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Silver as an Investment?

By: Jim Otis, The Optimist

-- Posted 25 May, 2006 | |

I received an interesting email from a reader this week, with the title of this commentary as its subject line.  This email brings up several points that are worthy of comment.  Here are excerpts from the email:

Dear Optimist,

I appreciate your cheeriness, but I regret the day I ever heard of silver.  It has done nothing but cost us significant money, this most recent rout is a wipe out.

The bit about the evil silver shorts who are finally going to stop their nefarious doings someday "real soon" is getting old.  I don't see them stopping, or running out of money...they certainly still have the power to bankrupt many people whenever silver crosses $15.  One has to admire people like yourself and Ted Butler for sheer tenacity...and an almost missionary like zeal for spreading the word. But your adversaries are very established, very rich, and they've been doing this for a long time, son. 

I found myself repeating for a while, until I began to realize: the investing world doesn't seem to know about it, or care.  It is time to accept that the vast majority of the investing public doesn't think of silver as a secure investment. It took years for them to accept gold.  It is not a slam dunk for silver.  Could that explain why with the recent rout, that Silver plummeted far faster and farther than any of the other metals?

I guess I shouldn't feel bad at being wiped out.  The investing road is littered with the bones of better men than I who thought they could get ahead investing in silver. 

Plain and simple silver is bad news, and should carry a big warning label, like a quicksand hole or poison ivy patch.  It looks pretty on the table and it's nice for cheap jewelry, and that's pretty much of it.  To think of silver as a winning investment you have to be an Optimist indeed.  I wish you luck.  You must have deeper pockets than the rest of us.

Honorable Mention

The Optimist is very happy to be mentioned in the same sentence with Ted Butler.  That is a much appreciated honor.

Yesterday was great, but what about tomorrow?

For the record, this Optimist does indeed think of silver as a winning investment.  That is an easy viewpoint for those of us who purchased much of our silver in the $4 to $6 range over the previous few years, and now have profits of substantially more than 100%.  Since none of us can go back in time to capture again the great gains we have already seen, the ever pressing essential question is always what do we do now for the future?  Once again for the record, the Optimist is a strong bull on all precious metals prices in general, and on silver in particular.  As many other analysts have recently pointed out, the inflation adjusted prices of precious metals today is much lower than the heights precious metals already reached in 1980.  As inflation continues to escalate, the Optimist firmly believes that silver and gold will dance ever upward to the beat of a much higher tempo.

All good things must end, but when?

Most readers have only read about the metals rise before 1980, though a few were investing along side me back then.  For those who did not experience those times, I can only tell you that it was truly exhilarating.  I am happy to confirm that I expect all of us to have the opportunity to again experience the thrill of victory as silver and gold explode to heights that few today can even contemplate.

But the reader who sent me the email above seems focused on the agony of defeat.  In January 1980, silver did crash from above $50 to almost $10 in just a few trading days.  Will the future rhyme with the past?  The Optimist doesn't think so, because this time it really is different.  The crash of 1980 was precipitated directly by the FED raising interest rates to significantly higher than inflation.  Administering that type of strong economic medicine to the national economy in its now weakened condition would surely be terminal for the patient.  The Optimist concludes that the FED will only apply band aids, and perhaps occasionally push on pressure points in a way that might be temporarily painful, but which will cause no lasting harm to the economy or to our investments.  The result that seems likely to the Optimist is that inflation will march relentlessly upward, and that ever increasing inflation will propel silver and gold prices to unimaginable heights.  All games eventually end, of course, but the Optimist offers the cheery viewpoint that the game of perpetually higher prices for silver and gold is likely to end only with the demise of the dollar.  Silver and gold will retain their value throughout the end game, while other investments measured in fiat will lose purchasing power even as their nominal prices increase but at a slower rate than inflation.

A sure thing investment that can't lose

How's this for an optimistic approach to investing?  Buy real physical silver (or gold or palladium or platinum) metal, and keep it in a safe place.  That's the full plan.  Buy the good stuff and keep it safe for a no risk approach to investing.  Long after stocks have fulfilled their destiny to fill the pockets of bankruptcy lawyers, and houses lose the inevitable battles with Mother Nature, and T-Bonds revert to the value of the fiat dollars they will be repaid in, an ounce of precious metals purchased now will still be worth an ounce of precious metals.  This simple sure fire investment plan has an equally easy timing approach.  Buy when you have surplus fiat to invest.  If you must sell, then do so when interest rates rise to significantly higher than real inflation.  Sleep soundly each night without worry about the latest price quotes for silver or other precious metals, because each ounce of precious metal that you own will always have the value of an ounce of precious metal, and your purchasing power will be protected.

Excitement, leverage, greed, and fear do not make an investment better

The Optimist congratulates the few readers who did not fall asleep while reading the above paragraph.  Yes, the Optimist does know that a simple and safe investment plan offers little more excitement than watching grass grow.  Every reader of this commentary is aware that the reduced supply and persistent demand dynamics of silver paint a picture of much higher silver prices.  Each of us is smart enough to figure out that when silver prices go up, then we can make a lot more fiat for our bank account by leveraging the gains.  Every person has a loud, shrill, and un-ignorable greedy voice inside that demands that he buy a lot more of this sure thing, and then he will have more fiat than he would know what to do with.  Mining stocks have natural leverage to rising metals prices, so we reason that those stocks will increase in price faster than just buying the metal.  Since mining stocks will explode upward with the rising metals price, then greed shouts at us to get more leverage by using options, and futures, and options on futures to maximize the amount we have invested.  Only after we are using the maximum available margin and leverage, possibly with money borrowed from other sources, will the greedy voice inside each of us begin to slip back into the shadows of our minds.

As the author of the email now recognizes, the next voice to interrupt our daydreams about all the baubles we will buy with the abundant profits from our extremely leveraged position is the painful screech of fear.  With fear pounding the drums of panic, the conversation that fear induces inside us goes something like: "What!  Silver prices just dropped a few percent.  I thought it could only go up.  The next phone call will be my broker demanding more margin money, but everything I have was already used to buy my leveraged position.  I can't sell now, because then I will lose a lot, but what if silver could decline a few more percent?!  At maximum margin, I would be wiped out!  I must sell now to avoid losing everything I own.  I'll call my broker and tell him to sell all my positions immediately, so I won't lose more when silver goes all the way back to zero."

Sincere sympathy, and a warning label

The Optimist understands very well the intense pressure for excitement through leverage, the irresistible lure of greed, and the devastating terror of fear.  The email writer, and many thousands of other investors who suffered similar losses, have my sincere sympathy.  Losing money by betting in the wrong direction is painful enough, but losing while betting on the right market to move in the right direction is especially difficult to handle.

The problem is not that people bet that silver would rise.  Silver has moved sharply higher from the $4 level three years ago to more than triple that now.  The problem is that greed caused those losing investors to use too much leverage at the wrong time, and then fear forced them out of the game just when they should have been buying more.  The Optimist agrees that there should be a warning label on those risky investment tactics, but that warning would be applicable only to the cycle of greed, leverage, and fear which may be the only way many traders know how to bet and which all too often converts a correct investment viewpoint into a serious financial loss. 

Make money the old fashioned way

The cure for investors whose results suffer from the afflictions of greed, leverage, and fear, is to take a step back to a quiet, calm, and simple investment process.  Tell the greedy voice inside to just shut up.  Avoid leverage, and there will be no need to do anything about the internal voice of fear, because there will be no fear.  Instead of taking huge risks now to try to get rich quickly, invest a reasonable amount of funds for the long term, and let time be your ally to help your well chosen investments to prosper.  The Optimist tries to convey a sense of perspective over time in his charts.  By showing the long term monthly, and medium term weekly, in addition to the near term daily charts, he hopes to better illustrate the long term trends without the confusion that the near term market noise often contributes.

To profit from the coming explosion in silver prices, one needs to have pockets which are deep enough to hold only a single U.S. FRN dollar.  Any elementary school kid with a dollar of allowance can buy a U.S. silver dime dated 1964 or earlier for just about one FRN dollar.  By simply putting that dime away in a safe location and waiting for time to pass, one can be assured of an eventual profit measured in FRN fiat, and of conservation of that much purchasing power through the years to come.  Investors who have more fiat dollars available to invest need not change the process, but simply buy more silver and put it away in a safe place.  Silver in safety is much better than the proverbial bird in the hand!

The good news is that investors don't know the silver story

The Optimist notes in the email a great piece of welcome news.  The investment community is not yet on the silver bandwagon, and many people do not even think of silver as an investment.  The Optimist can confirm that in recent weeks, he heard many news headlines about the rising prices for gold and base metals like copper, but he did not hear any mention of the rapid rise in silver prices over the last three years.  The news silence on silver, and the corresponding vacuum of information among the public, bode very well for future silver price increases.  Every person who does not yet know about the very bullish fundamentals of silver is a potential future buyer, and will help to push prices ever higher.

The sounds of silence are superb for silver

The Optimist encourages the email writer and everyone else to silence the internal voice of greed which frequently leads to losses, to quell the near term confusion caused by corrections and market noise, and to stay firmly focused on the long term progression of values in silver and the other precious metals.  The Optimist thinks the future for silver looks as bright as the past, and he encourages readers to share a part of that future by accumulating real silver metal in a secure place.  Cheers!

* * * Notice * * *

This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment. Please do not interpret any portion of this work as investment advice. If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest. The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions. The Optimist wishes you the best of luck in whatever you decide to do or not to do. Cheers!

-- Posted 25 May, 2006 | |

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