Silver and What I Look for in Contrarian Investing
Some outstanding points are made in the Puplava article.
Just want to mention a few before my brief thoughts on contrarian investing:
Dow/Silver ratio bottomed in 1980 at 18 to 1 which means that it took 18 ounces of silver to buy one share of the Dow. At the peak recently in silver it took an unbelievable 2,526 ounces of silver to buy one share of the Dow !!!
The Dow/Silver ratio has clearly turned down in favor of silver, but still stands at an incredible 1,938 to 1.
The average ratio over 100+ years at the bottom was around 80 to 1, so for silver investors this indicates tremendous upside and this is what Russell was referring to recently in his commentaries on silver !!!
Another ratio is the Gold/Silver ratio. It is currently at 73 to 1, meaning it takes 73 ounces of silver to purchase an ounce of gold.
This ratio bottomed in 1980 at 16 to 1. Richard Russell has stated publicly many, many times that he believes the price of gold is headed to $3,000/ounce. You can do the math, but one subscriber sent an email to RR which was published indicating that gold at $3,000 and a Gold/Silver ratio of 16 to 1 would put silver at $187.50/ounce !!!
The Gold/Silver ratio historically has been at a ratio for many thousands of years of around 12 to 15 to one.
The United States had literally billions of ounces of silver stockpiled after World War II. As the Chairman and CEO of Pan American Silver wrote to RR the other day (which was published) the massive "strategic stockpile" which the United States possessed after World War II is now completely gone and stands at "ZERO."
COMEX inventories which stood at about 330 million ounces in 1980 are now down to 106 million of which over 60 million ounces are already spoken for by investors.
Above ground stockpiles which were around 2.5 to 3 billion ounces in 1980 have been reduced according to all documented sources (which RR mentioned) to only 500 million ounces of above ground stockpiles.
We have been running documented deficits for over 14 years and this is why these stockpiles have been disappearing and are near crisis levels.
Richard Russell was correct in saying the world will run out of above ground silver in 5 years or less, as the average deficit has averaged well over 100 million ounces/year.
This silver is consumed and lost forever. Just one example of this is when your computer keyboard ends up in the dump eventually, the 12 cents or so of silver are not economically feasible to retrieve, so it is lost forever and will never be recovered. There are many, many other examples which I will not go into, you get the idea.
Another ratio is the Housing/Silver ratio which over the last 100+ years peaks at around 20,000 and bottoms at an average of 5,000 (3,000 in 1980).
What that means is that at the peaks it typically takes 20,000 ounces to purchase a "median" priced home. Today the average home purchased in silver stands at an amazing level of around 50,000, meaning it takes around 50,000 ounces of silver to purchase the "median" priced home !!!
A final point is that the lag times on new mining for silver is around 5 years so it won't matter if the price spikes significantly because it takes an enormous amount of time to get new mining projects under way. Any increase of silver mining on existing projects would negligible and not worth discussing in my opinion.
Those are the facts and those are the types of things I have always looked at as a professional investor/trader in order to make profit.
In summary it is quite obvious to me that those ratios are way out of whack and will cycle back down the other way (where they have typically bottomed) and I will be moving capital allocated to silver investing out of silver at that time and into some other type of investment which will be unloved (out of favor) and which the ratios will favor at that time (such as real estate and stocks).
On a final note I remember when I was buying up substantial chunks of oil stocks (primarily drillers) back at the end of 1999, early 2000.
One of the things that fascinated me was the way all of the insiders I talked to seemed to think the price of oil was going lower. I remember at about $11/barrel for oil the Venezuelan Oil Minister was in Florida at the time telling people he saw $2 to $3/barrel in the future for oil.
As I said I was talking to insiders at major oil companies who knew I was investing very heavily in their stocks and they were asking me, "Where do you think the price of oil is headed?"
I would answer them by saying, "I am not an oil trader, but it looks to me looking at 100 year charts for the price of oil that it is headed for $35 to $40/barrel of oil."
There were many other bullish factors which I will not get into which later revealed themselves.
I'll never forget the CFO who was with the # 2 land driller for 28 years responding by saying, "You are alone on an island with that prediction."
Within 12 months of that conversation in early 2000, oil skyrocketed in price (faster than I expected) to the $35 to $40 area.
That particular stock PTEN eventually traded from 2 5/8 to around $43/share.
Others I had loaded up on such as OIL (now merged) went from a low 5 1/4 (yes I was filled there for some of my purchases) to about $50.
There were many others I had, but the point I am trying to illustrate is those are the types of contrarian plays which have been successful for me and greatly increased my net worth.
For the record I always sell too early, sometimes way too early (smile).
People don't have to follow me on silver, I just wanted to give some of the types of things which I look for when investing/trading (because I will also trade while holding my core positions).
There are so many ways for investors to make money in the world markets, but I have repeatedly mentioned silver on this board because it seems so very obvious to me.
I don't know where the price of silver is headed, but rather will look at the ratios to determine my sell points, as well as fundamentals.
For what it is worth it is generally always worth while to go against the herd (smile).
July 21, 2003