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Tuesday, March 28, 2006 - Page updated at 12:00 AM

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Gates among investors benefiting from rising price, demand for silver

Bloomberg News

The biggest rally in silver since 1979 is benefiting the commodities market's largest investors, including Bill Gates, the world's richest man.

The Microsoft chairman's Cascade Investment is the second-largest shareholder in Vancouver, B.C.-based mining company Pan American Silver. His 3.32 million shares of Pan American are valued at about $85.2 million and have tripled since 1999, when Gates made the investment.

A 55 percent jump in the past 12 months has put silver on track for its best year since the billionaire Hunt brothers caused prices to skyrocket in 1979 by hoarding the metal.

Silver, above $10 an ounce for the first time in 22 years, may reach $15 by year-end on rising demand from jewelry makers and commodity investors, said Philip Klapwijk, executive chairman of London-based metals researcher GFMS.

"Silver is a market that sort of acts like a freight train," said Frank McGhee, head metals trader at Integrated Brokerage Services in Chicago, who forecast a high of as much as $13. "It's really slow-moving, and once it gets started in a direction, you cannot stand in front of it."

Silver for May delivery rose as much as 10.5 cents, or 1 percent, to $10.89 an ounce on the Comex division of the New York Mercantile Exchange. It traded for $10.84 in London. After a six-year rally, prices are up 22 percent since Dec. 31.

The metal also has attracted the billionaire Warren Buffett. His Berkshire Hathaway bought 129.7 million ounces of silver in 1997, most it for less than $6 an ounce. He won't say if he still owns it.

Leading Pacific Northwest silver-mining companies


Hecla Mining,

Coeur d'Alene, Idaho

2005 financials: Net loss of $25 million on sales of $110 million

Silver production: 6 million ounces in 2005

Silver mines: Idaho, Alaska, Mexico

Gold production: 140,559 ounces in 2005

Stock (ticker HL): Up 19.9 percent over 12 months

Coeur d'Alene Mines,

Coeur d'Alene, Idaho

2005 financials: Net income of $10.6 million on sales of $172.3 million

Silver production: Almost 14 million ounces in 2005

Silver mines: Idaho, Nevada, Chile, Argentina, Australia

Gold production: More than 130,000 ounces in 2005

Stock (ticker CDE): Up 90.7 percent over 12 months

Pan American Silver,

Vancouver, B.C.

2005 financials: Net loss of $28.6 million on sales of $122.4 million

Silver production: 12.5 million ounces

Silver mines: Peru, Mexico

Stock (ticker PAAS): Up 74.4 percent over 12 months.

Source: Company reports, SEC filings

Silver "is a diversification tool," said Graham Birch, who helps manage $8.5 billion in mining assets for London-based Merrill Lynch Investment Managers, the world's biggest investor in gold stocks. "Investors are putting more money in commodities and within that there are some hot spots like silver."

Buffett's stockpile of silver, if still held by Omaha, Neb.-based Berkshire, would be valued at $1.39 billion, about $700 million more than from June 1997 to January 1998, when the investment was made. Buffett declined to comment.

Spokespeople for Gates and Cascade Investment didn't return calls seeking comment.

Hunts bought in 1970s

The gains in silver are the biggest since Nelson and William Hunt of Dallas started buying the metal in the 1970s, sending prices to $50 an ounce by early 1980 from $6 at the start of 1979.

The Hunts, who, along with their brother, Lamar, once had a net worth estimated at $6 billion, were convicted in 1988 of conspiracy for trying to manipulate prices. They lost $1.5 billion and were forced to pay $130 million in fines.

This year, rising demand may help silver outperform gold and copper, said Michael Kagan, who helps manage $5.2 billion at Legg Mason's CAM North America in New York.

Copper rose 37 percent last year, touching a record this month, as demand from China depleted supply. Gold reached a 25-year high in February as investors bet against the dollar.

The 30 percent gain in silver last year exceeded the 3 percent rise in the Standard & Poor's 500 Index and the 2 percent return on the benchmark 10-year U.S. Treasury.

"Silver supply-demand fundamentals are tightening this year, while copper's may loosen in the second half," said Kagan, who owns silver and manages funds that hold shares of Apex Silver Mines in Denver and Toronto-based Barrick Gold. "Silver is going to outperform gold until we get some new mines, and that's not coming on for another few years."

Not even a drop in demand by filmmakers, the biggest users of silver, has hurt prices as investors seek a cheaper alternative than gold, McGhee said. Gold is up 32 percent in the past year to $560.50 an ounce.

Supply may tighten should Barclays Global Investors get U.S. approval for an exchange-traded fund linked to the price of silver, creating new demand by making it easier for investors to own the metal.

The investment is modeled after the StreetTracks Gold fund that began trading in November 2004 and was the most successful new exchange-traded fund (ETF). The initial Barclays offer will be for 150,000 shares, each representing 10 ounces of silver, and the fund is seeking approval for as many as 13 million shares.

"Silver has been so powerful because there's a feeling that the ETF is going to pull more silver out of the market, and the market's already tight," CAM's Kagan said.

The metal's gains have helped mining companies.

Shares of Idaho-based Coeur d'Alene Mines, the biggest U.S. producer, are up 90.7 percent in the past year, and the company reported two straight quarters of profit for the first time since 1996.

Industrias Penoles of Mexico, the world's largest producer, rose 31 percent this year, the top performer on the Bolsa index after ranking fourth worst in 2005.

Not everyone is a buyer. Demand for silver from the ETF is overblown, and the switch to digital cameras may further slow silver demand, said Ellison Chu, precious-metals manager of Standard Bank Asia in Hong Kong.

"The total demand for silver is diminishing because the film industry no longer uses silver as much as before," Chu said.

"Silver is probably toppy around $12," said Alastair McIntyre, head of marketing at ScotiaMocatta, the bullion unit of the Bank of Nova Scotia, one of five participants in the daily trading session in London that sets world gold prices.

Even Microsoft's Gates has trimmed his holdings. Cascade Investments sold 1.79 million shares of Pan American Silver from Dec. 12 to 20 "to cover its original investment and also take a bit off the table," Pan American spokeswoman Brenda Radies said on Dec. 22.

At the time, the stock was at a 20-month high. Since then, it has risen another 46 percent to a record.

Michael Larson, chief investment officer of Kirkland, Wash.-based Cascade, remains on Pan American's board, where he has been a director since 1999. He didn't return calls seeking comment.

Silver's rally is boosting costs for makers of photographic film, including Rochester, N.Y.-based Eastman Kodak, the largest photography company.

Kodak told analysts at a New York presentation Jan. 22, 2004, that silver at $6.25 an ounce would erode earnings by $30 million to $50 million that year. The company declined last week to update the estimate. Kodak is raising prices for products such as medical imaging, spokesman David Lanzillo said.

The Silver Users Association, whose members include Kodak, jewelry-maker Tiffany and Dow Chemical, opposes creation of the Barclays fund because it may keep prices high.

"If the silver ETF is approved, it will mean higher product costs and lost jobs in our country," Paul Miller, executive director of the association, said in a Feb. 13 letter to regulators. The group's members employ more than 200,000 workers and process 80 percent of silver used in the U.S.

Haven from dollar

Silver's widening use in products from paints to batteries to medical devices has made it more appealing than gold for some investors seeking a haven from the dollar's decline. Demand for silver in industrial applications is estimated to rise 5 to 6 percent in 2005, researcher GFMS said.

"Silver prices are not driven by normal supply-and-demand fundamentals at the moment," Klapwijk said. "They're driven by investor demand. The funds have been buying silver in anticipation of the ETF, which will lead to a squeeze in the silver market and push prices even higher."

In the U.S., which accounts for about 20 percent of global silver use, demand exceeded supply by about 2,700 tons in 2004, prompting increases in output from China, Klapwijk said.

China, after almost tripling production in the past four years, increased its export quota to 4,000 tons in 2006 from 3,500 last year. The country raised output by 19 percent last year to 7,196 tons, and may have overtaken Thailand to become the biggest supplier of silver jewelry to the U.S.

China is the world's fourth-biggest silver producer, accounting for about 10 percent of the world's silver resources, according to the China Nonferrous Metals Industry Association.

Copyright © 2006 The Seattle Times Company

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