Monday, June 18, 2012

Back to the fundamentals of investing in silver


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It’s about four years since ArabianMoney began to recommend investing in silver (click here). It has been a roller-coaster ride but few investments have gained 70 per cent like silver over those difficult years for financial markets.

Things were even better last April with a short price spike that gave left us with almost triple our investment of three years earlier. But that is the sort of volatility that you have to live with as a long-term silver investor.

Market timing

You can of course try to be a market timer. However, it just is not worth the heartache. You will make horrible mistakes. At the end of last year one famous pundit was particularly bearish, only to get it completely wrong as silver found a New Year burst of life.

Will we see silver finally take out the 1980 all-time high of $50 this autumn as expected earlier this year? (click here) Given the long sideways move since that April spike in 2011 we ought to be due for some sort of an upturn, and the fundamental case for investing in silver remains as strong as ever.

It’s a precious metal with many industrial uses and limited supply and very limited reserves. Silver is a tight market dominated by three bullion banks who hold massive short positions. If they ever have to cover those shorts there is your $50+ silver price and very much higher.

For any commodity to be the same price as it was 32 years ago is a pricing anomaly in need of a correction. Then there is the historic link between gold and silver as precious monetary metals.

The average ratio of silver-to-gold in terms of value is a factor of 15 over the centuries. It is way out of whack now at closer to 50, so silver has the potential to outperform gold by a factor of three as the law of mean reversal says this must correct over time.

And don’t worry too much about the impact of a recession. Silver is mainly a byproduct of copper and zinc production and so supply will fall if production of these metals is cut, and that probably in the face of rising investment demand.

Money printing

What has been driving prices up and will continue to do so is the creation of money by global central banks to offset the deflationary impact of the global financial crisis. They can electronically print money to inflate debt away but not increase the number of ounces of gold and silver in existence.

Precious metals are also a safe haven asset class. That does not mean that their price always goes up in a straight line. It does mean that they always have a residual value and no third party between you and your money. Gold and silver are money or currency.

In times of inflation, deflation or financial insecurity this is the asset class to hold while all the others plunge in value. Don’t be fooled by the US dollar’s strength recently. Its denouement is yet to come and that is when you will really want to own precious metals.

1 comment:

  1. I doubt silver can be used for every day coinage. There is not enough of it to circulate to run an economy. Sadly it will be used only as investment or for manufacturing.

    If there is 7 billion ounces of gold in the world. That is one ounce per person. Unfortunately it is hoarded by the elite and central banks.

    Now if there is 1 billion ounces of silver, that is 1/7 ounce per person in the world. How can it be possible for people to earn $20 per week which is 20 ounces of silver per week?
    If you were to have 1 billion working people, you may need 20 billion ounces a week. times 52 weeks, will be 1 trillion ounces required for 1 year. How will an economic system run on the use soley on everyday coinage with no supply?
    The US mint produces about 35 million a year of $1 silver coins. Perth mint not much in comparison.

    We are DOOMED i tell you.

    Gold and silver investors are anticipating that they will buy everything they ever wanted on the cheap. Properties, cars, boats, assets, waiting for the time of opportunity, because they enjoy seeing how much paper dollars will pay for their gold and silver. Wow its at $1600 per ounce, cant wait till it is $10,000, $20,000, look how much paper dollars I can get. Profiteering works everywhere with the simple idea, buy cheap sell, dear.