Silver – my favourite asset

Many of you already know that silver has the biggest share of my portfolio. The amount of written material about gold is immense and this is why investors have decent knowledge about it. When we talk about silver, though, there are some myths giving people wrong assumptions. It is time to recap and refresh what we know about silver.

Industrial or monetary metal?

Silver is often identified as money. At the end of the day when we buy silver coins, we have a nominal value on them. In practice, silver balances between a precious metal and industrial resource. What we know for sure – it is not money. Yes, in the past we saw silver in a role of the monetary tool but it was during the ’60s when we saw an explosion of an industrial demand. This dwarfed stocks of silver and right now all available metal is worth 40 bn USD which is the amount the ECB is printing in a fortnight.

From a manufacturing point of view, silver has approximately 10 thousand uses. It ranks only behind crude oil, primarily utilised in medicine and electronics. The industry is responsible for 54% of demand and it is systematically growing – especially due to increasingly popular solar panels. Investment side (coins, bars) equals only 25% of the demand.

Depth of the market

Silver is often compared to gold. Prices of both indeed move in the same direction but the difference is that investment gold is abundant while investors struggle to find enough silver to put their money in.

We have 175 thousand tons of gold. Half of this is investment material owned by central banks, investment funds and private investors. This is to say that there are around 90 thousand tons which can change hands depending on the mood of the market. All worth 3.9 trillion USD today.

On the other hand, we see the market for silver. According to silverinstitute.org, there are 2.3 bn ounces of silver worth 40 bn USD. Other institutions have different approximations but 40 bn makes sense, especially that in private talks with Loomis, I heard multiple times that in their office in Kloten (near Zurich) they store 4 bn USD worth of metal deposited by their clients – 10% of the world reserve.

The main problem with rough calculation of the amount of silver is that there are only a few institutions publishing verifiable data. Below you can find a list of entities allegedly owning significant silver reserves. Two positions at the top: COMEX (blue) and ETF SLV (light green). For me, they both lack any credibility.

You can expect that there is less available metal than what the official data shows. When Eric Sprott started his ETF backed 100% with physical metal in 2010 he needed 9 months (!) only to buy silver worth 1 bn USD. Nine months!!!

Another advantage of silver is indeed its thin market. This makes it prone to sudden price changes due to relatively small capital injection. If it seems puzzling, recall what happened to the price of bitcoin. During the first stage, the price got to 30 USD from only 1 USD. But when bitcoin became a buzzword, in a very short time it jumped from 30 to 1100 USD. Such a change was possible only because bitcoin currency capitalisation was around couple billion dollars. It is smaller than the rounding error when compared to global transfers happening every day.

If you still ask yourself whether the silver market is worth 20 or 40 bn USD let me give you a bigger picture: Apple stores in cash 200 bn USD and the bond market is valued at 200 trillion USD.

Gold/Silver ratio

Silver fans really like using a historical ratio of metals – 1:16 – and silver returning to those levels. I believe Argentum has a better perspective than gold but this is too optimistic.

After analysing last 50 years, we see the ratio varying from 16 up to a 100. Most time we can see it above 40 and below 80.

When we talk about gold/silver ratio there are thresholds I take into consideration when thinking about investing:

a) above 70 – buy only silver;

b) between 45 and 70 – buy both gold and silver;

c) between 30 and 45 – buy only gold;

d) below 30 – start thinking about selling your silver.

Historical prices vs prices today

Patterns from the past help us predict what might happen in the future. Silver has a problem – the last boom in the market for precious metals ended in 1980. Four decades ago. This is when we saw 50 USD/oz handle.

Today we see it below 20 USD/oz (and recently even below 18 USD/oz) which is a 60% discount. Always when you talk about long time frames take inflation into account because a dollar today is worth much less than one 36 years ago.

As you can see, to find silver at similar levels like in the ‘80s it would have to increase 7-fold (CPI inflation).

Also, it is worth comparing silver with Dow Jones.

Silver has not been that cheap vis-à-vis equities since 2001 and its price is still very attractive. To catch up to 1980’s price it would have to aim at 800 USD/oz mark. Is that possible? I do not believe so.

In the case of US equity market losing 75% and simultaneous bubble in the market for precious metals pushing silver to 240 USD/oz, would return the ratio to its level from 1980. This is possible.

To cool down every eager investor fantasizing about the price of silver reaching for the sky, I want to remind you that the record of 1980 was due to Hunt brothers dominating the market.

What is more, in 1980 silver was not used so often in the industry, contrary to the situation today. Industrial lobbies are very strong and we can rest assured that they will do everything to stop prices from getting too high. Cheap silver and gold are very good for central banks. Keeping them low conceals the machinations destroying fiat currencies. All in all, today there is much more moving parts in the system, and a more complicated world overall, compared to 1980.

Volatility in the silver market

Unlike gold, silver is very volatile. You can see both metals moving in the same direction but when gold moves 10%, silver price doubles that.

Between October 2008 and April 2011, gold climbed by 150%. During the same period, silver grew by 420%. This is only 18 months we are talking about. But then the story of 2011 – 2015 makes you sober again. Gold lost 45% while silver dropped by 72%(!).

This is the volatility I mentioned before and unless someone is able to mentally handle it, one should not try this kind of investment. The Golden alternative would be better.

Coins or bars?

When we talk about gold I consider popular bullion coins, but for silver, I make an exception. Small, standard sums should be invested in tubes (20-25, 1oz coins) or master boxes (500, 1oz coins). This way makes it easier to sell them in the future. In countries with VAT, coins are cheaper than bars (the only exception is buying bars with no VAT stored in warehouse – before duty tax – but this operation requires over 70 000 USD).

Summary

I am sure that now you know why silver ranks so high in my portfolio. Although, playing against central banks I believe that this metal in just a few years is going to give a decent profit. Max Keiser is a bit dreamy when he announces 500 USD/oz, at least without hyperinflation, but 100 USD/oz is a definitely viable target.

There is also one last advantage of silver. You can keep it outside the system giving you the opportunity to prevent a lot of problems during potential debt reset, banking crisis and consequences surely to follow.

Trader21