Silver Speculators: Keep Your Eyes On The Prize

February 13, 2014

The reasons for owning physical silver are many. Silver is a real asset that stands outside the banking system and therefore has no counterparty risk. If you lived through 2008 as an investor and don’t know what the term counterparty risk is, you aren’t doing a very good job diversifying your assets. Likewise, with recent discussions of the bank bail in concept, silver is a private asset, one that you can sell on your own terms. Related to silver being a private asset, the white monetary metal is also an item useful for barter. No one wants to live in a bombed out, destroyed, hollowed out shell of world—but at the same time, what we want in life and what we get in life are two separate things. Being prepared is the motto of anyone watching the horror show that is the global economy of late—and while there are many ways to be prepared, owning one of the oldest and best recognized monetary metals is a good start.  Besides those who view silver as a necessary part of the survivalists took kit, there are those who gravitate to silver as a form of peaceful political protest against a system that has let them down. For some, this may be the most idealistic of reasons to own the white metal.

But in a world of zero percent interest rates, and where many are just too scared to park vast amounts of money in a bond market that has been appreciating for decades, precious metals like gold and silver are also a new, alternative speculation whose time has come. Thinking outside the box is a necessity in the current global war on savers, and real assets like silver certainly fit the definition of thinking outside the box when so few people own the white metal. Those who buy silver as a speculative investment are not necessarily committed to silver as money, not necessarily waiting for the apocalypse, and they certainly haven’t put all of their eggs in one basket—precisely the opposite, they understand the power of diversification and the possibility that even a small amount of silver has to make you very happy as an investor.

Although the silver speculators may have survived the carnage of 2013, at the same time they may also be wondering whether or not the current countertrend rally in this space is simply a rally within a secular bear market-- where they will need to get out relatively soon before silver heads lower once again. I would rather make the case that what we endured in silver from 2011 to the present was simply a very long interlude within an existing secular bull market. But as with all speculations, it is important to keep your head clear, remain calm and not get caught up in the daily prognostications, or other noise out there that may dissuade you from sticking with silver for the long term.

Inflation is the Policy Goal of Central Banking

Anyone with even a passing familiarity with monetary and banking history understands that the paper currency emitted by central banks is constantly being debased. It doesn’t mean the world is going to end, but it does mean that you have to pick the right assets to own aside from bank accounts or short term bonds in order to benefit from what central bankers constantly do to a nation’s currency. This past week in testimony to Congress the new Fed head, Janet Yellen, seemed to once again reaffirm the commitment of policy planners to deliberate plans at inflating away debts. She believes, as do many other academic economists, that they must aggressively try to inflate asset values in the hopes that it will trickle down to the great unwashed masses. They forget that the use of inflation is a very blunt instrument—one that may keep the credit expanding house of cards going at the same time that it punishes people who spend most of their income on basic necessities. The central planners also like to ignore (on purpose?) how their policies disproportionately favor those nearest to the fonts of credit creation—like other bankers—and that the vast majority of people in the western world own few assets that benefit from this credit creation.

You may hear from some sources that stocks are the primary beneficiaries of this process of inflating asset values—and that was certainly true last year. But if, as is likely to happen (because it has happened several times before) that the central bankers’ efforts to generate inflation too quickly spill over into commodities or other real assets like gold or silver, you could easily see substantial upward moves in physical silver prices. You should pull up a chart of what silver did in the 1970s as an example. You might also want to remember what the white metal did before the 2008 crash, when oil was pushing toward 140 dollars a barrel.

Silver Stocks Screaming Higher

But there is another way for silver speculators to benefit from central bankers’ misguided efforts to spark significant inflation—and that is with the silver stocks.  Personally, I favor the SIL ETF, which is a good basket of small to large silver mining and streaming companies. These stocks were pounded into oblivion last year for all sorts of reasons relating to how fearful the market was of perpetually lower silver prices, to concerns about cost overruns. Some of these concerns were justified as too many mining executives got sloppy with acquisitions and underestimated just how hard it is to profitably mine precious metals (or any metal for that matter.)

Also, many bullion investors, responding to all of the fears arising from our global financial crisis treated the mining stocks with disdain, refusing to own paper promises on future production streams. This strategy seemed smart over the past several years. But with investing, nothing remains the same for long. The same mining executives who couldn’t control costs a few years ago may have learned some lessons, and the speculators who were convinced that these shares should be shorted all the way to zero-- because they were convinced that gold and silver would keep collapsing-- are also learning a lesson as we speak. 2013 was a one-off event in terms of the ability of Wall Street paper pushers to try to bomb the precious metals into the Stone Age. Just take a look at gold demand out of China as a potential clue as to where price is heading soon. This is all the more true if the Indians ever get back in the game in terms of gold purchases.

While the gold and silver shares (many of which are up over 30% in just the last six weeks) may be in for a needed pause soon, don’t count them out. And for those speculators who are doubting whether this rally is the real thing, remember the long term fundamentals underpinning what is still a long term bull market in silver.


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Peru became the world’s largest producer of silver in 2012.

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