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Why I’m Buying Silver at $30
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Archive for February, 2011

Why I’m Buying Silver at $30

The silver price has bounced 27% since January 28. It’s already soared past its 2010 high and was selling for less than $16 this time last year, a double in 12 months. So, is it pricey? Or should we ignore the run-up and keep buying?

I’ve read a few articles that say we should expect silver to drop to the $25 level, and one pinpointed $22. Others, of course, see bullish tea leaves for the near term and believe it’s headed higher. Of those that assert silver will decline, most believe it will be temporary, though one writer claims the bull market in precious metals is over (I think he’s a holdout from the gold-is-a-bubble camp).

These authors could be right about a near-term decline, but I’m less concerned with what the price does this month or even the next few months, and more focused on where it’s likely headed over the next few years. Caution: the chart ahead may cause excitement.

While there are lots of reasons to be bullish on silver, what everyone really wants to know is how high the price can go. Here’s one hint, based strictly on historical price performance.

Silver rose an incredible 3,646% from the November 1971 low of $1.32 to its January 21, 1980 high of $49.45 (London PM fix prices). Our current advance, through February 4, is 596%. At $30, silver would have to climb over five times to match the last great bull market. If it did, the price would hit $160.89 per ounce (from its bottom of $4.295 on March 30, 2001).

You’ll also notice silver has a record of outperforming gold in these two bull markets. In spite of the price dropping 26.9% in 2008 (while gold gained 5%), the metal has outrun its yellow cousin by 38.6% since their respective lows in 2001.

Gold advanced 2,333% in the 1970s; it’s currently up 430%. If it matched the last run, the price would hit $6,227.26 per ounce, a return of four-and-a-half times the gold you buy today.

From solely a historical price perspective, the chart certainly suggests we’ve got a long way to go with both metals. The question is if the fundamentals support such price advances (show me a healthy dollar and no threat of inflation, and we’ll talk), but my point for the moment is that there is an established precedence for the price of these metals to climb much higher. And just as important, to keep one’s eye on the big picture.

So, yes, I’m buying silver at $30, in part because I think the potential for enormous gains is high.

However, I’ll add that I’m not draining my cash account to do so. I think it’s important for the precious metals investor to always be in the game, but given silver’s volatility and the precarious nature of most markets right now, prudence suggests we keep some powder dry as well.

Let’s say one of the soothsayers noted above is correct and silver temporarily falls to $25. If you snag it at that level, your endgame return would be 543%, vs. the 436% gain from $30 (excluding premiums and storage costs). That’s more than another 100% gain on your original investment.

But how does one buy silver not knowing if the price will plummet or soar? For example, silver could take off from these levels, never to see $30 again, leaving those of you waiting for a sell-off out of the market. Or it could sink to $25, making investors who went all in now regret they didn’t wait for a better price. Or it could trade sideways until, say, next fall, leaving both parties uncertain and on the sidelines.

In my opinion, there’s a one-word answer to the question. It solves all dilemmas – it keeps you in the market, while simultaneously letting you buy at lower prices if that occurs. It lets you build your position bigger and bigger without the worry of whether you’re getting a good price.

That one-word verb is, accumulate. Or in the vernacular made popular in the ’80s by the financial planning community, dollar cost average. In other words, buy a little now, buy a little next month, etc., until you have a position sufficient in size to fight off inflation and any other economic woe we’re likely to encounter over the next few years.

So my advice is, buy, hold, repeat. Because if our silver market ends up looking anything like that left bar in the chart, you may regret not having bought at $30, too.

Six Reasons For You to Purchase Silver Now, Despite High Prices

1. China has turned net importer
China, the biggest commodity guzzler in the world, is importing silver big time. In fact, in 2005, China exported 100 million ounces of silver (one troy ounce = 31.1 grams). In 2010, five years down the line, the country has turned a net importer, importing 122.6 million ounces, which is around 14% of the global production.

Now, we all know the impact China has on the price of a commodity it takes fancy to. India, the biggest consumer of gold and silver in the world, imported 1,200 tonnes of silver in 2010, up 20% from the previous year. This increase in imports has largely been attributed to increase in the price of gold, thus making gold jewellery very expensive.This has made people in these countries turn to silver jewellery. In fact, as the price of silver keeps going up, more and more people are likely to take fancy to silver jewellery.

2. Supply demand mismatch
This is a very basic point, which is behind every price rise. Silver demand is more than silver supply, and thus the prices have been on a run. The Silver Institute, which tracks silver supply, reports that from 2000 to 2009 (the latest data available), the supply of silver went up to 709.6 million ounces, up from 591 million ounces. This shows an increase of around 2% per year.

Data from the CPM group shows that mine production rose to 741.5 million ounces in 2010 (up around 4% from 2009).
Silver demand in 2009 stood at around 889 million ounces and the difference between supply and demand was largely met out of scrap sales. Given this, nearly 19% of silver demand is being meant out of scrap sale. This is not sustainable.

3. No recycling of silver
One way to increase supply is to recycle silver like gold has been over the years. Silver is largely used as an industrial metal. It is a very good conductor of electricity, the best heat transfer agent and reflector of light, a very good lubricant, catalyst and alloy. But it is used in very small amounts as an industrial metal. Given this, it is not easy to recycle silver.

Also, at its current price, it is not monetarily feasible to recycle silver. Experts are of the view recycling will become monetarily feasible only once the price of silver crosses around $50 per ounce (currently it quotes at around $32-33 per ounce). Given these reasons, increasing sale of silver scrap is not very easy.

4. Not easy to ramp up production
Experts who closely track silver believe the world is running out of silver. The most vociferous of this lot, Adrian Douglas, the proprietor of Market Force Analysis and also a director of GATA (the Gold Anti-Trust Action Committee), has gone on record to say the world will run out of silver in 2020, and thus become the first element of the periodic table to become extinct.

Theodore Butler, silver analyst, Butler Research, has said in the past that silver inventories have declined from 10 billion ounces (one ounce equals 31.1 grams) in 1940 to 1 billion ounces today. In comparison, gold inventories stand at a total around 5 billion ounces. So, if we were to believe these experts, there is five times more gold on this earth than silver. But does that reflect in the price of these metals? Certainly not.

This decreasing inventory cannot be built up through increase in production. The earth’s crust has around 17 times more silver than gold. Despite this, silver production cannot be ramped up quickly. The primary reason for this is that it is rare to find a pure silver deposit. Hence, nearly two thirds of the silver that is mined comes as a by-product of mining other metals, like copper, zinc and lead. So, increased production of silver in turn depends on the price of the other metals it is co-mined with.

Also, the silver “mine-cycle” is around 10 years, i.e. the time it takes from starting to explore for silver and until the mine finally begins to produce silver. Over the years, the low price of silver has ensured that the mining companies haven’t gotten around to looking for silver.

5. New uses of silver
As mentioned earlier, silver has lots of industrial uses, given that it is the most malleable and ductile metal, after gold. Silver is currently used in electrical applications like conductors, switches, fuses etc. It is also used in photography, and silver alloys are used as cathodes in batteries. Interestingly, the new uses of silver keep growing.

As a recent report from Hinde Capital points out, “As a bactericide, silver is used in water purification and air handling systems. Silver is also a natural biocide and is very effective against bacterial infections such… New products using silver’s biocidal qualities are being developed each year; clothing, bandages, toothbrushes, door-knobs (flu-protection), keyboards, the list goes on growing.”
All this will ensure the demand for silver keeps growing.

6. The investment argument
Investors are gradually realising the potential of silver. This has led to an increased demand for silver coins as well as exchange traded funds worldwide. The US Mint sold more than 6.4 million silver eagles this January —- the highest sales in a single month since the coin was introduced way back in 1986.

Eric Sprott, who runs Canada-based Sprott Hedge Fund and who recently launched a silver fund, made a very interesting point during an interview. His new fund entered the market to buy 1 million ounces of physical silver. The silver wasn’t readily available and it took the fund nearly 10 weeks to acquire the entire lot.

Now, this was the impact of just one fund. Imagine what would happen once a few more silver funds are launched.
In fact, data from the Silver Institute shows that the investment demand for silver went up by a whopping 184% to 136.9 million ounces in the year 2009 (the latest data i.e. available).
Moral of the story: Buy silver.

Silver Gains on Inflation Concerns and Tight Supply

The price of silver has been running strong this last week, closing over the $30 per ounce range four times. Lingering concerns over debt and instability are still weighing on investors minds, making safe haven assets like silver and gold more attractive. The white metal finished the day in New York up $0.18, to $30.78 per ounce.

Many analysts see 2011 as an incredibly strong year for silver, and believe prices willl outpace those of gold over the course of the year. “Last week, the gold to silver ratio fell to just above 45:1,” said Wayne Atwell , Managing Director of Casimir Capital, in an interview with Silver Investing News reporter Damon van der Linde. The historical long term ratio is 15:1, silver has been gaining on this historical average. If it caught up to current gold price, the silver price would be at $91 per ounce. Silver still has a long way to go.

Inflation numbers from Europe to China are a main driver of silver futures. In the U.K., the CPI was reported as rising to 4 percent in January, up from 3.6 per cent in December. Much of the same in China as “inflation readings of 4.9%, higher that 4.6% for December but lower than the expected 5.4%… A strong reading in China will also perpetuate negative real interest rates in the country, which is currently negative 1.9%,” reported Alix Steel , for The Street. The inflation data in China was not as high as expected, which could stop the People’s Bank of China from raising interest rates, which it has done multiple times since October.

The US Dollar index slipped 0.01 percent after slipping 0.1 percent on Feb. 14. This factor, as well as the release of the US budget which forecast a $1.6 trillion dollar deficit in the coming year has all played into the week long run up for silver. Concerns over the long term debt issues in America and Europe are enticing investors to run to silver as a long term store of wealth. All of the money that was poured into banks after the collapse has been used to balance the books of the banks, and has not yet spawned inflation in the US.

“As the banks begin to gain confidence in an economic recovery and start to lend money again, all that cash that the Fed created out of thin air during the financial crisis will begin to make its way into the economy. Then, we will finally see true inflation as measured in the CPI and felt in the streets,” stated Ananthan Thangavel , founder and managing director of Lakshmi Capital. The real possibility of this scenario playing out will cause inflation in the US market, driving more investors to silver and gold.

The supply/demand market conditions for silver are strong as well. Mining firms have not been able to increase production enough to meet demand. As a result backwardation, where long term futures contacts are less than short term contracts, are a reality for the first time since 1997 after Warren Buffet bought a staggering 130 million ounces of silver.

“”The extent of the backwardation in silver is unprecedented. It suggests that retail investment and industrial demand internationally is very robust and the small silver bullion market cannot cater to the level of demand for refined coin and bar product,” bullion dealer GoldCore said in a note on Friday.

This supply issue is good for silver going forward. Many analysts expect silver to have significant gains this year ranging from $35-$50 forecasts. The political instability that Egypt, Yemen and other countries are experiencing may also spook investors into precious metals in the coming weeks.

Read more:

Why Higher Oil Prices Are Good for Silver

Stephen Leeb thinks oil prices are going much higher, as is clear from the title of his 2006 book: The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel.

What might not be so clear – or obvious to most – is that Leeb’s view on oil prices underscores his bullish view on silver.

Come again?

Yes, Leeb is bullish on silver because silver is “a vital part of any solar energy development”, thanks to its unparalleled ability among metals as a thermal conductor. “And it’s not clear at all that we have enough silver to satisfy the eventual demand for solar energy,” which is the most practical alternative to hydrocarbons.

Silver is also the best electrical conductor, topping even copper in that department, he notes. “It’s not just a precious metal, it’s also an industrial metal with extraordinary properties.”

These “special” characteristics explain why China’s silver imports quadrupled in 2010, he says. “They get it…in spades. Silver is a very valuable metal on both sides of the board; industrial and precious.

Check the accompanying video for more of Leeb’s views on silver and find out which largely undiscovered silver stock he says is “50% undervalued” and a “legit homerun.”

Municipal Bond Shock Could Ignite Silver Charts

Less than 45 days into 2011, it appears that this just may be the year of the paper recovery, but that doesn’t mean that lingering problems have been wiped away.  At center stage now is the municipal bond market, which having grown tremendously as investors fled to safe havens in 2009, may soon find itself in a perilous situation.

The problem now is that the markets are struggling to find enough capital. Throughout the financial crisis, municipal bonds perceived to be less risky than other investments accepted cash in droves. This new investment was buoyed mostly by a large, Federal stimulus package that stood as an underwriter for new debt issuance. That is, states could issue more debt to take advantage of ultra-low financing costs before passing on the one-year expenditures to the Federal government.

Thus, first-year borrowing costs were nil, and so too were the long-term borrowing costs expected to be. However, as the markets recover with tons of paper cash, investors aren’t all that interested in low returns, nor do they believe municipal bonds to be worth the inherent risk they bring forth. While few municipalities have ever gone bankrupt, many are reaching breaking point this year, as the costs of running these cities grows exponentially while revenues continue their decline on poor housing values.

Municipal Bonds and Metals

Municipal bonds are considered to be what gold and silver have always been: a reasonable store of value and protector of wealth. The idea is that municipal bonds are generally very regular on their interest payments, incredibly safe, and also tax-advantageous. As a result, they became an investment staple of the insurance business and are still, to this day, one of the single most important assets to that industry.

However, with the markets in turmoil, and few knowing the extent to which they are exposed to municipal defaults, any future shocks will play out well for gold and silver holders. All things considered, gold and silver can provide near equal returns for investors from arbitraging and option contract sales.

Plus, when contracts are written against gold and silver owned by a company, the earnings are taxed as ordinary capital gains, not as collectables. Thus, gold and silver present an opportunity for profits on rising inflation, as well as routine cash-flow for insurance companies, a necessity of any investment.

Small Muni Shift = Major Movement for Metals

Whether or not the business will shift entirely to gold, silver, or other commodities is of little concern, mostly because it requires only a small shift in assets for commodities to move quickly. The municipal bond market rests at a value of just under $3 trillion, a size that dwarfs the commodity markets and any above ground supplies for both gold and silver. If even a fraction of this cash were to migrate to an investment with similar risk profile and roughly the same risk-adjusted returns, then silver prices would have more upward trajectory than ever before. In 2010, less than $100 billion in funds were added to gold ETFs. That amount is just over 3% of the current supply of muni bonds.

Do the math. Silver and gold make sense.

Dr. Jeff Lewis

What Do the Chinese Know That We Don’t

Written By: Richard Russell

What do the Chinese know that we don’t? According to my favorite newspaper, the Financial Times, the Chinese people are buying gold like there’s no tomorrow. According to the Times, “Precious metals traders in London and Hong Kong said on Wednesday they were stunned by the strength of Chinese buying in the last month. The demand is unbelievable. The size of the orders is enormous. . . . . Official data shows China importing 209 tonnes of gold during the first ten months of last year: vs. 333 tonnes for India the entire year. . . . Traders say China will overtake India as the largest consumer of gold this year.”

Russell Comment – China and India, between them, have a combined population of 2.6 billion people or near one half of the planet’s entire population. China’s leaders have been urging China’s people to buy gold. India’s population needs no urging, gold is built into the DNA of most Indians.

In answer to the question, “What do the Chinese know that we don’t?” The Chinese know that all fiat paper eventually ends worthless. They also know that through the ages gold has been a store of value. The Chinese see their government getting out of dollars, and they are following their government’s example. The Chinese people’s alternative choice vs. fiat paper is gold.

The American people see that the Fed is now the world’s largest holder of Treasuries. Treasuries are denominated in dollars. Americans are following the Fed’s example. Americans are staying with Federal Reserve notes, still mislabeled as “dollars.”

A dollar was originally defined in terms of specific weights of gold and silver. There is no definition for a Federal Reserve note. A Federal Reserve note can only be defined in terms of other fiat currencies.

So where are we? My studies show that the primary trend of the stock market remains bullish. Therefore, I recommend pilot positions in DIAs and more if there’s a correction.

My studies indicate that the bull market in gold (and silver) is still intact. The ideal position in gold (and silver) is to hold the actual physical metal (hide it where you want).

I believe the world has “had it” with the Fed, the US Treasury and the US dollar. Swap your dollars for either of the above.

Sell your Treasuries, your munis, and all bonds. Sure they’ll pay off, but they’ll pay off with shrunken dollars.

A decent loaf of bread may cost you two bucks today. Ten years from now, the same loaf of bread may cost you ten shrunken dollars.

It will still be a decent loaf of bread, and they’ll still call a dollar “a dollar.” But that dollar will have lost maybe 90% of its purchasing power. No wonder the Valley Girls are screaming OMG. They’re thinking about the future of the dollar.

Come to think of it, when I was a kid it was considered a sin to take the name of the Lord in vain. OMG! But who cares about sins here in 2011?

Gerald Celente – “Crisis Video Report”

Gerald Celente on RT 28 Jan 2011…with all the uncertainty in the world – Gold & Silver Are Your Insurance Policy.