There are more than a few arguments being floated around backing the explosion of silver prices in the coming years. Looking at it from both fundamental and technical viewpoints, I am more than confident that silver prices are bound to rise steadily. The good thing is that with all the mystique surrounding gold, investors tend to ignore silver and its value as an alternative to Fiat currency. I am certain though that this will not last long, and people need to wake up and buy silver before they end up chasing the rally like they have with gold.
The Fundamentals:
Every now and then in the world of investing, opportunities come along where the most profitable returns are provided by the safest assets to hold in the given economic cycle. The demand and supply of silver tell us that it is in fact one of those unique things to own, much like gold, when the prevailing economic environment dominated by inflation and instability fears dictates that it is both a safe and a lucrative investment. Unlike gold which is the first hedge for investors to run to; silver remains to be an afterthought. This is surely going to change, given that gold is already pretty expensive for small players (albeit it is not done with its bull run yet).
Silver supply has been lagging behind silver demand for a few years now. China, which used to be a net exporter of silver, has now become a net importer. Furthermore, the PBOC has expressed its interest in expanding its silver reserves. If this is not a bullish signal, I don’t know what is. The supply for silver has been declining steadily over the last 70 years, whereas the supply for gold has been rising. A major cause of the supply gap stems from the fact that a majority of silver that is found underground is found mostly, as a by-product during mining for other metals such as copper and lead. Therefore, the supply for silver cannot be ramped up very quickly even though it is not in short supply in nature.
The fastest growing area of the silver market is its use in industry, and analysts estimate that silver’s use in industry has gone from about 35% of entire production in silver to about 50% in recent times. Silver is used extensively in electrical devices, as it is a very good conductor of electricity. In fact, it is the best conductor of both electricity and heat amongst metals. There is zero wastage of electrical current when passed through silver, which is a property that makes it indispensible as a conductor. Here is something interesting on one of the applications for silver as a superconductor: http://www.gold-eagle.com/editorials_01/haynes111401.html. Silver is widely used in low technology and high technology manufacturing. Apart from all this, silver is of course widely used for coinage. The number of patents filed on silver, exceed those of most known metals, an indication that it is extremely useful to civilization for now.
The Technical:
Silver and gold prices have historically moved in tandem. Silver has traded at about one fifteenth to gold prices per ounce on an average. Currently, with gold around $1360 and silver around $30, silver is grossly undervalued at one forty fifth the price of gold per ounce. Economic cycles are all about mean reversion, and in the case of silver and gold, mean reversion dictates that silver catches up. Gold is certainly not going to have much of a downside in the coming 5 years, given that there is economic uncertainty as long as the developed world recovers on the crutches of easy money. If gold were to go to $1600, silver could easily go to at least $50 and still be trading at double the average ratio of gold to silver prices historically.
Silver is not waiting around for long. There has been heavy shorting of silver by big investment giants such as JP Morgan in an attempt to manipulate gold prices to keep the dollar stable. JP Morgan and its contemporaries are all front running open market operations for the Federal Reserve. JP Morgan has one of the biggest open short positions on silver. One does not need to be a conspiracy theory buff to believe that the US government and its Permanent Open Market Operators act hand in hand, looking after each other’s interests. That is the nature of capitalism, not cronyism or any other dirty word. However, the short positions on silver cannot hold off common investors for long. There has been a significant bull run on silver prices over the last year, and I truly believe in the very real upside potential this year as well.
The famous Dow Theory states that there are three primary phases in a bull market. The accumulation phase is when informed investor’s begin to participate in the market after observing facts that are not yet clear to the uninformed investor. This is the phase that silver will be in till it reaches $50 an ounce. After that, the accumulation phase will begin, whereby people will wake up and smell the coffee, and will participate in the trend up based on popularity and technical signals. This is the phase that gold is in right now. There is significant attention on the metal and prices have almost doubled since the global economic crisis began. The informed investor would have bought in to gold over two years back. The last phase is the excess phase, when the smart money starts to scale back its positions and selling off to people who are willing to buy an overbought market.
In Conclusion:
Silver, like any other commodity, cannot fall to a value of zero, unlike stocks which can. Brokers generally tend to advise investors to not have more than ten percent of their investments in things like silver and gold. Apart from the fact that this is just not the correct advice given the economic cycle we are in, brokers also cannot make any commissions off silver and gold. Two years ago, I had a discussion with a friend about my optimism about gold, and he retorted, what is the point of gold, you cannot eat it! This would surely not be his response now that we are in the second phase of the bull run in gold. Human beings tend to make decisions in a herd, so that they don’t have only themselves to blame when the outcome goes awry, and end up participating when everybody else is. This is not to say that geniuses do not act in this way; Newton’s example is the first one that comes to mind. He participated in the South Sea bubble, after seeing his friends get rich, and ended up joining as the bubble began to unwind and went broke. This is when he made his famous “I can calculate the motion of heavenly bodies but not the madness of people” quote. There is a still a slim chance of chasing gold and ending up cursing the madness of people, but not even that with silver.
PS...Buy physical silver not ETFs.
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