-- Posted 3 August, 2004 | | Source: SilverSeek.com
As expected, there was a major liquidation of tech fund long gold positions, with massive dealer short covering. According to the latest COTs, as of 7/27, the gold clean out appears complete, with the path of least resistance now to the upside. How significant the probable gold rally will be depends upon how aggressive the dealers short sell on that rally. In silver, we had expected dealer short covering to a lesser extent. The silver COTs remain neutral and it is expected that the clean out in gold dealer short positions will aid in a silver rally from here. Also supportive is the tech fund clean out of short dollar currency positions, clearing the way for potential dollar declines.
On the COMEX silver warehouse stocks situation, there has been noticeable movement between various warehouses, but the net total out movement has abated for now. One feature of the recent warehouse transfers seems to confirm my theory that a large dealer, Calyon, was tricked out of its silver by other dealers associated with HSBC and Scotia Mocatta. This silver was originally stored at the Brinks and Delaware warehouses, and seems to be in the process of being transferred to the warehouses owned by HSBC and Scotia Mocatta. The motive for the transfer is simple – why pay storage fees to others, when you have your own facilities? The bottom line is that this silver (around 25 million ounces) appears to have found a new owner and home, and may no longer be available to the market at current prices.
I discuss such short-term considerations in silver to include as many relevant aspects in silver as possible. But to most people, it is better to focus on the long term. Most people don’t stand a chance of short term trading success; their only legitimate chance for investment success is long term. That means buying something of value and putting it away. This is the approach to take with serious money.
There are three broad choices for serious, long-term investments - stocks (including mutual funds), bonds (including bank deposits) and all others. The "all others" category would include collectibles, real estate and tangible commodities (including gold and silver). For most people, there are only two choices, stocks or bonds. Among commodities and collectibles, choices are few. That’s one reason why the majority of investors gravitate towards stocks and bonds. Even if an investor held a strong conviction about holding copper or oil, there is no practical and simple way to profit, except to invest in the stocks of the companies producing those commodities.
The only real choice for diversifying is precious metals, principally gold, or to a lesser extent, silver. The predominant investment choice is gold mining stocks. However, there is risk in owning gold stocks. Mining in foreign countries carries a risk of nationalization and expropriation, as well as currency risk. Then you have the problem of mines petering out, superfund problems with mine closures, strikes, accidents, permitting problems and environmental concerns. We may not be able to say with certainty what the price of the metals will be 10, 20, or 30 years hence, but there should be no question they will exist. That’s something you can’t say with about a particular stock or bond.
Gold represents a true diversification from stocks and bonds. That’s because gold is outside the financial system and is no one else’s liability. It has prevailed through the ages and is recognized everywhere in the world. If there were no such substance as silver, gold would be the only choice for a precious metal diversification. But, amazingly, all the attributes of gold are present in silver, and to a much greater extent. If you like gold, you should love silver. That’s because, in addition to sharing and magnifying all of gold’s attributes, silver has two unique pluses of its own, namely, there is less of it, and that inventory is shrinking. Those two factors mean, in future investment performance terms, that silver is like gold on steroids.
Not only is there more above ground gold, the total value is 200 times greater than silver. Silver’s total dollar value is less than one half of one percent of gold’s total dollar value. If all investors dumped all their silver and shifted it into gold, it would hardly cause a ripple in gold. If only one percent of the world’s gold was sold and shifted into silver, a trade that makes sense to me, it would be impossible to calculate how high silver would explode. One percent of the supply of gold has more value than all the silver in the world. One percent is more than 15 times the current value of all the silver in the COMEX, the largest stockpile in the world.
I have continuously suggested that folks buy silver due to its low risk and potential high price for the past three and a half years. I’ve argued silver would do better than just about anything else. How has that recommendation held up so far? For the three years ended in 2003, the price of silver averaged $4.61 an oz. For the first six months of 2004, it averaged $6.48, 40% higher. Silver doubled in price from the low points of the last three years, to the highs earlier this year. For stocks, the S&P 500 is approximately 15% lower from the end of 2000 through 6/30/04, with the NASDAQ down about 30%. And stocks were much lower in the interim. Bonds are up in value around 10%, on top of a total income stream of 20% for the duration. I’d characterize silver’s performance as respectable, especially considering the low risk and still unrealized profit potential.
Generally, an investment becomes overpriced if it’s extremely popular with the masses. Clearly, that’s not the case with the precious metals. Silver is about as under-owned as an asset can get. There are many well-known and respected market analysts warning of danger ahead for stocks and bonds, while I see zero intelligent debate on the long-term downside on silver. In fact, I get requests from readers to direct them to those who make a legitimate bearish case for silver, so they can balance what I write. I don’t know where to direct them. Instead, I see more and more independent confirmation of silver’s bullish case.
Some experts say the stock and bond markets are manipulated by the government. I think there are elements of truth to that. In the long run, is it better to buy assets that may be artificially elevated (stocks and bonds), or artificially depressed (silver)? Everyday, there are more shares of stocks and bonds. There is more gold in existence every day. Only in silver is there less daily, the result of more demand than production. The law of supply and demand dictates prices must go higher.
One of the world’s most successful investors, Warren Buffett, thought silver was appropriate for serious money seven years ago, when he bought a very large chunk. While the price may be a bit higher than what Mr. Buffett paid, the value is greater now. In the seven years since his purchase, we have 700 million ounces less silver in world inventories. It’s not everyday that the average investor gets the opportunity to invest serious money at a better value than did Warren Buffett.
What makes silver so attractive now as serious money is its current low price. This low price means the current risk is relatively minimal. For instance, it is hard to imagine a sudden 3 or 4-dollar drop from 6 and change per ounce. But at $12 or $15 or more an ounce, such a decline becomes more possible, even if only temporary. More important than trying to time any market is to acquire good assets at undervalued prices and let them ride. There is no way of knowing when something may happen. It is more logical to gauge if something will happen, especially if there is no great risk associated with buying and holding such an asset. Silver more than meets the standards for serious money.
-- Posted 3 August, 2004 | |
