Why Should I Buy Silver?

February 6, 2014

Standing apart from herd is a difficult thing to do. Even more difficult when that herd-- at present-- has every reason to celebrate seemingly endless news highs in the stock market, an invincible market, it seems, that will forever be held up by central bank money creation.

Those who invest only with the system-- for example by owning solely brokerage accounts, residential real estate, and bank accounts, like to dismiss gold- and especially silver investors- as some sort of combination of wild gamblers, doomsday nuts, or charlatans. The conventional take on silver investing is that it is unnecessary, that whatever deflationary threats out there will be met head on by our central planning masters and that whatever inflation gets created will always first and foremost go into financial assets like stocks-- and not into real assets like precious metals. To many, the upward trend of conventional asset markets- particularly stocks-- appears unstoppable.

And so it seemed in 2007, 2000, 1987, 1929, as well as other times, I might add. This time is never really different, but I also have to admit that timing markets is nearly impossible. If I knew exactly, precisely when this stock market was going to roll over I would be somewhere else right now. Without being able to bet actively against the conventional stock markets, let me just remind those overconfident in the infallibility of the central bankers that sometimes unconventional, underowned, and underloved investments surprise people. In other words, sometimes it pays to bet against the herd. 

I shouldn't have to remind readers with a broader, deeper understanding of monetary history, that diversification does not only consist of some combination of paper assets in a brokerage account. During the 1930s, holders of gold stood tall while banks went under, stocks crashed, and governments devalued with abandon. Fast forward to the 1970s, and a similar story unfolded, though this time owners of precious metals' investments were the beneficiaries of inflationary, rather than deflationary threats. The precious metals far outperformed stocks in that decade.

The bull market in gold and silver during the 1970s, by the way, took gold briefly up over 20 times and silver up over 30. If one were to overlay the precious metals bull of the 70s onto the one that began roughly 12 years ago, we would see gold at nearly 6,000 an ounce and silver at roughly 125. At their peak in 1980, it was impossible to ignore gold and silver, as nearly everyone was at least trying to gain some exposure to these investments. I really don't think that 2011 was at all like 1980, and I therefore do not believe that we have seen the parabolic blowoff top often associated with the end of a gold or silver bull market. 

The laundry list of reasons to buy silver is long and varied. First and perhaps most significant, is the need for central banks to keep real interest rates negative-- meaning below the rate of inflation. This is the oldest trick in the book to try to stoke the fires of inflation. And while real rates have been mixed (shorter term they are still negative, but when using 5 year Treasuries they are positive), there is little doubt that our monetary masters will likely be meeting any economic headwinds with renewed efforts at pushing rates negative across the board.

Then we have all of the continued news out of Asia regarding demand for real physical metal. You can now add other nations, like Turkey or Argentina to the list of gold and silver buyers, as at least some of their citizens respond to capital controls and good old fashioned emerging market currency mayhem with a rush into physical precious metal.  If it weren't for the fact that the Indian government has been trying to kill its gold market, I think the avalanche of physical demand recently would more than teach the paper shorts over here a lesson or two regarding why gold and silver are not just another couple of commodities, but in fact are money.

Another, final reason to own silver is the issue of a short squeeze.The question of silver manipulation is a controversial one-- in part because so many different people have their own competing definitions of what is going on. You also have people who are essentially guessing at what some large bank-- say JP Morgan-- is or is not doing with their derivatives contracts in the precious metals, or with their growing hoard of underground physical metal. Yes, only a few trading houses control most of the paper silver trade, but this does not mean that they are impervious to physical demand- and it doesn't even mean that we can know which direction for certain these trading houses want the price of silver to go.  

What we do know-- without question-- is that the number of paper claims on real physical metal has exploded over the course of the past four decades. This is probably the only fact worth focusing on.

Remember, even the most powerful of market corners don't last forever. 


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

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