Silver Investing—The Big Picture

The last 12 months has not been good for silver investing.  The volatility of silver provides opportunity for stellar annualized short-term profits through derivatives.  And short-term investing is the domain of technical analysis.  But the price of silver and gold often crash for no good reason.  Price breakouts fail, short term up trends are broken often, despite the fact that the fundamentals have not changed, and if anything, have become more bullish.  As mentioned in previous posts, that reason is price manipulation.  Some speculate that the purpose of the price manipulation is to punish speculators—to hurt the pocketbooks of the long side speculators that drive price up in the futures markets.

The only reason the macro economists that I follow can think of for the manipulation of the price of gold is to stabilize major currencies.  That makes more sense to me than punishing speculators, although it does have that affect.

The 5-year silver chart below shows the big picture.  Silver began an intermediate down trend a year ago.  There is no doubt that silver got ahead of itself in its run to $50.  A sharp correction had to happen, and did.  So far, price has corrected over 70% from its high of a year ago, even though the fundamental price drivers are stronger than ever.

There are two types of price support noted on the chart; trend lines, and previous price points.

April silver investing chart

There is price support at the $26-$27 range, which held about four months ago.  There is strong price support in the $20 range, which happens to be the price level at which JP Morgan is reported to have held massive short positions a couple of years ago.  JP Morgan still holds massive short positions in silver.

Note that the long-term uptrend line is crossing above the $26-$27 price support range in April 2012.  The 1-year downtrend line intersects that price range in about four months.  Which will prove stronger, the downtrend or the uptrend?  There is no way to know.  Furthermore, the natural course of events may be subverted once again by manipulation—huge sales of gold in the futures markets as was the case a month ago.  I think more manipulation of gold, which will also affect silver, is very likely in the next year.

Which brings us to the intersection of the downtrend line with the strong price support at around $20– about a year from now the 1-year downtrend line intersects the $20 price support range.  As mentioned in previous posts, I believe economies in developed nations are headed beyond recession and into depression.  Since silver is seen by professional speculators as more of an industrial commodity than a precious metal, when the markets recognize the probability of recession and possibility of widespread economic depression, I believe the price of silver will plummet.  I predict the $26-$27 price range will be broken.

I won’t be selling my physical silver.  But neither will I be buying more physical silver until price resumes a strong long-term uptrend.  And neither will I be going long on paper silver until after the professional speculators react to the potential of economic depression.  I’m expecting silver to trade in the $20 range when that happens.

And I’m hoping the massive short position at JP Morgan will finally be unwound at that time so silver investing can get back to its normal level of unpredictable volatility.

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Silver Investing–Chart Update

The silver investing price chart below, compliments of kitco.com, is a 1-year chart ending March 30, 2012.  It doesn’t look good if you are a silver bull.  The major trend on this 1-year chart is an intermediate term downtrend, labeled “trend 2.”   I made my last post about a month ago, the day after price closed at $35.57, fifteen cents above former price resistance of $35.42.  I stated that it was time for short-term investors to go long.  It was a very short trade.  The opportunity to make money to the upside lasted only a few days

silver investing chart

The price of silver closed above the intermediate term trend line on February 28th, 2012.  Closing above “trend 2” was a very bullish sign, especially since price did not hesitate or approach the trend line a time or two and pull back before crossing.  But all that changed drastically a couple of hours into the next trading day.

What happened?

Silver followed gold down.  That’s what happened.  But why did the price of gold drop $100 intraday and close down about $80?

It’s complicated . . .

Take a look at the 60-day gold price chart below.

Apr12silver1 Silver Investing  Chart Update

At ten AM on February 29th, 2012, Ben Bernanke, Chairman of the Federal Reserve, made public comments.  A few minutes later, the price of gold dropped about $100 in thirty minutes—and the price of silver along with it.

Market pundits concluded that it was something Bernanke said—that it was a reaction to his somewhat positive statements about the economy and interest rates.  When one is on live TV and something significant happens, one must comment.  But nothing Bernanke said or implied should have had such an effect on the price of gold.

As it happened, the price of gold swooned when a million ounces of gold was put on the market.  First, this was not real gold, but futures contracts representing a million ounces of gold.  Not many people who own physical gold seem to be selling it.  Still, a million ounces dumped on the futures market all at once is quite a lot; about $1.8 billion.

When the price of gold drops $100 per ounce, the holder of a million ounces of gold futures loses $100 million— in under an hour!   If you held a million ounces of gold futures and something Bernanke said caused you to want to close out your positions/s, wouldn’t you sell a few thousand ounces every few minutes?  Or maybe even stretch the sale out over a few days to keep the price from collapsing?

Maybe the timing was just coincidence.  Maybe some single entity that was smart enough to amass such a position was stupid enough to put it on the market all at once a few minutes after Bernanke spoke.  Not likely.  And if the million ounces was not all from a single seller, but from two or more, then it was a coordinated event.

Knowing this information makes it clear that a powerful person or persons with a lot of money wanted the price of gold to swoon.  The timing with Bernanke’s speech was an attempt to disguise that fact.

The million ounce sale took gold down, and will keep it down awhile—and silver with it.  But it was done at great cost.  It will probably happen again; maybe multiple times.  But eventually the fundamentals will win out with gold.  Then it will be silver’s turn.

The only sure short-term bet on gold and silver is that both will be volatile.

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Silver Investing—Short-Term Trend Chart and Resistance

I am a long-term bull on silver.  And when I say long-term, I mean ten years or more.  That’s ten MORE years, not ten years total. Since I have accumulated a fair amount of physical silver as part of my Wealth Insurance Policy against the probability of high inflation in the U.S. and possibility of total economic chaos, I invest short-term in “paper silver.”  For short-term silver investing, I use technical analysis rather than fundamental analysis.  My favorite “paper silver” investment vehicle is silver ETFs and options on silver ETFs.  In the past 12 months I have used SLV, AGQ, and ZSL.

My long-term and mid-term view of silver is based upon macroeconomics.  I believe that the world economy will suffer a meltdown in this decade, and when it does, there is a significant chance the price of silver will swoon.  Therefore, my paper investing is short-term.

Below is a 1-year chart of the closing price of silver on the New York Exchange.  During the short-term downtrend labeled “trend 1” I shorted silver via options on an ETF once and via a leveraged reverse ETF, ZSL, once.  I also went long silver once.  Two of the three trades made a nice short-term profit.  The third lost a little.

Silver investing chart

Look at the price chart during the last week of January and the first half of February.  Price made a top short of price resistance at $35.42.  It looked to me like it was rolling over and headed back down.  I lost a little trying to pick the top.

During the last week the price of silver has shot up and closed at $35.57, 15 cents over previous resistance.  Does this mean price will continue to move up until it meets resistance of the mid-term downtrend line labeled “trend 2”?  Not necessarily.  Some Chartists believe a close of a penny above former resistance is significant.  Many of us believe charting provides a price range.  Many things affect the closing price.  The last trade of the session sets the closing price.  Is the last trade of the session always made by a rational person?  I think not.

However, if price holds above for a couple of days, or even better, continues higher, the next resistance is the mid-term downtrend line labeled “trend 2.”  If price breaks through that, the next resistance is the former price highs in the $43 – $44 range.  It’s time for  short-term silver investing traders to go long.

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Silver Investing—Price Chart Analysis

In previous posts we have looked at a 5-year and a 6-month chart for silver investing. Recent zones of upward price resistance as well as short-term and long-term trends were identified.  Two weeks have passed, and the picture has changed considerably.  In this post I am utilizing a 1-year trend depict the price resistance and trends relevant to the next few weeks.

Before we get into the technical analysis, I want to clarify that I am a long-term bull when it comes to silver investing.  By long-term, I mean a decade or more. But I am also a short-term investor.  In my IRA brokerage account I have recently shorted silver, and expect to do so again.

This 1-year chart depicts the daily silver closing price on the New York exchange.  On it I have drawn two horizontal dotted lines depicting two levels of upward price resistance, and two solid lines that define two short-term downtrends discussed in recent posts.

silver investing chart

The first price resistance level was about $32.  On Friday January 20, 2012, silver closed at $32.20, breaking through that price resistance.  Note that on the way to $32, the short-term trend line labeled “trend line 1” was broken.  The second price resistance level is around $36. What does this mean for short-term silver investing?

I am considering making a short-term bullish trade.  I will probably trade an in-the-money call spread with a February 18, 2012 expiration date.  I like options and the leverage they provide. Another way to play it is to buy SLV, the silver ETF, and place a close trailing stop.  The problem with that strategy is that silver is so volatile that there is a good chance of an intraday or one-day price move triggering the stop.  The advantage is, if silver keeps going up to $36 and beyond without triggering the stop, profit is not limited as it is in a vertical call spread.  A leveraged variation on the SLV play is to buy AGQ instead.  AGQ is a 200% bull silver ETF. Leveraged ETFs are not designed for long-term investing, but for hedging and short-term trading.  AGQ is twice as volatile as SLV.  If buying SLV is like riding a galloping horse through rough terrain, buying AGQ is like riding a bucking bronco.

I think my written discussion has convinced me to take a small bullish position using a vertical call spread AND a small position with AGQ.  Why not invest more heavily, since price has broken the short-term downtrend and first price resistance?  Notice on the chart that “downtrend 2” intersects the “2nd price resistance” line at about the end of February.  Two types of technical resistance will gang up on the short-term silver investing bulls simultaneously.  By far, the majority of short-term traders and speculators utilize technical analysis.  This point of double resistance is not lost on them. Many may take profits at $35.

As and if price approaches $36, I’ll be watching chart development closely for an opportunity to reverse and short silver. If silver bounces off of resistance in the $36 price range, there is the possibility of an inverted head and shoulders chart pattern developing, which would be very bearish for the outlook for silver.

In the mid-term, one to three years, I believe the macro-economic reality of slowing economies will put severe downward pressure on silver because as world economies slow, industrial demand will lessen.  But in the meantime, the high volatility of silver provides an opportunity, albeit a dangerous one, to make short-term profits in silver investing.

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Silver Investing—What Happened in 2011, and How To Play 2012? Part 2

In Part 1, we considered recent silver investing price trends. Silver is currently in a short-term downtrend within a longer term uptrend.  Although not discussed, this longer term uptrend has taken place within a decade long (so far) bull market for silver.  The primary driving force of this multi-decade bull market is fundamental forces of supply/demand.  In any bull market there are price pullbacks, usually resulting from short-term changes in supply/demand, or price getting ahead of supply/demand, usually due to speculator activity.

In the silver market there has been, and probably sill is, price manipulation that causes price pullbacks.  Also, in 2011, margin requirements were raised several times, resulting in forced liquidation of long positions in the futures market.

Successful short-term investing must be done within the context of the long-term trend. I believe the bull market in silver will continue for at least ten more years, driven by inflation.  And the price bubble hasn’t even begun to form.  However, I believe there is a good chance of a price pullback to a price well below the current $29-$30 level in years 2012-2013.  In the futures markets, that set the spot price of silver, silver is still seen as an industrial metal.  When it becomes clear that world economies will not recover, I expect the price of silver to swoon because demand will be expected to drop.  What will eventually propel the price of silver upward? A price for gold that many will believe to be at scary high, price bubble levels.  When that time comes, people will turn to silver as a “poor-man’s gold” hedge against inflation.  I do not expect that gold price to be reached before late 2013, and perhaps as late as 2015.  It will take a while for inflation to hurt those who have assets to invest in precious metals, and longer still for them to realize that the Federal government and Federal Reserve cannot control it.

Meanwhile, in early 2012, I believe there is opportunity to make short-term profits in silver by shorting silver.  In Part 1, we looked at a 5-year chart.  Below is a 6-month chart that covers the short-term downtrend we looked at in Part 1.  This chart notes three forms of short-term price resistance.

The first type of resistance is the short-term downtrend, labeled “trend 3,” as it was on the 5-year chart in Part 1.  Several days have passed since the chart in Part 1 was posted, and during that time the price of silver has staged a rally.  Price has bumped against the line, but not broken it.

The second form of resistance is former support.  When price falls through support, that support becomes resistance.  As the price of silver fell, it twice found support in the $31 – $32 range in early October, and once in late November of 2011.  The October support is labeled “former support” on the chart.  If price breaks through the resistance of the short-term downtrend, it may have difficulty breaking through resistance at the price area in the $31-$32 range.

I shorted silver in early December 2011 via Proshares Ultrashort silver, symbol ZSL.  I placed a close trailing stop when price bounced intraday from a low below $27.  I was stopped out with a double-digit gain a couple of days into 2012, which is not bad for a four-week trade.

If silver doesn’t break through resistance of the downtrend line at just below $30, or the resistance of former support in the $31-$32 range, I hope to find an entry point to go short again.

chart1 12pt2 Silver Investing—What Happened in 2011, and How To Play 2012?  Part 2

If price does break through those two areas of resistance, there is additional resistance in the $35-$35.60 range.  This resistance is labeled “former resistance” on the chart.  Three times over a two week period, price tried unsuccessfully to break through this price range.  If price approaches this range, I will be looking for failure to go higher and an opportunity to short.

I want be clear, I do not advocate selling physical silver purchased as a long-term hedge against inflation or insurance against economic calamity.  I haven’t sold an ounce of mine.  However, I believe lack of economic growth, and therefore industrial demand, will keep a lid on silver prices in the short to medium-term.  “Paper silver” prices will remain under pressure and limit short-term silver investing to the upside.

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Silver Investing—What Happened in 2011, and How To Play 2012?

Silver investing was the proverbial “Place to be” in early 2011.  In early 2011 the price of silver hit a new all-time high just shy of $50 an ounce.  Then price dropped sharply, leaving silver at a loss for the year. Did the silver bubble burst in 2011?  Many say it did.

Before I get into technical analysis, I’ll point out that in my observation, the price of physical silver has not fallen as much as the “paper” price of silver.  I cannot buy physical silver for spot price, as I often did during 2010 and early 2011.

The spot price of silver is determined by the futures market, in which total open contracts represent 100 to 200 times as much processed silver as physically exists. The futures market was established to provide sellers and buyers a market in which they can buy and sell commodities at guaranteed prices. Speculators provide the liquidity (the guaranteed price in the future) that all markets need to operate–and speculators take the risk.  For various reasons, those who owned paper silver sold in droves.  But those of us who own physical silver are not letting it go so cheaply.

If you are familiar with technical analysis at all, you know that “The trend is your friend.” Let’s define trend.  An uptrend is defined by higher price highs and higher price lows. When drawing trend lines on a chart, the slope of an uptrend is defined by a straight line drawn through the low points for the period of time being considered.

A downtrend is defined by lower price highs and lower price lows. The slope of a downtrend is defined by drawing a straight line through the high points for the period of time being determined.

Consider the five-year silver price chart below. I have drawn three trend lines; the longest labeled “trend 1.”  Trend line 1 depicts a nice steady uptrend that covers almost two years. Then, in Q3 of 2010, “trend 2” begins. The upward slope of trend 2 is much steeper than trend 1.

silver investing chart

In early 2011, the price of silver shot up steeply for about three months. Then it crashed; turning almost straight down for two weeks. We then had a recovery, and then another crash, during which the price of silver broke the short term trend line 2. In the middle of 2011, a new short term trend began. That trend is down, as depicted by “trend 3.”

An uptrend line often acts as price support when price is above it (note the number of times prices touched or approached trend line 1 and “bounced” back up). A down trend line often acts as resistance when price is below it.  At the beginning of 2012, price is below the downtrend line 3, but above the long term uptrend line 1.

I have extended trend lines 1 and 3 off the end of the chart, into the future. Down trend line 3 will act as resistance, and uptrend line 1 as support.  Obviously, price must break one of those two trend lines on or before that future date. Which is it likely to break?

Remember, short term trends occur within long term trends. Trend theory holds that longer term trends are stronger than shorter term trends. Also, the fundamentals that propelled silver into this multi-year uptrend remain in place.

Odds are, the longer term trend line 1 will hold.

Despite what the silver bears say, there is no price bubble.  Therefore, the bubble did not break in 2011.  There will be a bubble, but it will be several years before it forms and gets into bursting territory.

I own physical silver, and have sold none during this price drop. I look on physical silver as insurance against high inflation, which I am confident is coming, and against the risk of economic chaos, which I am pretty sure is coming.  I have not bought more silver because I think mid-term (1-3 years) fundamentals factors may take the price lower.  But that is another discussion

I also invest in “paper silver” in the stock market via ETFs and options. I was short “paper silver” in late 2011, and made some money.  There may be another opportunity or two to short silver before it take off to new all-time highs.

For silver investing ideas on how to play silver in these volatile times, see part 2 in a couple of weeks, with an updated chart.

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The Five Whys of Silver Investing—Part Two

In part one the first two “whys?” were listed and explained.  In part two, the final three will be covered, as well as the solution to root cause.

3.  Why will the price of gold explode upward?

Because of widespread fear of runaway inflation.

Inflation has already started. Inflation in India is running about 9%.  The official inflation rate in China is about 6 %, but the actual rate is much higher. The Chinese government, like the American government, keeps adjusting the official measurement.

In America, the number most often quoted is the core Consumer Price Index (CPI), which does not include food and energy. Core CPI is running 2.4%. What consumer doesn’t eat or buy energy? The CPI has been modified so many times the past 40 years that it doesn’t resemble its original form at all.  Measured as it was in 1970, year over year inflation in the U.S. is running seven to eight percent in the fall of 2011.  Those who do food shopping on a budget know.   The ingredients for Thanksgiving dinner for four in 2011 cost 13% more than they did in 2010.   That little fact is based on average prices in 135 American cities.

4.  Why will there be widespread fear of runaway inflation?

Because rising, out-of-control inflation will soon be a reality and obvious to all.

Inflation cannot be hidden and “adjusted” away much longer.  The more observant and analytical amongst us already see inflation and are quietly converting assets to gold and silver. In the 1970s, the annual inflation rate in the United States ran 15% to 18%.   The price of gold shot up from $35 an ounce to about $850 an ounce in a few years.   During that same time period, the price of silver shot up from a couple of dollars an ounce to almost $50 an ounce.  After allowing for inflation since 1980, neither the price of gold nor the price of silver has yet reached those highs.

The middle class in America is already beginning to pull their retirement savings out of the stock market.  Much is going into the bond market, which already has a real rate of return of less than zero.  Ten year U.S. government bond pay about 2% a year.  But the real rate of inflation is 7% – 8%.  Those who buy 10-year bonds are losing at least 5% a year.  Of course, those who are holding cash are losing at least 7% a year in buying power.

5.  Why will there be rising, out-of-control inflation?

Because The Federal Reserve, and other central banks around the world, have printed unprecedented amounts of currency.

In fact, this is the definition of monetary inflation – the creation of money without the corresponding creation of assets.  As economies grow and more assets are created, more currency is required to keep the wheels of commerce turning. However, when more currency is created than assets, the result is monetary inflation.  The Federal Reserve Bank of the United States has created some two trillion dollars in the past three years, even though the U.S. economy actually shrunk.

Monetary inflation has already happened in the U.S., Japan, China, and Europe.  All countries have created much more currency than is required.  It takes two to three years, depending on the level of commercial activity, for monetary inflation to be felt. Monetary inflation took place three years ago as the result of the TARP program at the end of the Bush administration is being felt now (7% – 8% real rate of inflation in the U.S.).  Since President Obama took office, the rate of increase in the money supply has tripled.  That inflation has not yet been felt.  The real rate of inflation will hit double digits.  And even when the government adjusts the CPI measurement again, more people will begin to realize we’ve been duped.

The Root Cause is printing of money to the tune of a 300% increase in the U.S. money supply in a 2-1/2 year period.

The solution, pull the money out of circulation.  But the U.S. government is experiencing annual deficits of $1.3 trillion.  To be able to reduce the money supply, the federal government must cut its budget by more than $1.3 trillion per year.  AND—the surplus must be taken out of circulation.

Any congress that cuts spending by over $1.3 trillion a year will be voted out, and they know it.  Root cause will not be remedied.  5) The money supply of the U. S. will not be decreased by $2 trillion.  4) The monetary inflation that has already occurred will continue to manifest itself in the economy.  3) Real, rising inflation will cause fear of runaway inflation.  2) Fear of runaway inflation will result skyrocketing gold prices.  1) Investors will turn to silver, poor man’s gold, and the ratio of the price of gold to the price of silver will return to historic levels.

How long for this silver investing scenario to play out? My best guess is four to ten years.

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The Five Whys of Silver Investing—Part One

I worked in the manufacturing industry in the United States for 30 years. My first job after dropping out of college was machinist trainee. Ten years later I earned a Bachelor’s degree in Operations Management while working full time as a lower level manager in a 1,700 employee operation. Twelve years later I earned an MBA while working full time as a high level manager.

A couple of years after earning my MBA I made Vice President. Since I worked in multiple industries and worked my way up from the bottom, I gained a well-rounded perspective of U.S. manufacturing.Early in my career Toyota began exporting cars manufactured in Japan to the United States. Some of the country’s “best” manufacturing companies were put to shame.  Toyota offered better quality at a lower cost even though Toyota had to import steel to Japan and pay to ship autos across the Pacific Ocean to the United States. For about ten years most U.S. manufacturers made excuses. But a few learned about what has come to be called the Toyota Production System (TPS).

Everyone who has managed in a progressive manufacturing industry knows something about TPS. One of the most memorable lessons Toyota taught U.S. manufacturers is to “Ask why five times” to get to the root cause of a problem.  If you ask why only a couple of times, you get symptoms of the problem, or symptoms of a symptom. Unless the root cause is determined and remedied, the problem cannot be solved. The tremendous opportunity we have in silver investing this decade is the result of a problem. What are the chances of that root cause being discovered, remedied, and spoiling the tremendous silver investing opportunity?

1.       Why does silver have such tremendous upside potential? The ratio of the price of gold to the price of silver will eventually return to historic levels.

The ratio currently stands at about 50:1—that is, an ounce of gold costs 50 times as much as an ounce of silver.  For 200 years the ratio fluctuated in a range of 15:1 to 20:1. That makes a lot of sense when you know that the earth’s crust contains about 16 to 17 times as much silver as gold.  Over 200 years ago, people did not know this.  Geology had not evolved to such a high state. However, supply/demand forces resulted in an average price ratio of about 17:1 for over 200 years.The ratio has been as high as 100:1 the past 20 years.  I think it may get there again before beginning a swift return to a historic ratio.  It may go even lower– to perhaps 10:1. In short, I think the price of silver will plummet while the price of gold increases when the world realizes the recession of 2008 is merely the beginning of a worldwide economic depression of the magnitude never before seen.  The price of silver will drop because silver is thought of as more of an industrial metal by those who control short term prices through the futures markets where open interest equals 100 to 200 times the amount of actual physical silver available for purchase.

2.       Why will the gold to silver price ratio return to historic levels, or less? Because when the price of gold explodes it will be out of reach of the middle class.

Gold has great potential.  But silver has greater potential because when people turn to silver as a “poor man’s gold” the still high price ratio will be justification for buying silver at what will seem like outrageous prices.  Until the historic ratio is again reached, silver will be considered underpriced relative to gold.

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Silver Investing—Decoupling of Precious Metals Price Movements from the Markets

The gold market is showing signs of decoupling from the American stock markets. Coupling refers to the fact that for many years, the price of gold has moved with the markets. Markets up—gold up. Markets down—gold down. And silver generally moves the same direction as gold. It is no secret that gold has moved up much more the first decade of the 21st century than the U.S. market indexes, but the correlation in price direction held very well on short term moves.

The reason for the coupling is that the stocks and gold are deemed risky, while bonds, especially U.S. government bonds, are deemed safe. When markets are perceived as risky, money flows out of the markets and gold and into treasuries. The decreased demand for gold and stocks results in a price decrease for gold and stocks. The increased demand for bonds results in a price increase, and a yield, or interest decrease for bonds.

In the late summer of 2011 the U.S. markets pulled back about 10% from recent highs. Volatility increased also.  However, the price of gold did not follow stock prices nearly as often.  As the indexes etched a chart pattern of lower lows, the price of gold etched a chart pattern of higher highs. During this time period U.S. Treasuries did very well, indicating that many still viewed them as safe. The fact that gold did well also indicates that more investors now view gold as safe. It doesn’t take many, because as an asset class, the gold market is very small compared to stocks and bonds.

How about the precious metals of platinum and palladium? These are industrial metals. By far the largest demand for these metals comes from catalytic converters in automobile engines. Therefore, these precious metals are tied to automobile production, which is tied to the economy. I believe the developed world will suffer a deep and long economic depression this decade and into the next. If that happens, demand for platinum and palladium will decrease, and so will price. They will remain coupled to the stock market.

Now for silver, the other precious industrial metal. Industrial demand for silver is much, much higher than that of gold. It is the combination of this high industrial demand, low supply, and the fact that price has been manipulated lower for two decades that leads me to believe that over the long-term; the price of silver will outperform the price of gold by about three-to-one from current prices.  However, as world economic conditions get increasingly worse, the price of silver could suffer for a period of time. In the short term, it is short term expected demand, that has the greatest effect on price. Industrial demand will shrink. Also, I am not at all confident that the price manipulation is over. That one-two punch could push prices into the cellar. I hope it does. I’ll convert gold bullion to silver because I buy silver bullion for the long haul.

On the other hand, the estimated value of all the silver above ground is only about $35 billion. Compare this to gold at around $10 trillion.  The tininess of physical silver stock makes price susceptible to manipulation. But it also makes it easy for investment demand to overpower decreased industrial demand and manipulation. If just a few billion dollars of physical silver was purchased and pulled out of circulation by investors who intend to hold for the long-term, there will be a real physical shortage for industry.

So which will it be? Long term depressed prices, or short term depressed prices?

If world economies merely slide into depression, I think the former scenario will hold; the price of silver and stock prices will fall while gold rises (decouples completely). However, if economies fall off a cliff, the latter is more likely. The price of silver may be confused for a few days, but will then follow gold up. Silver decouples and will then be driven by investment demand, not industrial demand and manipulation.

Even though I believe the most likely scenario is depressed silver prices for months, I’ll hold the physical silver bullion I currently have. But it’s time to lighten up on “paper silver” – mining stocks and stock options. There is no need to take the risk when “paper investments” in gold are less risky.

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Silver Investing—The First Big Pullback of 2011 and How to Play It

On April 29th, 2011, the price of silver finally hit a new all time high of almost $50 a troy ounce. Not since early 1980 had the price of silver passed $49 per ounce. The three weeks following the 2011 new high, the intraday price dropped below $32, a 35% pullback. How much more will price drop? Are the analysts who have been saying the price of silver and gold are in a bubble since the price of gold broke $1,000 right? Will the price of gold and silver drop to multi-year lows and stay down for decades as when the 1980 bubble precious metals burst.

I don’t think so.  Consider this: Even if you use the U.S. government’s suspect numbers for inflation, the 1980 peak price of silver was about $112 “2011” dollars.  And today’s U.S. currency issues are much more serious than those of the 1970s. The price of silver was in a bubble in 1980, but we are nowhere near the inflation-adjusted price of 1980.

Regarding the U.S. currency issues, I believe with 99.9% confidence that the worst is yet to come. And that means the best is yet to come for silver investing.

If you have long term silver investments, such as silver bullion or coins, silver mining stocks, or ETFs, don’t worry.  Just hang on.  Likewise, if you own 2013 LEAPS on silver equities or ETFs, hang on.  If you hold a leveraged ETF, such as AGQ, Proshares Ultra silver, you lost big time, 66%, over the course of the 3-week (so far) pullback. I don’t think price is going much lower.

I expect a sharp recovery because physical silver is beginning to be in short supply. But there are charges of manipulation in the futures market circulating again. If correct, that action could keep price down through the summer. Leveraged ETFs are designed for short term trading; days or weeks at best. Slippage occurs in sideways price action. If you still own leveraged silver ETF and price doesn’t recover quickly, you could lose even more. On the other hand, if you sell and there is a sharp recovery, you miss recovering a big part of your paper that resulted from the pullback. I advise holding for the long run. When the price of silver approaches $50 again, place a trailing stop on your leveraged ETF; or a portion of it.

If you own relatively short term call stock options on silver mining stocks or ETFs, you paid a stiff premium, unless you bought a very deep-in-the-money strike price. If you did not buy a very deep-in-the-money strike price, the deterioration in premium over time will kill your profit potential. The only chance of recovering a good portion of the paper loss you have at this point is for a sharp and complete retracement to the $50 price level or above. Sell now.

If you own vertical call spreads, you might buy back the short side of the spread at a big profit whole the price of silver is depressed, thereby offsetting the paper loss you currently have on the option that represents the long side of the spread. That action leaves you with a call option, possibly a short term one. Why wouldn’t my advice above to sell now be appropriate? Because you have recovered much of the loss suffered on your remaining option by buying back the short side of the spread. A quick recovery in price could result in recovering the remaining net paper loss, or even result in a profit.

Another strategy, if you also own gold, is to convert gold assets to silver assets. The gold to silver ratio when both gold and silver were at their all-time highs in April was about 31:1. The price of silver pulled back much more, on a percentage basis, than the price of gold. The current ratio is back up to 43:1. If you believe that the ratio will eventually return the historical ration of 17:1 or lower as I do, now is a great opportunity to shift investment assets from gold to silver.

This deep price pullback is a great silver investing opportunity. The short term silver investing is very tricky. But long term—it’s just a matter of time until silver price explodes.

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