moves in many years." After silver exploded over 6% on Wednesday, silver closes out the week above $5.00 for the 3rd consecutive trading day and all of this on "bad news." Very interesting in my opinion, you know what they say about something that has been in a long bear market in silver's case 23 years, that stops going down on bad news (even goes up). This came as no surprise to David Morgan (as a student of silver for over 20 years) because he has been on record for many years as saying that the silver bull market would begin in the summer of 2003. Throughout my career as a value investor, I have consistently looked for under-valued assets and sectors to increase my net worth. Most recently a couple of examples are the oil sector in late 1999, early 2000, small cap restaurant stocks in 2001, but in late 2002 silver caught my attention. I believe silver is ending a 23 year bear market and is just about to begin a very significant bull market. Since I have taken possession of over 3 tons of physical silver (so far) I decided to research the digital/conventional photography market. This search led me to a company, which recycles silver and has the greatest percentage of recovery of anyone in the world! No small feat of achievement in my opinion, the name of the company is Itronics. The Chairman and CEO of *Itronics is Dr. John W. Whitney, one of the top minds in the world on silver recycling. Dr. Whitney kindly agreed to go on record and clear up some of the misinformation about digital photography and it's effects on the silver market. The following dialogue took place in the third week of July 2003: King: "Thank you for spending time with me on the subject of digital photography Dr. Whitney. Maybe you can help myself and others to gain a better understanding of digital photography and it's impact on the silver market. To start off, what percentage of silver used in color photography is recycled?" Dr. Whitney: "80 to 85% of silver used in color photography is recycled. Silver used in color film is completely removed from the paper and all of the silver goes into the liquid so there is an incredible recovery rate." King: "What about the recovery rate on X-Rays and black and white photography?" Dr. Whitney: "When you say black and white what you really mean is black and clear. Only about 50% of silver is removed from the negatives into the liquid so recovery is much less than conventional photography." King: "With regards to digital photography, I have heard there are problems with photographs having tremendous deterioration and fading over time when the photographs are not printed out on silver coated paper is that true?" Dr. Whitney: "That is one of the 'dirty little secrets' of digital photography. Printed images fade and some papers being manufactured and sold have longer life, however none of it is permanent. Conventional prints are permanent and black and white is good for 100 years." King: "So in the end consumers who want to keep these pictures permanently as stores of memories will have to use conventional methods of development in order to ensure they will last?" Dr. Whitney: "I am servicing one of the big companies which takes in digital photography and they are using conventional methods for developing the pictures for that very reason." King: "Conventional methods for developing the digital pictures, interesting. What about the picture quality of digital?" Dr. Whitney: "High quality digital photography has 4,000 to 10,000 pixels. To contrast, conventional photography has 16,000,000 to 20,000,000 pixels so resolution is much sharper. There is a technological problem and it has existed as a problem since the early 50's, how to get those inks to stabilize so they don't fade on you. The word is getting out; I think even Kodak has admitted there is a problem. The other issue which is none of my business, but which bothers me a great deal is CD Rom is the new method of storage and it is not entirely stable. So when people store those photos they may not know they have to replace the CD's every 5 years or so because of deterioration." King: "Isn't this going to be a major 'black eye' going forward for the digital world?" Dr. Whitney: "As I said, storage is a problem and I would suspect that when people store those pictures they may not know they have to replace those (CD's) every 5 years or so because of deterioration. Consumers may react with anger and a sense of helplessness when they find out their photos they planned to save for a lifetime and pass on to their children have been lost because of a technical issue." King: "Is silver being used in any other form in the digital world?" Dr. Whitney: "Silver is now being used to coat the new CD Roms, they have a silver mirror finish. I believe Kodak developed the technology and I believe it allowed them to bring the cost of the CD Rom down as well as they were previously using gold to coat the CD Rom." King: "I am sure digital businesses are aware and working on these problems. What are your thoughts on attempts to remedy these problems?" Dr. Whitney: "Technology is being improved, but right now it is a minimum of 10 years to even think they can successfully remedy some of these problems. For governments this is already an issue. Microfiche is a permanent successful method of storing images; of course again this involves silver usage. This is second hand, so this is in the gossip category, but from what I understand NASA put some of it's photos and text into new technology at one point, destroying the original microfiche and the technology failed causing the loss of a portion of a decade worth of photos and data to be lost forever. Recently, Hong Kong and Singapore have switched back to microfiche because of these types of problems; the only reliable way to store long-term is microfiche. This is a trend change back to conventional." King: "So governments and government agencies have tragically lost records forever because of technology failures?" Dr. Whitney: "That is my understanding." King: "What are your thoughts on the silver market?" Dr. Whitney: "Fundamentals and price don't correspond." King: "So you think silver is headed higher?" Dr. Whitney: "Where you have a problem is if individuals decided to buy silver as a 'store of value' then there would not be enough silver to supply the demand and there would be major dislocations in the silver market." King: "Any other thoughts on the silver market?" Dr. Whitney: "I'm one of the major shareholders in Itronics, so I am heavily invested in silver with my own portfolio and also with 16 years of work in recycling and helping to develop better and more efficient technology for the recovery process." King: "What are your final thoughts on digital's effect on conventional photography?" Dr. Whitney: "Well, digital imaging and digital photography have decreased the growth rate." King: "So the conventional photography market continues to grow?" Dr. Whitney: "I believe that to be the case. Worldwide it continues to grow, most folks can't afford computers and even if they can it is still very complicated. By the way, a high growth area for conventional photography is disposable cameras." King: "In the end as consumers lose some of their photos they had planned to keep for the rest of their lives, how do you think this is going to affect the digital world?" Dr. Whitney: "I don't know the answer, but I know if my wife lost all of her photographs she would be extremely upset." King: "One more question before I let you go. I am wondering, because you and your spouse are very knowledgeable about both conventional and digital, how do you choose to develop your photographs?" Dr. Whitney: "My wife develops using the conventional method, because it permanently saves the pictures." King: "Thank you Dr. Whitney for taking time to dispel some of the misinformation out there about digital photography and its effect on the silver market." Dr. Whitney: "You're welcome." Needless to say I was stunned after talking to Dr. Whitney. It is quite obvious to me after getting information from one of the top minds in the world on silver recycling, that digital photography is not killing conventional photography, in fact just the opposite, conventional is continuing to grow. Also, digital may move more in the future to print out the final pictures on silver coated paper so the images will not deteriorate, but rather be saved permanently. This confirms the current bullish structure of the silver market, which David Morgan has talked about so often in his newsletter. SOME FACTS ABOUT THE SILVER MARKET Four billionaires that are heavily involved in the silver market, George Soros, Bill Gates, Warren Buffett and Larry Tisch. The Dow/Silver ratio bottomed in 1980 at 18 to 1, which means that it took 18 ounces of silver to buy one share of the Dow. At the peak recently in silver it took an unbelievable 2,526 ounces of silver to buy one share of the Dow !!! The Dow/Silver ratio has clearly turned down in favor of silver, but still stands at an incredible 1,835 to 1. The average ratio over 100+ years at the bottom was around 80 to 1, so for silver investors this indicates tremendous upside. Another ratio is the Gold/Silver ratio. It is currently at 73 to 1, meaning it takes 73 ounces of silver to purchase an ounce of gold. This ratio bottomed in 1980 at 16 to 1. Richard Russell has stated publicly many times that he believes the price of gold is headed to $3,000/ounce. You can do the math, but one subscriber sent an email to Mr. Russell, which was published indicating that gold at $3,000 and a Gold/Silver ratio of 16 to 1 would put silver at $187.50/ounce. No wonder Richard Russell has recently become "bullish on silver" saying, "silver may be the cheapest thing around." The Gold/Silver ratio historically has been at a ratio for many thousands of years of around 12 to 15 to one. The United States had literally billions of ounces of silver stockpiled after World War II. As the Chairman and CEO of Pan American Silver wrote the other day (which was published) the massive "strategic stockpile" which the United States possessed after World War II is now completely gone and stands at "ZERO." Comex inventories, which stood at about 330 million ounces in 1980, are now down to 106 million of which over 60 million ounces are already spoken for by investors. Above ground stockpiles, which were around 2.5 to 3 billion, ounces in 1980 have been reduced according to all documented sources to only 500 million ounces of above ground stockpiles. We have been running documented deficits for over 14 years and this is why these stockpiles have been disappearing and are near crisis levels. This silver is consumed and lost forever. Just one example of this is when your computer keyboard ends up in the dump eventually, the 12 cents or so of silver is not economically feasible to retrieve, so it is lost forever and will never be recovered. There are many other examples, which I will not go into, you get the idea. Another ratio is the Housing/Silver ratio, which over the last 100+ years peaks at around 20,000 and bottoms at an average of 5,000 (under 2,000 in 1980). What that means is that at the peaks it typically takes 20,000 ounces to purchase a "median" priced home. Today the average home purchased in silver stands at an amazing level of around 50,000, meaning it takes around 50,000 ounces of silver to purchase the "median" priced home !!! The lag times on new mining for silver is around 5 years so it won't matter if the price spikes significantly because it takes an enormous amount of time to get new mining projects under way. Any increase of silver mining on existing projects would negligible and not worth discussing in my opinion. A final point is silver just broke out above a twenty year sloping downtrend line from the high of 1982 which touched the "Buffett peak" of 1998 and continued down to the highs of 2002 and early 2003. This is a major breakout for silver and one that many have been waiting to see before getting long silver. Those are the facts and those are the types of things I have always looked at as a professional investor/trader in order to make profit. It is quite obvious to me that those ratios are way out of whack and will cycle back down the other way (where they have typically bottomed) and I will be moving the portion of my portfolio allocated to silver investing out of silver at that time and into some other types of investments which will be unloved (out of favor) and which the ratios will favor at that time (such as real estate and stocks). In summary, the big picture on silver exposes that the days of capping the price of silver at $5.00 may soon be over. More importantly digital is not killing conventional photography, just the opposite, silver usage in conventional photography continues to expand as does the worldwide market for conventional photography. Finally, I believe silver is way undervalued and is in the beginning stages of a massive bull market! Eric King * Itronics Inc. is the world's only fully integrated photochemical recycling company. It provides photochemical waste collection services, recovers and refines silver from the photochemicals, manufactures and blends liquid fertilizers - GOLD'n GRO from the processed residual, and sells and distributes a line of liquid fertilizers developed for specific applications, such as golf and lawn turf maintenance programs, vegetables, wine grapes, citrus and evergreens.
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