Digital Photography Can't Dent Silver's Bullish Case

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That giant earthquake in northern Japan was the biggest news I saw last night. No doubt, the surf will be up in various and sundry locations. On the other hand, the early action here was something short of tempestuous. After opening quietly, the market saw a slight setback when the Michigan confidence survey reported a rounding-error decline of 87.7, vs. expectations of 88.5. With that news digested, there ensued a bit of motion back and forth, and then things settled down.

Internet Triumvirate Vanquished: All day long, the indices flopped and chopped in a rather small range. A couple of times, it looked like the bulls might mount an offensive to the upside, but each attempt at a rally fizzled. There was a bit of noteworthy action below the surface that I think is worth discussing. China Internet darlings Sina (SINA - commentary - Cramer's Take), Sohu.com (SOHU - commentary - Cramer's Take)SOHU and NetEase (NTES - commentary - Cramer's Take) were down about 15%, 10% and 15% respectively -- a sign that some of the recent speculative fever may be breaking. The precious-metals stocks also continued to struggle today, as did the metals themselves (more about that below). It will be interesting to see what kind of muscle the bulls can muster as we head into the end of the quarter next Tuesday.

Away from stocks, fixed income was strong, the yen was a bit firmer, and the euro was a little weaker. The metals sagged again, with silver closing down 1.5% and gold closing down 1% plus. Some of the recent swoon in silver perhaps stems from Eastman Kodak's (EK - commentary - Cramer's Take) announcement of plans to refocus (sorry) its efforts on digital photography (more about that in a minute). That straw apparently broke the camel's back of the current silver rally. It also made its mark on gold, and hence the pretty violent setback seen in precious-metals stocks.

Kodak Gets a Hot Flash: As I stated yesterday, the environment seemed to be frothy enough that something like this could occur, which was why I sold a chunk of my gold. (Once in a while, even a blind pig finds an acorn.) In any case, I believe this is just one of the periodic shakeouts that occur in bull markets. But it doesn't change the bullish case one iota, in my view. We'll just have to await an attractive opportunity for folks underweight in the metals to add to their positions.

Back to Kodak's news, I want to put this into perspective vis-a-vis silver. First of all, though the photography market is important, it's not the be-all and end-all of the silver market. Total silver demand, not counting investment demand, is estimated to be around 850 million to 900 million ounces. Photography demand is about 200 million ounces, roughly the same as 10 years ago. Digital photography has become far more prevalent in the developed world, but what folks in developing nations can afford are cameras that run on film (instead of PCs and digital cameras). So, to address the bearish argument about digital photography, the bullish response is, in essence, so what? It hasn't really changed things very much.

Unsullied Silver vs. Debased Dollars: All of that, however, is static that detracts from the true bullish case for silver -- potential investment demand driven by the race to debase in currency land. It's starting to dawn on folks that the world's central banks are hunched furiously over their confetti machines. That is what has been taking silver and gold higher, and it will continue to take them higher. It is the same case I have been making for gold. Jewelry demand is important, but jewelry demand is not what's going to drive the price of gold up, just like photography and industrial demand is not going to drive the price of silver up.

If you think about what a silver exchange-traded fund would do to the silver market, I would wager to say that investment demand for that ETF would easily equal the silver demand that comes from all of photography. At today's prices, you're talking about $1 billion worth of demand. I don't think it would be far-fetched to see something like that.

A P.S. on NLY: To end on a similarly bullish note, I added to my position in Annaly Mortgage (NLY - commentary - Cramer's Take) today. Hopefully, that answers the questions folks have been asking me about my plans.

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William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital was long Annaly Mortgage, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail].