Should We Sell Silver? Is it Going to Fall?

If you are the busy type and enjoy concise and direct information the answer is: No and maybe.

In order to fully comprehend the art of selling, you must first understand why you bought in the first place.

The Long-Term

As a long-term buyer, I base my investments on sound fundamental principles, I am patient to see my gains and I hold as long as those values remain in place. I am not a trader and thus I don’t have the ability nor the interest to profit from short-term small-return trades.

I will sell when I rationalize that (a) the value of silver has become limited and the risk has turned to the downside or (b) I find a potential investment with limited downside and greater potential.

I see none of these two elements in silver at the moment and as a matter of fact I believe that we may still see some strong gains, even in the short-term.

Supply and Demand

I find it hard to sell an asset when these two aspects remain relatively unchanged. There is still much concern of a silver shortage with limited new supply to meet industrial demand as well as the increase in investment interest that will most probably lead to higher prices.

This demand has been limited as only recently have major mining companies began to de-hedge their operations. In addition Jewelers who have been reluctant to buy forward into this market as they have become so accustomed to selling forward. These companies are well aware of their actions, providing the market with the assumption that this bull still has legs.

Furthermore only recently have some financial institutions and funds stated that they have opened some interest in the precious metals and commodity arena. Nevertheless the premise seems both limited and cautious, as many of these same funds see much short-term volatility. This is reflected even as Lehman Brothers suggested buying long-dated futures showing that the only gains to be made are over many years.

The Short-Side
I have no recollection of any institution of any sort being short millions of shares as the Dow was making new highs in the late 90s yet as silver merely has broken out of its multi-decade bear market there is in excess of 250 million ounces short in the market a total of nearly 25% of the contracts on the futures exchange. These are most probably a just insurance policy being held by commercial companies against any possible collapse in the price of the metals. Should the price of the metal rise there would be more than adequate profit to cover their positions. Nevertheless the size of the short side alone exposes a sense of skepticism in the market.

The Ratios
Many if not most traders refer to just about everything, commodity, asset or equity in terms of its dollar ratio. Hence Gold’s ratio is 975 dollars to every ounce or 1:975. Precious metals investors on the other hand often refer to prices in its intrinsic form. One such ratio is the Dow/Gold ratio which divides the most prominent public companies with a measure of gold. This ratio has fluctuated between 1 and 30 over the past 200 years.

The Dow/Gold has been declining since late 2000, falling from a multiple of 40 to a current 13. This would place us at about mid-term with regard to this commodities cycle. With earnings declining and interest in the precious metals rapidly increasing it can be assumes that this trend remains intact and that only a lower multiple will scare investors away.

There is much discussion as to what effect an an economic downturn has on commodities. There are three general misconceptions that may be had. (1) While recessions may or may not limit demand they will most probably weigh down on producers, thus even if demand falls it would have to fall faster than supply falls to make an impact. (2) Those who have since invested in the precious metals have done so on a long-term basis considering any short-term downturns, thus most have already discounted the effect of a recession. (3) If history may be of any guide we look at the business downturn of 1973-75 (one many economists equate to our current woes) which saw a general rising in precious metals prices throughout with silver in particular rising from $1.50 to over $6.25 an ounce, with the $3-6 rally rising in a steep vertical line, with the recession practically non-existent.

The Bubble Theorists

A friend of mine just quoted an article he had read stating that we are in the midst of a “Commodity Bubble” that will burst near year-end. I sympathize for two reasons. Either my dear friend does not understand the writer’s intention, or the writer himself has no understanding regarding the nature of markets.

One thing for sure: This is no Bubble. A temporary top or a correction? maybe. But a Bubble it is not and here’s why.

A “Bubble” requires exuberance, speculation, fearlessness, unfounded price gains coupled with future expectation none of which has been witnessed as of yet in any commodity (including Uranium).

It cannot be predicted – not in it’s formation (which often comes as a result of irrational expectation of future price gains) nor in its demise (which comes as a sudden surprise to many with unfounded perceptions).

In today’s world of rapid change any such thing that rises more than any one person’s expectation is immediately labeled a bubble and shunned regardless of rational analysis or true value. True speculators care only for price and not for value. They will undervalue an issue with all the right properties and overvalue even the most worthless piece of paper.

Two mindless mistakes: (1) Many buy on time but sell too early frightened of a possible decline, thus capping their potential gains, and justifying their actions by warning others of an impending collapse. These claims are often unfounded. (These are often the same folks who run back in showing up too late for solvency). (2) They extend their losses by reasoning that if they have not yet bought till now there is probably little to gain and that the decline is close at hand. (Many of these spectators end up throwing in the towel towards the very end interested in getting one good piece of the action).

Meanwhile the Dollar and continues to decline, and even as interest rates begin to rise there will have already been unbelievable pressure built into the inflation predicament.

Excessive optimism is nowhere to be found as the highest mainstream expectation for gold has nearly reached at $1000.

We will most probably witness a price correction over the next few months (My guess is late April) but will be nothing less than a buying opportunity – one that will be missed by many.

I do believe that the prudent investor should begin accumulating a significant “cash” (something other than precious metals) position in preparation for such a downturn.

Continue buying silver under $22.


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