Silver has had an incredible run over the past year or
so... Where do you think it's headed in 2011? Might touch $49/ounce
Silver has definitely been very exciting. The price has
basically more than doubled [ 83% in 2010] and many of the stocks have done much
better than that... Silver has already touched $33/ounce [first in 31 years] on 21 Feb, 2011. Its in backwardation phase, which is common in commodities but rare in precious metals. But its happening...... [what’s Backwardation: When spot price is higher than future price] So you could be forgiven for asking how long that
can continue. I think the bullish case for silver going forward comes down to three main factors.
FIRST is industrial demand. Everyone knows industrial use is much
greater for silver than gold, and that does make it more susceptible
to an economic slowdown. But what's interesting is these industrial
uses are growing rapidly. But this silver investment could be one of the cheapest ways to protect your money from the decline of the U.S. dollar.
For example, all of the following uses for silver are increasing:
medical, apple i-phone, plasma tv, electronics, food processing, water treatment, paper,building materials, wood preservation, textiles, consumer products...
the list goes on and on. Every bandage-maker, for example, now offers
a silver-based product. You can buy silver-laced toothbrushes,
hairbrushes, combs, and make-up applicators. In England, you can buy silver-based soap.
The takeaway is that all these uses are on the rise, so even in an
economic slowdown, there is a higher level of base demand. The demand
for any individual application could decline, but the total number of
applications for silver is increasing. Over time, I think we'll see
increasing levels of demand.
SECOND major factor is investment demand. Investment demand is
soaring and can't be ignored. The U.S. mint sold more one-ounce Silver
Eagles in January than in any other month since they began creating
them in 1986. China's net imports of silver quadrupled in 2010.
Against all this you have the fact that most Americans don't own any
gold or especially silver. So even though there's already incredible
investment demand, the potential for it to increase is still
tremendous.
THIRD factor is supply. Ask yourself what's wrong with this
picture: Total global demand for silver is about 897 million ounces a
year. Total global supply is about 729 million ounces a year.
Sources:
Deutsche Bank
Credit Suisse
JP Morgan
Goldman Sachs
UBS
HSBC
Citibank
Nomura
ICBC
China Construction Bank
Scrap currently makes up the difference, but I think the crucial point
to recognize is that producers can't dig up enough silver to meet
current demand.
So what happens if industrial uses continue to rise? What happens if
investment demand continues growing? What happens if we do get some
type of currency collapse?
Vietnam has already devalued its currency Dong [ 8.5%] on 20th Feb-2011 to boost exports, which is not the solution to her problem. Moody’s downgraded Vietnam and Japan in recent reports. More to come from advance economies whose policy makers are still in the reactive mood. Europe is shivering with fiscal profligacy.
There were few bottleneck issues with physical supply in 2008, where mints
across the world couldn't keep up with orders. A lot of it was due to
them being unprepared for the rush, and they've since improved some of
their operations. That's great.
But even with all the improvements, even after adding equipment, even
after adding staff, even after adding work shifts... they're still
having issues. Over the past three or four months we've been hearing
about mints having delays, temporarily running out of stock, etc. So
it's still a problem.
And if all the factors I just mentioned come into play, then I think
you could say "bottleneck, meet desperation." Regardless of how well
prepared a manufacturer might be, demand at some point could
legitimately overwhelm the system, and I think that's a very real
possibility. Anything could happen. But the scary thing is, we may not
have enough supply to meet demand if we get a mania.
So based on these factors, my view is that silver can continue rising
for quite some time. I don't think it stops until SLV, the silver ETF,
is a favorite of the fund managers... until Silver Wheaton is a market
darling of the masses... until Pan American Silver is Wall Street's
top pick for the year... That's when I'll be looking for the end of
this silver bull market.
Many people don't realize this, but silver rose 3,647% in the
1970s, from its November '71 low to its January 1980 high. If you were
to apply the same percentage rise to our current bull market, silver
would climb another 500% from here, and the price would hit $160 an
ounce. Those are just numbers, but it shows that we have an established
precedent for the price to go much higher.
It's the fundamentals, of course, that will determine how high the
price ultimately goes. Show me a healthy dollar, show me no threat of
inflation, show me a responsible government that stops printing
money... Show me a repentant Iran and North Korea...Show me that Middle East is at peace with rulers[ Jordan, Egypt, Tunisia, Bahrain, Morocco, Saudi Arabia, Kuwait] acting normally and not running from the country. Show me that the
sovereign debt issues in Europe are resolved... Show me positive real
interest rates... Show me that unemployment is plummeting, that bank
closures have stopped, that real estate is recovering...Show me all that and I'll talk about the gold and silver run being over... But until those things start changing in a big way, I'm still buying.
Silver bears often suggest that a large part of the rally in the
last bull market was due to the Hunt brothers, who were accused of
trying to corner the market. What is my take on that?
I'm skeptical that the reason silver went as high as it
did was primarily due to the Hunt brothers' activity in the market.
It's interesting to note that they bought silver primarily because
they mistrusted the government, and because they thought silver was
going to be confiscated. Remember... gold ownership was illegal when
they first started buying silver in the early '70s.
Yes, they [ Hunt brother] bought a lot of silver... But if you look at the
correlation, you'll notice the price didn't necessarily move up when
they bought. In fact, when the rumors that they were trying to
"corner" the silver market really started going mainstream, which was
in the spring of 1974, the silver price dropped solidly for the next
two years. One would think that the price would've risen not fallen if
silver was being "cornered."
Secondly, if you look at price charts, silver moved in lockstep with
gold back then. They rose and fell pretty much together. They both
peaked on the very same day, January 21, 1980. So unless the gold
market was equally spooked by what the Hunt brothers were doing with
silver, it seems a stretch to assume they were the primary cause of
the rise.
Lastly, you have to consider that it was the mainstream media that largely promoted this idea the Hunts were "cornering" the market. With that in mind, one has to be suspicious that was, in fact, the case.
To be clear, I'm sure they had some effect, but to suggest they were
the main impetus behind silver's tremendous rise doesn't seem wholly
accurate. And look at the price today... It's outperforming gold in
our current bull market, just as it did in the '70s, and there's no
Nelson Bunker Hunt around. Besides... who's to say that we won't see other "Hunts" come along today and try to buy up large quantities of the metal? I wouldn't rule it out.
So again, I think it's more important to look at silver's fundamentals
for any kind of price projection than a one-off event. And those
fundamentals are very bullish.
ECONOMIC CRASH
I elaborated this earlier... but if the economy crashes, silver is likely to suffer more than gold due to its large industrial use component. Another factor is that silver is not bought by central banks, so one source of demand for gold is not present with silver.
But I think the bigger trend of a currency crisis is going to dwarf
those concerns. I see lot of currency intervention in the global financial markets. Chinese yuan would be under pressure from USA. However, Yuan/Renminbi would appreciate 4-5% in 2011 against US dollar with GDP touching 9.6%
Prudent approach
Silver is more volatile than gold, but that just means you get better
opportunities to buy it cheaper, and probably make more money on it if
you sell near the top. So yes, there are bearish arguments for silver, and one has to be prudent in buying it – you don't want it to be the only asset you own,
for example. But it would be equally a mistake to not own a meaningful
amount.
Good time to buy…
There's your answer. If you have minimal or no exposure, I suggest
buying. Don't rush out and spend all your available cash, because
there will always be corrections, but the less you own, the more you
want to make a plan to add a meaningful amount to your portfolio.
Remember...silver is a currency replacement just like gold. It's
money... and therefore you want to make sure you own enough for both
protection and profit. If you don't own enough, I suggest going into
"accumulation" mode... buying some on a regular basis, like
dollar-cost averaging.
My recommendation which is a conservative by the way – is that approximately one-third of your strategic valued assets be devoted to the precious metals market. That includes gold, silver, and precious metal stocks. That may sound
extreme to some, but I think the risk to currencies right now is
extreme. Chinese government has already communicated to her people to increase their Gold and Silver holding in their asset portfolios. Therefore, being overweight precious metals is justified. Obviously, each individual investor has to be comfortable with what they do.
I generally recommend you hold more gold than silver. I suggest approximately 70%-80% in gold versus 20%-30% in silver. Depending on your situation and risk tolerance, you may wish to have more or less in silver, but again the point is to have meaningful or market focused exposure.
Silver purchased method:
The options are becoming more and more mainstream, so it's
getting easier to buy both metals. The alternatives are growing, and
they're also improving. You basically have two choices: You can either
buy and store it yourself, or you can buy and have someone else store
it for you. Ideally, you want to do both... you want to DIVERSIFY YOUR RISK AND ASSET CLASS.
There are risks to storing metals yourself, such as theft, loss, or
fire. You can put it in a safe deposit box, but then it's in the
financial system and it's subject to banking hours and could even be
susceptible to confiscation, though I'm skeptical that will actually
happen. But I do think everyone should have some physical silver
handy, at least a couple months worth of expenses.
So the short answer is to diversify what you buy and how you store it.
For physical silver, I would stick to buying the popular one-ounce
bullion coins – Eagles, Maple Leafs, etc.
Silver Stocks.
It's pretty clear the go-to stock in the silver industry
– in my opinion at least – is Silver Wheaton. It's definitely been a
sweetheart the past two years. It's given us everything we could want
in a silver stock.
The stock suffered badly in the meltdown of '08, and things did get a
little dicey at the time, but I remember thinking that unless the
world comes to an end and the silver price never recovers, this
company is going to survive and bounce back – in part because of
management and in part because of the business model. They have no
exposure to mining costs, for example.
Shares back then were around $3... If you bought at the time, they're
now a ten-bagger. So it's been an incredible run. The question, of course, is going forward: Since the stock is already at $35, can it be another ten-bagger from here? The company expects to increase "production" by 70% by 2013. And
their costs will basically stay stagnant. Meanwhile, imagine where the
silver price could be in the next two to three years, and you can see
this company can make enormous amounts of cash. Some of that is
probably priced into the stock already, but you can't deny where this
company is headed over the next few years.
Could it have a big correction? Recently dropped as much as
28%, but sure... it could easily fall more than that in a major
correction. But if that happened, I'd consider it a big buying
opportunity. In my opinion, the bigger the correction, the bigger the buying
opportunity, because I really believe the future is very bright for
the company.
NUTSHELL
If you're bullish on gold, I think you need to be bullish on
silver, unless you think inflation will never come to pass. Regardless
of the short-term fluctuations in the market, it's only a matter of
time before the currency issues punch us in the gut and inflation
really takes off.
Second, remember that silver will be volatile, but focus on the
fundamentals and use sell offs as buying opportunities. Until the
fundamentals driving the bull market change, buy.
Bottom line, the bull market is far from over. I think it's going to
go much longer and much stronger... So buying on dips is the best
advice I could give anyone.
DISCLAIMER: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any strategic investment or strategy implemmentation.
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