-- Posted 15 January, 2011 | | Discuss This Article - Comments:
Never mind the correction in the price of silver, says Silver Strategies Editor Sean Rakhimov; better things are ahead. "It may be volatile; it may be steep; but it should be short-lived," he says, adding that he expects silver to rise well above its 2010 high at some point in 2011. Some of that price support could come from governments entering the silver market. Find out all the reasons for this in this exclusive interview with The Gold Report.
The Gold Report: Sean, it seems that among commodities, silver is getting the biggest headlines. The price of silver hit a 30-year high in late December. Silver was up 83% in 2010. And a high-profile lawsuit was launched by a significant silver investor against JP Morgan for allegedly manipulating the silver market. It seems that silver has, for the time being, wrested the spotlight away from gold. What sort of things do you expect for silver in 2011?
Sean Rakhimov: Well, the short answer is that I expect silver to continue its run. In previous interviews with The Gold Report, I discussed how small and volatile the silver market is, and how explosive the moves can be. We're in the middle of one of those explosive moves now. A year ago, silver was going nowhere, having spent quite a bit of time in the $14–$16 range. A lot of people were questioning if it was for real, especially with gold reaching new all-time highs while silver languished. Speaking of these 30-year highs, these are all nominal numbers versus inflation-adjusted numbers. That should be kept in mind. You have to keep it in perspective.
TGR: What is the all-time high in terms of inflation-adjusted numbers?
SR: I don't have an exact number but it's probably around $140. Then again, inflation-adjusted numbers are an ambiguous notion because of the way they print money these days. Is inflation at 3%? Or is it at 8%, or 15%? The current accepted all-time high for silver was around $50 in 1980 when the Hunt Brothers were trying to corner the silver market.
TGR: We're going through a bit of a correction in the price of price in the first week of 2011.What's your view on what's happening?
SR: This correction couldn't come soon enough. David Morgan and I were expecting a correction in the low $20s about three or four months ago and it didn't happen. But that's the way bull markets work. They don't often act the way you anticipate; it's very difficult to call the timing on these moves. However, the correction is a very welcome development. I think this correction is going to be a very treacherous one—maybe down to about $25. It may be volatile; it may be steep; but it should be short-lived. It's very difficult to call these things in the silver market, which is very small and in which individual players can actually move the market in the direction they desire. But after this correction, I expect silver to reach new highs in 2011.
TGR: Does that mean you're selling silver now?
SR: No, it doesn't mean that. You can play these moves if you are a trader, but I'm not. I'm a long-term investor. I never sell silver. I may trade some stocks, but that is not usually related to a current sentiment; it's more about the stock itself. But I do not sell silver as a strategy. We're in a bull market, and the way to play a bull market is to get in and stay in.
TGR: On SilverStrategies.com, you recently published an article titled Why Governments Will Buy Silver. If things progress as you suspect they will, government-sponsored silver buying could add further momentum to the bull market you just talked about. Could you discuss that premise with us?
SR: Yes. I tried to make the case for why I think governments will come into the silver market and be very prominent players, if not dominant players, in a way that's not too different from the situation in the gold sector, where the Central Banks became net gold buyers.
In the gold sector, developing countries—the ones with the cash—have been turning their paper assets into gold. I expect something similar will happen in the silver sector for a couple of reasons. One reason for this is monetary. Another is that some of these players could be priced out of the gold market. And the other reason that I outlined in the article is silver's use as a strategic metal. It's one of the most versatile industrial metals out there.
I think governments will try to secure access to certain resources, and silver will be on a list of commodities or metals that will be highly sought after. For example, silver is very important in energy production. It's also very big in electronics. Governments may not care about silver's use in consumer electronics, but they are likely to care about electronics for military use. If governments don't have silver in the quantities they need, that may pose some challenges to countries without ready access to silver. Countries that don't mine silver have to buy it in the market and then wait for delivery. And the physical silver market is especially tight right now.
TGR: How long will we have to wait before we see that happening?
SR: It is difficult to say, mainly because the playing field is changing on a weekly basis. One day Greece is out of the woods. The next day it's not out of the woods. The day after, it's falling over. There are questions about the European Union; there are questions about the U.S.; questions about currency depreciation. There are so many moving parts it's very difficult to say when a government would enter the silver market.
That said, there is nothing indicating that it has not already happened. For instance, the Chinese government is encouraging its citizens to invest in silver. And a good number of governments mint coins in countries without silver mines. That means they have to buy the silver in the market, if they intend to continue their coin programs.
TGR: If governments come into the sector, and there are already silver supply issues, what influence would that have on silver demand?
SR: That is actually the most intriguing part of my premise, because it would send a message to the market. It would make silver so much more visible and important. It would add to silver demand, and maybe cement silver's position as a strategic metal. But aside from the demand side of the equation, it's the sentiment. It's the perception that governments would ultimately send to the markets that I think would generate waves of interest in silver.
TGR: You talked in vague terms about what silver will do in 2011.In early January, the gold:silver ratio was 46.2:1.Where do you expect that ratio to be by the end of 2011?
SR: This is where you probably can't pin me down. I don't like to make specific predictions, mainly because it's a bit of a loser's game. I mean, gold could reach $2,000 overnight if some war breaks out or some currency fails. Precious metals are geopolitical assets.
What do I expect? I published an article at the end of October 2009 in which I called for the next move in silver to register a high somewhere between $30 and $50, and we have met the lower end of that range. I still believe the next stop is likely to be that nominal $50 high. As far as the gold/silver ratio is concerned, I believe silver will continue to outperform gold. When I started looking at silver, the ratio was around 82:1. Now it's below 50:1. By the end of the cycle, I expect it to be below 20; and there is a 50% chance that it will be below 10. But I don't expect this cycle to end in the next couple of years, so that's definitely not going to happen in 2011. If anything, 2011 is going to be the year that will make silver mainstream. We should see fireworks from both gold and silver, but in relation to each other, I expect more on the silver side.
TGR: How long do you see this bull market running?
SR: It's difficult to say. Commodity cycles usually run about 20 years. Arguably, we're about 10 years into this one, so in loose terms, we may have another 10 years left. However, silver and gold are monetary assets, and we're looking at a currency crisis of epic proportions. We may have to rebuild the entire financial system. Who knows how long that would take or when it's going to get underway? Is it going to be the failure of the euro? Is it going to be the failure of the U.S. dollar? Is it going to be something else? We don't know.
What we do know is that gold and silver are money. Unlike other types of money, the value of these metals is historically proven and universally accepted. Gold and silver will play a prominent role in whatever new financial system is established. And I maintain that in real terms, these metals will go up in value.
TGR: Imagine you are out for drinks with some friends, and someone there doesn't believe in the safety and economic security of precious metals. How do you convince that individual that investing in precious metals is in his or her best interest?
SR: I actually do that on a regular basis. I usually tell the individual that owning precious metals is no longer just an option. It has become a necessity, if you want to protect yourself from the inevitable financial crisis. The financial crisis may not be imminent, but it's inevitable. You should get into gold and silver, and between gold and silver, silver is more affordable. It's easier to buy a $30 silver coin than a $1,400 gold coin.
TGR: What's your silver investing strategy? Tell us about your silver portfolio.
SR: I buy physical silver. I actually bought some—not a lot—very recently. I buy silver bullion whenever I have the funds, but not on the scale that I used to given recent silver prices. But other than that, my investments are largely in silver equities. I spend a lot of time analyzing these.
TGR: When it comes to silver equities, there are several large, steady silver producers. But there's much more leverage to be had with small-cap silver producers and explorers. How do you pick those stocks? Do you prefer specific jurisdictions? Is it about grade? Or do you rely on other tangibles?
SR: All of the above. But people are the most important consideration when picking these junior companies. You also have to look at the assets. I penned an article a while ago titled The Coming Wave of Resource Nationalizations where I made the case that hard assets—and silver is definitely on that list—will be nationalized by governments where those assets are located. It's not specific to silver, but silver is very prominent on that list. It's one thing to nationalize timber operations or coal, but it's a different story when the asset is basically money that is very liquid and universally accepted. The geopolitical aspect is becoming increasingly important, and lately I have been putting more emphasis on that. On the flip side, it's not very easy to do because silver deposits largely occur in the Americas. There are some in Canada, but most are in Mexico and Peru. There are some in Argentina. There are some in Russia and China, but that about sums it up. There are not many other jurisdictions where you can find silver assets that are investment grade.
TGR: Sounds good. Do you have some parting thoughts on silver?
SR: In previous interviews with The Gold Report, we've discussed why silver is important, its uses and some other things. And I provided some potential price targets for the cycle and said we're going to see a silver price in the triple digits. I think we're well on our way now.
This year, 2011, should be a very good year for silver. This current correction may have to do with the amount of bullish commentary on silver. Usually when there is overwhelming sentiment in one direction, price action moves in the opposite direction. I actually think it's a welcome development, because silver is very overbought on a technical basis, but not as an asset itself. So I think silver remains one of the best investment options out there.
TGR: Thank you for talking with us today, Sean.
In a previous life, Sean Rakhimov designed financial systems to support various areas of the investment banking business. He seized the opportunity to learn about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. He's not only been putting that knowledge to work ever since, but also sharing it with others, with writings published on such Internet portals as Le Metropole Café, 24hGold, 321gold, Kitco, Gold Seek, Gold Seiten and—of course—The Gold Report. Sean has been a contributor to renowned silver guru and writer David Morgan's newsletter for many years and publishes and edits his own website, SilverStrategies.com focused on silver and related investments since 2004.
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-- Posted 15 January, 2011 | | Discuss This Article - Comments:
Last Three Articles by The Gold Report and Sean Rakhimov