SPECIAL REPORT

Silver Fundamentals—Fundamentally Flawed?

Gold Fields Mineral Service (GFMS Ltd) published a document on the Silver Investment Market in
late April 2009. I carefully went over this report and will offer some comments, but my main
analysis centers around the fundamental case for silver. Both GFMS and CPM Group will be issue
their respective reports on the silver market each year.

Being a proponent of true free markets, not the version that is “spun” by way of the mainstream
financial press, we only need to go to Ayn Rand of Atlas Shrugged fame to “check our premises”
and verify that we have not overlooked something or assumed something that is not valid.

First, we must define what we are trying to prove or at least examine, and this is simple (not
easy): just how “tight” is the current silver supply? Before delving deeper it is absolutely essential
to define our “givens.”

Givens: The basis for this analysis

The silver bullion market will be examined

Allowing for the amount of commercial grade silver per CPM Group

Coin market will be mentioned but not pertinent to this analysis

As mentioned to our readership, we examine the bullion market more carefully, because this is the
market that sets the “price” for silver. Yes the coin market is an important aspect of the silver
market, making up roughly fifty percent of the total, but this silver is not deliverable against a
COMEX contract or London Bullion Market Association (LBMA) position.

There are two main studies on the silver market. I have both and have read them for years. One is
produced by CPM Group of New York, and this year’s CPM Silver Yearbook 2009 . The other is
sponsored by the Silver Institute and is produced by GFMS of the United Kingdom. Your editor has
met and spoken with the principals of both of these organizations at a face-to-face level.

Although no one in this industry knows the true amount of physical silver bullion existing in
commercial form (1000-oz. bars), we need to begin our analysis at some point. Therefore rather
than give you my opinion of how much exists, let me cite the two best-known studies on the silver
market.

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According to this year’s study by CPM in their Silver Yearbook 2008, page 17, the Estimated Silver
Bullion Inventories, Year-End, were less than 400 million ounces. However, this year’s study, just
released, put the figure at nearly 600 million ounces. This is primarily due to increased silver
production and increased recycling.

As we can see (chart on next page), according to CPM there is approximately 600 million ounces of
fine bullion available. Now before moving onward, we must examine what GFMS has to state about
total silver bullion inventory, and here we find a much larger number, primarily about 200 million
ounces more in fact. While reviewing all the data for this segment over several weeks, it suddenly
dawned on me that we can “arbitrarily” add 200 million ounces at any point in time—because this
is the float of recycled silver each and every year. Specifically, the amount of silver recycled in
2008 was closer to 250 million ounces per the new CPM report.

So, it does not make either of the studies right or wrong; it just helps to explain a wide fudge
factor in the data. Let me be very clear: this is “my take” on the matter and is NOT that of GFMS. I
only wish to keep this discussion as fair and open as possible without resorting to “bookkeeping”
entries of silver. In other words, a great deal of silver—over 200 million ounces—is always in the
recycling pipeline as film, scrap, or as many may not know—liquids.

Going a bit further, people who are very studied on the silver market may recall that in March 2006
an article was penned about the debate between Jeffrey Christian of CPM Group and Philip Klapwijk
of GFMS concerning silver inventories. Without going into all the details, the GFMS survey has
maintained that more silver is available than the CPM Group but cannot point to it, and my bias is
to that which can be proven.

For the purposes of my analysis I will take the “best case” scenario and use the 600-million-ounce
case of commercial grade silver. Again, you can use any number you wish. The purpose is not to
determine exactly how much silver exists in commercial form, and the main purpose is to give a
strong indication of just how tight the silver market is at present.

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Known:

Barclays ETF, 283 Million Ounces

Zurich Cantonal Bank, 50+ Million Ounces
ETF Securities, 17 Million
Central Fund of Canada, 58 Million
Bullion Management Group, 5 Million
COMEX, 118 Million
Total: 530 Million +

Basically we have very little silver that is not accounted for as investment silver. This gives us a
very clear message that the market must be very tight presently. COMEX is only about 20% of the
total market yet it has a huge influence, as does the LBMA, because of the massive amount of
paper contracts bought and sold on a daily basis. Additionally, two new silver investment vehicles
were added recently, Silver Bullion Trust and another Silver ETF. On top of that bullish news, China
has recently started to offer silver bullion investment to their general public. Can you imagine what
will happen if ½% of over a billion people discover the fundamental value of silver?

If we look forward we must consider that if new purchases of silver are going to continue, and that
is a very reasonable assumption, at what point do we start to see delivery delays and/or price
increases?

The first Silver ETF was introduced in April 2006, so in three short years we have gone from 130
million ounces (what SLV began with as their projected “allotment”) to 350+ million ounces. This
yields a total increase of 220 million ounces in three years’ time. If the silver demand continues
unabated for three more years at a similar pace, where will the silver come from? (Note: 350 is the
total of Barclays, Zurich, and ETF Securities combined.)

Central Fund of Canada recently added another $210 million in mid April to purchase more gold
and silver bullion. Additionally, all the others mentioned above—Barclay’s, Zurich Cantonal, and
ETF Securities—added to their holdings the past two months. Increased investment demand is
expected to continue for several years into the future as more people seek silver to diversify their
holdings into precious metals including silver.

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As the founder of Silver-Investor.com I have devoted most of my life to studying the financial
markets, money, metals, and mining. You are all welcome to visit the website daily as new news
items are posted on a regular basis. Further, for those “Silver Bulls” you might consider our free
list and that way you are certain to stay informed on this dynamic market.

Remember Get Real, Buy Real

Sincerely,

David Morgan

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Information contained herein has been obtained from sources believed to be reliable, but there is no
guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary
should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein
are statements of our judgment as of this date and are subject to change without notice. Any action taken as
a result of reading this independent market research is solely the responsibility of the reader. Stone
Investment Group is not and does not profess to be a professional investment advisor, and strongly
encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before
making any investment decision. Stone Investment Group and/or independent consultants or members of
their families may have a position in the securities mentioned. Mr. Morgan does consult on a paid basis both
with private investors and various companies. Investing and speculation are inherently risky and should not be
undertaken without professional advice. By your act of reading this independent market research letter, you
fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions
you make regarding any information discussed herein.

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