Has the Silver Bubble Finally Burst? Is Silver Investing a Bad Idea?

+Hans Schoff wrote:

Silver investing has gotten a lot of press lately with silver’s amazing run up over the past eight months and even more so since February, making it a good market for creating wealth for some (and preserving wealth for others).  Pundits all over the main stream media had been calling for the silver (and especially gold, with it’s 10 year run) bubble to burst and for the market to come crashing back down…

From an incredible high of near 50, the market finally did correct sharply… but it has NOT crashed, nor have the fundamentals for silver investing changed.

To understand both the gold and silver investing markets, you have to understand the macro economic picture, the big picture.

Silver is an industrial commodity, meaning that it not only has monetary properties due to it’s intrinsic nature and rarity among other things, but it is also used industrially in everything from cell phones, street lights, computers, solar panels and all sorts of consumer electronics.  Therefore it is a metal that is consumed (and in such small quantities per application it makes recycling the metal impractical in most instances), which reduces the supply over time which puts upward pressure on it’s value (if there’s less of something it becomes more valuable).

Gold is more a store of value and is mostly used as jewelery and as a backup for real money.  It is one of the best (if not the best) conductor of electricity, but at $1500 an ounce today it again doesn’t make much sense to use in that application.

Today, our society operates on a fiat money system, which is essentially just paper money.  The paper itself has no real value, in fact it’s only backed by the faith we have in the U.S. government to be able to govern it’s own affairs that gives it any value.  And with the massive levels of debt we as a country are faced with – more debt than we could ever repay, even with a 100% tax rate for all Americans – many people are beginning to doubt that our government can manage it’s own affairs responsibly (as in paying it’s debts and assigning a fair value for the paper we trust them to create).

This is one of the fundamental factors driving up the prices of silver, gold and other precious metals.  Yes, there is speculation in the market due to the nature of leverage that’s available in the markets, but speculation on it’s own is not driving up prices.  In fact, this most recent decline was due to regulators imposing not one or two but three increases in margin requirements, again affecting the amount of leverage a “trader” could apply to the market which caused many traders to have to liquidate their positions or put more skin in the game.

At the same time, billionaire George Soros’ fund sold a large quantity of silver into the market which further exasperated the situation and drove the price down (simple supply and demand).  Then, as the market began to decline, fear kicked in and computer programs and momentum really began to takeover bringing the price down now to around 34.

I’ve been a big proponent for silver investing for many years now, due to the market fundamentals, some of which I outlined above.  Am I now bearish on silver because the price came down?

Absolutely not! I am still very bullish on silver investing as well as gold investing because the fundamentals remain unchanged.  Has our government somehow discovered an extra $14.3 trillion to cover the growing deficit?  Or another $80 trillion or so to cover the unfunded liabilities that may be off-balance-sheet but are still debts paid for and owed to tax payers (think of social security, medicare, medicaid, etc).  There’s over $100 trillion of debt our government is defaulting on and the interest that’s accruing on it is only compounding making the situation exponentially worse…

…But our government does have a solution to this problem (though they won’t admit it through their words – you have to look close at their actions to tell).  It’s called inflation.  Their plan to pay off all this debt is to basically inflate or hyper-inflate the debt away.  What does that mean?  It means they plan to steal that money from everyone else by devaluing our money as they add trillions of dollars to the money supply.

Imagine you were playing monopoly with a friend and you got to be the bank.  You both started out with the customary $1,500 each, right?  Now let’s say you purchased several properties and ran out of money but you landed on Boardwalk and purchased it with an I.O.U.  You simply tell your friend that you are going to simply give yourself an additional $400 so that you can buy Boardwalk but he doesn’t get that extra $400 (he’s not the government or Federal Reserve – which is neither Federal nor does it have any kind of reserve, nor is it a government entity, but I digress…).

So what’s happened? Essentially the money supply that had a value of $3,000 (both your $1500′s together) now in nominal terms is $3,400 – that is 13% inflation!  If you kept that up each round, what would happen?  Your friend would run out of money while you could simply buy anything you wanted.  And as you go around the board buying properties with your money-out-of-thin-air, he goes broke and you end up with everything – (even though technically you should be in debt to your eyeballs).  That’s what our government does!

However, in the real world, businesses are not stagnant.  If they see prices increasing, they have to raise their prices in order to continue being able to make enough money so they too can survive.  In the monopoly example, that would be like the price of Boardwalk going up to $500 to compensate for the extra money in the system.

So what about silver investing and creating wealth?

Anything that takes off and shoots up like silver did recently in such a short period of time – even when the fundamentals are sound – is bound to go through corrections.  No bull market only goes straight up.  As mentioned before, speculators jump in when they think they can make a profit and push high prices higher and lows lower.  Silver is a volatile market due to it’s small size among other factors.  The general trend going forward continues to be up, however, as the metals do every year, I expect the summer to be a perfect time to pick up the metals cheap, silver perhaps in the high 20′s or so maybe a little lower as the dollar appreciates some with everyone currently fleeing the Euro for safety (Portugal and Greece default concerns, etc).  The dollar is likely to drop back down coincidentally at the end of the summer as well which should prompt another good rally for silver.

The important thing is to do your homework and become financially educated. Learn about the benefits of  silver investing as well as gold investing for that matter as well.  Don’t just jump into or out of them because of fear or emotion.  Use common sense and educate yourself about the bigger picture in particular so that you’re prepared for whatever may come down the pike for creating weal regardless of the outcome – keep your emotions out of it by being prepared and getting financially educated.

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Originally posted 2011-05-12 08:30:56.

Original post can be found here: “Has the Silver Bubble Finally Burst? Is Silver Investing a Bad Idea?