-- Posted 1 January, 2008 | | Discuss This Article - Comments:
Source: SilverSeek.com
(This article was originally written in early October by silver analyst Theodore Butler, an independent consultant.)
When it comes to investing, there are only a few broad asset classes from which to choose. While there are many thousands of individual choices within each category, the actual asset classes are few in number, and include stocks, bonds (and interest-bearing deposits), real estate and all others (tangibles, commodities and collectibles).
Over the years, I have tried to make the case for investing in silver, by comparing it to other commodities, gold and even raw land. I believe those comparisons (all of which favor silver) are as valid as ever. Today, I will try to convince you about the merits of silver by comparing it with common stocks. I will attempt to demonstrate why silver will be a better long-term investment than virtually all common stocks.
I believe, given the verifiable facts about silver’s supply, demand and future prospects, that it’s a better choice than any single stock. I won’t be so presumptuous to assume that there won’t be a stock that will match or better silver. However, you can’t pick one of them today with any certainty. Please envision mentally an ounce of silver as one share of common stock. One ounce equals one share. I believe if you perceive an investment in real silver as you would any well-researched common stock, you will greatly improve your chances of success with silver. And to insure we are comparing apples to apples, I am assuming a full cash investment in either, no margin or leverage whatsoever.
The ownership of common stock has been one of the great creators of long-term wealth known to modern man. Such ownership is an important cornerstone of prudent financial planning for the vast majority of mainstream investors. With very few exceptions, common stocks belong in any balanced investment portfolio. The reason why common stocks are considered an important component of just about every investment portfolio is that they promise higher returns than no-risk investments, such as insured interest-bearing deposits. Of course, the promise of higher returns with common stock ownership comes with commensurate higher risk. Therefore, the accepted prudent approach is to balance one’s portfolio with a mixture of low-risk, low return investments and higher-risk, higher return common stock investments.
One of the general requirements for long-term common stock investment is a broad sense of optimism for the future, at least for the prospects of the stock you may be investing in. It’s hard to invest for the long term if you think the world is ending. That scenario is one reason why folks invest in precious metals, namely as a hedge against things going very wrong. But that has never been a big motivation behind my interest in silver. My main attraction has always been silver’s growing, vital role as a strategic industrial commodity in an expanding world economy. It’s always been a bonus that silver may get flight-to-quality buying in the event of rough economic times.
Silver, by just about any relative objective measurement, is cheaper than almost any other industrial commodity and has far greater potential to the upside. It is relatively easy to envision the price of silver increasing ten to twenty-fold in the long term, on its merits. It’s hard for me to imagine a ten to twenty fold increase in oil or copper or nickel. Like a common stock, anyone can buy and hold silver. The average investor could not hold real copper, oil or nickel.
Common stock ownership represents a bet, not only on an individual company’s prospects, but also on broad global economic developments. Same with silver. The true success stories in stock ownership invariably revolve around long-term holding periods, and not quick in-and-out trading. So it will be with silver. You shouldn’t buy a common stock unless you anticipate dramatic long-term gains and are prepared to weather the inevitable short-term price fluctuations. Ditto with silver.
The most important investment rule is to not lose money. Let’s compare the risk profile of silver versus common stocks. The biggest risk with any common stock is that something could go wrong and cause the price of the stock to decline drastically, or even become worthless. Companies can go bankrupt for a variety of reasons. Silver can’t go bankrupt or become worthless. You don’t have to worry about an accounting surprise or bad business development.
Common stock ownership carries a higher risk than deposit accounts. Therefore, diversification of holdings is a core principle in prudent stock portfolio theory. Because silver can’t possibly become worthless, diversification into things other than silver is much less of an issue. The likelihood of continued world demand for natural resources far into the future offers a compelling specific case for investing in silver. It is also a great proxy for the natural resource sector in general. In other words, if you envision continued strong world demand for commodities of all types, silver is a great way to play them all. It is impossible for there to be broad demand for industrial commodities without there being strong demand for silver. Diversifying into silver makes sense, diversifying out does not.
Silver has a lower risk profile than a common stock. It easily satisfies the most important investment rule to not lose big. What about potential relative reward? Here, the comparison overwhelmingly favors silver. While some stocks will prove to be outstanding investments in the years to come, the trick is to identify them before hand. That’s a tall order for the average investor. There is no way I would risk my reputation by speaking with such certainty about a stock the way I speak about silver.
In order to think in a long-term mindset, imagine that you will suddenly be out of touch for the next five or ten years. You have one choice where to put your money while you are gone. If your goal is to return wealthy, silver should be that choice. One reason is dilution. It is very hard, and perhaps impossible, for additional shares (of silver as a stock) to be issued and your ownership diluted. That’s because additional silver shares can only be created by digging them out of the ground. The total mined must be in excess of what is being consumed by industry. That hasn’t happened in more than 60 years. In fact, the total amount of silver shares issued and outstanding has been reduced by more than 90% over that time.
The total amount of silver bullion in world inventories (the equivalent of the total amount of shares any stock has outstanding) has shrunk dramatically because of the structural deficit over the past half-century. It’s the same as a company buying back 90% of all its outstanding shares. This automatically increases the value of the remaining shares (silver ounces). In addition, because the metal silver can’t have a management and board of directors, there is no possibility of a sudden unilateral decision to issue more shares or grant options. The only way to increase the amount of silver in existence is over time and at great expense, not with the stroke of a pen.
Only an infinitesimal percentage of the world’s investors recognize that the amount of silver in existence has been so drastically reduced. Once that understanding kicks in, it will be reflected in the price. Imagine the price impact on a stock if it was discovered that there were 90% less shares in existence than previously thought. The key to silver’s future profit potential as a common stock is based not just on the fact that its shares have been greatly reduced in quantity and increasing that quantity is difficult at best, but also the impact of future demand for those few shares remaining. That means that new investment flows must compete over the shares that do exist. This competition will drive the price sharply higher.
What I am trying to convey is the thought that silver available for purchase can only come from other existing owners of silver, and not from newly issued stock. While this can be said about many items, it is unusual in silver. In addition to the small, unrecognized amount of silver in existence, the current low price makes the value of all the silver in existence shockingly low. If silver were a company, it would be a prime target for a hostile takeover. However, the owners of real silver will never be sold out too cheap by a company management, because none exists in silver. No matter how high the price, no one can force you to sell.
Naturally, I can’t compare silver to a company that is an ongoing business. They are two different things. One is an inert material, while the other is a business operation. But there are remarkable similarities in how outside investors participate in owning a percentage of each.
When I compare silver to a common stock and suggest you buy and hold silver the same way you would buy and hold a stock on a long-term basis, I am talking, for the most part, about buying and holding real silver in your possession. US Mint-issued American Silver Eagles are one favorite form of mine. When you own the actual physical silver, you are far less likely to sell it for a short-term profit. When silver becomes a possession, you have to find a safe place to keep it. You own it, but it also owns you. Oddly enough, it’s a bother to sell it, ship it and part with it. You hang on to it and that’s what gives you the best chance for big gain.
If you are fortunate enough to be able to buy quantities greater than you can practically store yourself, you must employ professional storage. Make sure you get the specific weights and serial numbers on all 1000 oz bars. Never let the dealer you buy from hold the silver for you. Make sure an institution stores the silver in your name and not the name of the dealer you bought from.
The perfect common stock would include low risk, with a guarantee the stock could not go bankrupt or become worthless. It would also include a guarantee that new shares not be issued easily. It would preclude management mistakes and internal financial surprises. There would be no management succession problems or surprises in foreign countries. It would thrive in a growing world economy. It would be immune from financial and currency upheavals. It would be undiscovered by the great majority of investors. Its value would be misunderstood and under- appreciated. It would be a stock that wasn’t a fly-by-night, and had a long history. Most of all, it would be cheap, with the potential to multiply many times in value. It would be capable of favorably impacting your financial condition. You can dream of such a perfect stock, or you can just buy silver.
-- Posted 1 January, 2008 | | Discuss This Article - Comments:
