Positioning for the Next Move in Silver

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We have been in the silver space since the beginning of this cycle in the early 2000s and have had all kinds of experiences, discussions and arguments with industry buffs, pundits, execs, investors large and small, advisors, professionals and cheerleaders. . .

The Past
We have been in the silver space since the beginning of this cycle in the early 2000s and have had all kinds of experiences, discussions and arguments with industry buffs, pundits, execs, investors large and small, advisors, professionals and cheerleaders. Note the effort to avoid using "expert" to name anyone on that list as there are very few who fit that description in our view. In that time we have survived various cataclysmic events and developments perpetrated by influential groups, authors and speakers ranging from "digital photography will kill silver" (what was sold as a sure thing), "silver is not money," "silver will never get over $6/oz," to "if silver gets to $10/oz we'll all be rich," and everything in between. Mind you, the latter two came from executives of silver companies. Here we are with silver trading at $17+, yet little seems to have changed.

The Present
As mentioned in recent interviews, we are somewhat concerned with the flurry of publicity silver's recent break out from an 18-month consolidation pattern has been accompanied by. There's just too much attention being paid to silver in the last couple of months for our liking. Such sentiment usually results in some sort of pullback to shake off the overly enthusiastic and performance chasers. That said, there is always a chance "this time it's different." With silver being an extremely small market compared to most others, it is prudent to expect every time to "be different", for—certainly—one of them will be.

Then there's the "geo's trap"—a term we coined at least in our own minds—which we use to describe the eternal pessimism of technical people in the industry towards the upside potential of silver prices, due to what they call "mountains of silver out there", referring to mountains of silver they get to walk on for a living. They say this because they get to walk, talk, breathe and sleep silver every day and therefore cannot imagine why silver price would go high(er), when there is such an abundance of silver around (them). What they fail to remember is that some 6.5 billion people want the next i-gadget or at least electricity in their home, a car and all the other wonderful things the geo has—they couldn't care less where the metals to make them are going to come from. In our opinion, worldwide consumption of silver is roughly ONE BILLION OUNCES PER YEAR; and, if it ain't there yet, it's getting there and beyond fast.

By the same token we try to watch out for a similar trap in our own thinking. Maybe the fact that there is 5 times more info on silver this year than there was in the previous 5 years, should not necessarily mean that the silver story is out of the bag just because we happen to eat, breathe and sleep silver (albeit on a computer screen). At some point the silver story will break wide open and you will find yourself surrounded by silver "experts" more numerous than there were real estate agents in the heydays of the property market of the mid 2000s. We've said many times before and will say it again: ultimately silver's price will be determined by people living on $10 a day who do not know or care what you, I, the Wall Street Journal or anyone else says or writes about silver. They will flock to silver on their own accord because it works - it does what they need it to do: preserve buying power and serve as medium of exchange. But that's in the future, for now it's still an investors' market, so let us get back to that.

The Future
Despite our reservations in the short term, we are very bullish on silver longer term. More importantly, we believe that the next big move up in silver is about to begin. Not tomorrow, not next week, but in the medium term, say next couple of years, we should see silver at much higher prices, perhaps on the order of a double the current level. Let's disclaim that by reminding the reader, that silver is a bit "loco" of a market and anything is possible any day of the week. However, we should be entering the second leg of a classic three-legged bull market, which could potentially test the all-time highs on the 1980.

Whether we get there or not, will depend on a bazillion factors most of which have nothing to do with silver. Chief amongst them should be action in currency markets, including but not limited to the US Dollar. That is assuming the entire financial system is not going to hell in a hand basket, which it eventually might, but we don't expect it to in the next couple of years.

Regardless of the magnitude of the anticipated move in the silver price, it should be substantial enough to lift all boats. There are three main types of instruments available to investors in the silver space: bullion, "paper silver" and silver stocks and funds, with hybrid vehicles straddling two or more of the categories. They all provide some degree of exposure to silver price and carry commensurate risk.

Investment options
As always, we advocate buying silver (gold) bullion first. But it's getting late in the game for starter positions, so between now and year end you may want to buy all the bullion you ever plan to buy. A short term pullback may be desirable and healthy for the overall silver market, but we wouldn't bet on it. A more mature approach is to dollar-cost-average your way into a position (works for other types of investing as well). That means buying X% of your overall position every few weeks or months regardless of silver price. How large an "X%" is totally up to you. This method usually ensures that you get a reasonable average price for the entire position. If that doesn't quite do it for you, remember the big picture—why you are buying silver in the first place—there should be plenty of upside over time. It is a good idea to buy bullion with the intent to "never" sell. Think of it as your rainy day stash, crisis insurance, nest egg, retirement savings, heirloom—in short, whatever helps you keep your head straight and hands off of it for as long as you can manage. Attempts to cash it in are often ill-timed due to the omnipotent grip of market psychology. If your theory about silver is half right, there should be a plethora of options to switch into something more attractive at an opportune time; if you don't have a theory, you wouldn't be buying silver.

There are some "paper silver" alternatives, such as ETFs, pool accounts, mint certificates, warehouse receipts, futures and options contracts. Paper silver instruments are best suited for trading price swings and are oft exploited by the pros. If you're still reading this, you're likely not one of them.

There are also a few hybrid instruments, such as Central Fund of Canada and Bullion Management Fund, GoldMoney, BullionVault, etc. some of which allow you to take delivery of your metal, others don't. Hybrids are convenient and will track the metal price rather than stock indexes which can come in handy in a stock market crash like the one we just endured.

That brings us to stocks and funds. There are no public silver funds that we know of at this time. Established mutual funds such as the Tocqueville Fund, Van Eck Funds, US Global Investors and others can serve as the next best thing to those unwilling or unable to do it on their own. Most major fund companies nowadays have some sort of precious metals, natural resource and/or commodity funds. There is also an emerging trend of mainstream funds turning to gold and silver.

Over the coming weeks and months we will be discussing some silver companies that we think should do well in next few years. While some of the names may be familiar to you (did we mention that the silver universe is very small?), there are gaps to be filled and considerations spelled out regarding individual companies to aid in your thinking about silver and related investments.

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