Silver Poised to move UPWARD IN PRICE

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Silver - Lagging Gold,
But Ready to Soar

Five years ago, when someone asked for our opinion about gold and silver, we told them we thought a growth-oriented allocation should be weighted more heavily to silver than gold. At that time, silver was trading in the low $8 range, nearly double its price of January 2001.

Nine years ago, I was on the phone talking with clients virtually the whole day long. And I can tell you, after rendering our opinion on silver, there were more than a few awkward pauses in the conversations.

In addition to the silence, I remember a number of clients expressing an almost visceral reaction to the thought of owning that much silver. The reasons offered by those that disagreed were plentiful. The four most common arguments I heard were,

“Silver will not out-perform gold…. Silver is an industrial metal. It cannot withstand a recession…. The advent of digital photography, and the decline in silver-oxide film, will kill the silver market…. And finally, “Increases in silver mine production will easily outstrip demand.”

Of course, none of these things happened. Today, silver trades at around $19 per ounce -- more than double the price five years ago. And yes, we continue to be bullish on this unique and irreplaceable precious metal.

Today we would give equal weighting to gold and silver. And maybe include a small allocation for the Noble Metals, platinum and palladium. A mix of 40% gold, 40% silver, and 20% in the Noble Metals makes sense to us. However, I could easily make the case today to put more money into silver than the other three metals combined.

In the precious metals complex, gold is the undisputed leader. It is the first thought of those looking to precious metals for asset diversification. It is clearly the best-known, most widely identified precious metal.

For that reason, gold is typically the first to move upward in a rally (and, just as important, the first to move downward in a correction). The rest of the precious metals follow gold’s momentum. Investors buy gold first, then, look to other holdings for further diversification.

Once the rest of the precious metals get moving, silver tends to out-perform gold. Of course, when gold starts correcting, silver can out-pace gold on the downside as well.

To make a long story short, in the long term, silver will appreciate just as much as the Midas metal, maybe even more. But its short-term swings tend to be greater than gold. If you want the most “bang for your buck,” try silver. But if you can’t stand volatility, you don’t want to be heavily weighted here.

It should come as no surprise that silver is a less capitalized market than gold. Today, there is something like 52.8 billion dollars invested in the gold ETF, GLD. While there are only 4.91 billion dollars invested in the most popular silver ETF, SLV. (Note: this is not an endorsement of either one. In both cases, what you own is paper, not actual ounces of metal.)

The present secular bull market in commodities began in January 2001. Since then, gold has soared from $262 per ounce to $1,242 per ounce as I write this. In dollar terms, it has appreciated 374%.

In the same period, silver went from $4.53 per ounce to $18.88. For those of you keeping score at home, that’s only a 317% gain. Given that over the long term, silver and gold tend to keep pace with each other, now appears a good time to bet that silver will climb faster than gold.

Intuitively, that also makes sense. Gold recently tested new highs at the $1,250 level. A technician will tell you that part of that process is to test downside support around $1,190-$1,200 per ounce. Silver is sitting in the wings looking for guidance from gold. If gold breaks through upward resistance, silver may close the ratio gap very swiftly.

None of us has a crystal ball. But keep this in mind: the supply/demand fundamentals for both metals are quite strong. The real impetus behind the higher metals prices, however, comes from the lack of confidence in fiat currencies and paper assets. There is no question that events of the past few years have shaken investor confidence badly. When investors get nervous, they look first to gold, then to silver, then platinum, and palladium.

If you want to bet on the prospects of a stronger dollar, lower deficits, and a healthy recovery, then by all means, don’t increase the precious metals part of your portfolio.

However, if you expect the grim economic outlook to continue and possibly even worsen, then let me ask you: Why would you put a majority of your assets in the U.S. dollar?

If you’re ready to move some of your wealth out of the dollar, and indeed outside of the U.S., we’re here to help. We have several practical, proven, reliable strategies we want to share with you.....

Last week, both gold and silver surprised a lot of people, including us, by how far and fast they fell. We remain convinced that precious metals are in a long-term bull market. We expect corrections to be short and recoveries to be swift. Mr. Market is handing you a gift; we urge you to take advantage of it.

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