Silver about to break $20 and looking better than gold
Posted on 14 May 2010 with 4 comments from readers
Go back to the 1970s and the last precious metals boom. In the late 1970s gold prices rose eight-fold and silver by a factor of 25.
Fast forward to today and you have ArabianMoney editor Peter Cooper publishing a book predicting a rise in gold prices to $5,000 as the world goes through something like a re-run of the mid-70s.
Then as now a massive credit expansion produced a huge bust in property and then stock prices, and governments reflated to counter the downswing.
Inflation not deflation
Inflation resulted after the initial price deflation, although stock and real estate prices stayed low, and bond prices fell. Even gold prices took a nasty tumble in 1976 as they did in late 2008 but then came the spectacular 1979-80 blow-off in precious metal prices with gold at $850 and silver at $50 an ounce. Is that final spike about where we are today, only to far higher price levels?
Note that silver is the only commodity in the world not to have passed its previous all-time high, and that was set three decades ago now. So will history repeat itself again?
If we look at what has happened to house prices and stocks (about due for another dip if 70s volatility is any guide) then things do look very similar. Governments have also been taking desperate measures to counter the financial crash, and signs of inflation are already emerging in places as far flung as China and the UK.
The next shoe to drop will surely be the bond market as it was in the 70s. Interest rates rocketed in the late 1970s and that is bad for bond prices. Today governments around the world need to borrow a lot of money to finance their deficits and the markets are going to exact a higher price for that money.
As real estate, stocks and bonds cease to be attractive investments then that leaves the precious metals as a store of value. The silver market is much smaller than the gold market and in the 1970s became cornered by the Hunt Brothers, forcing the price through the roof until the market rules were changed and the price slumped.
It could be different this time but actually the huge short positions in the silver market are already there and a very similar kind of spike to the upside is built into the market as it begins to achieve traction. That could happen very soon with silver up $2 in the past week or so.
Caveat emptor
However, life is never that easy for investors. Silver is volatile and fell by more than gold in the 2008 sell-off. Will this happen again if industrial commodities fall due to margin calls in a falling stock market? And it was this liquidation of the carry trade that brought precious metals down in 2008.
You cannot be sure. Then again if you do not invest now you might miss the best price levels. For the market cycle has moved on since 2008 and investors are not so highly leveraged and therefore may well not have to dump their gold and silver in a crash.
Indeed, most instability is likely to come in the currency and bond markets next and this is precisely where precious metals have their greatest strength as real money that cannot be devalued by the printing press. Ergo the best is yet to come for gold and especially silver.
4 Comments posted by readers:
the problem is that silver is not recognized in the gulf,, you cannot buy and sell it like gold, and there arnt any silver coins in the region, if any one knows a place where to find silver bullion let me know,,, silver is also cheap,, and u cant lose any thing if you buy now,, and not to forget that Chinese people will be investing in silver,,,, thats a billion reason hold if it do drop,,,,
Ed Note: Buy the SLV exchange traded fund through any online brokerage account. Silver is too bulky to store. The coins are relatively cheap but gold is far more popular in the Gulf.
Silver bulky? It is only bulky because it is still very cheap. Would it still be bulky at $500/oz? A kilo of silver is about the size and thickness of a iPhone and yet still cheaper than the phone (can someone say instrinsic value). A medium sized safe should be able to store all the silver required for an investment holding, a socks draw more than big enough for a very rainy day.
Avoid SLV As Though It Has the Plaque:
There are many reasons why investors should not purchases shares in the Exchange Traded Fund (ETF) called iShares Silver Trust (SLV). I’ve listed only a few here.
1. This ETF, SLV, is nothing but a sham, led by JP Morgan (JPM), who is also the biggest short seller of silver on the planet. At the current time, the NY bullion banks are “net short” over 319 million oz. of silver, and over 70% of this amount is held by JPM.
2. The Custodian for iShares Silver Trust called “SLV” is JP Morgan; if that isn’t a gross conflict of interest, I don’t know what is! In addition, according to Ted Butler, the ETF SLV is “owed” millions of oz. of silver, but from Feb 2010 through early May 2010, JPM has not added any silver to the SLV’s holdings.
3. In addition to large short positions in “paper silver”, JPM shorts SLV, so that they don’t have to add physical silver to the ETF’s holdings. Where’s the fiduciary responsibility here?
4. SLV’s performance (whether short term or long term) is poor, when compared to the price of silver
5. The GLD and SLV Fraud:
Consider the apparent failure on the part of the two largest precious metals exchange traded funds (“ETFs”) to disclose material information to potential investors regarding:
• Custodian Conflicts of Interest
• Market Irregularities
• Market Manipulation
• Leased Bullion
• Role of ETFs in Commodities Market Pricing and Trading”
Bottom Line:
Buy physical silver and gold; SLV and GLD are nothing more than paper derivatives of the real commodity.
Ed Note: True, perhaps – but GLD holds more gold than China. Still a highly liquid way to hold gold and silver and far more convenient than the physical metals. But for large amounts of money a vault is the safest place to hold precious metals.
GLD does NOT hold more gold than China. It holds more PAPER GOLD. The difference will be made clear in the next few years.