DoctoRx wrote this piece before this morning’s silver flash crash.
Silver prices are quite vulnerable right now.
Despite being almost 30% off their recent high, they are slightly more than double their price of one year ago, which in turn was nicely up from one year before that. When I last did a post praising the investment qualities of silver, on September 12, 2010, the fund “SLV” was trading around $19.50. SLV is now pushing $36.
More to the point, there are clear signs of froth in the silver community. In that post, I stated:
Silver has some highly committed partisans. Some of them argue passionately that there is a cartel that has been manipulating the price of silver down, and that there are massive “short” positions that would cause a tremendous rise in silver’s price should these positions have to be covered.
I have no opinion on this controversy. It is, however, helpful to less committed silver bulls to have owners of silver who are not looking simply for another 5-20% appreciation (for example) before they sell. There may be many holders of silver who are looking for much, much higher prices. Thus the more modest aspirations I have for silver prices may allow me to sell with less competition from other sellers.
I did sell most of my silver “too soon”, that’s for certain, though I replaced it with other “hard money”-type assets that also appreciated. I continue to hold some physical and some paper silver, because I do think that it is a more-or-less permanent part of a sound money-oriented investment portfolio.
I grew up in a house with pounds of silver sitting around in the basement, as my father was an inventor in the silver field. To quote him, “Silver is a junk metal”. Silver is mostly produced as a by-product of mining of other metals, such as gold or copper. Silver has no mystique in my mind. It has some fine physico-chemical characteristics, but there is plenty of silver in this world. So long as silver remains a non-monetary metal, the normal pattern of very high silver prices is to encourage substitution to other substances in manufacturing processes. Thus, silver is very different from gold, which has been generally agreed by central banks and many people across the globe to represent wealth, and which can act as a stable store of value because there are so few industrial uses for gold given the high value it has commanded for centuries as the monetary metal par excellence.
The silver space is replete with allegations of market manipulation, and if some of them are correct, its price could indeed skyrocket soon. However, I am skeptical, because a major paper silver trading vehicle, the Sprott Physical Silver Trust (PSLV), trades at a 17.1% premium to its net asset value. Why anyone would pay that much of a premium for a fund that holds silver, even with a redemption policy into physical for very large holders, is beyond me. I called up a local coin dealer yesterday and was informed that I could buy and sell physical silver at less than a 5% spread between bid and asked. There are no shortages for a retail investor, and the dealer was talking about a substantial $25,000+ cost for a bag of silver. I thus suspect that more likely, the small investor has ended up on the wrong side of a trade involving an asset whose price is too high for a challenging economic environment.
Every day that I look at the futures market and continue to see $100/barrel oil, as is the depressing case again today, the more I anticipate the stereotypical response of the U.S. economy to very high oil prices, which is an economic downturn. Given that silver is basically an industrial metal and is a monetary metal primarily in the minds of its partisans (though it may become one again), we just may find out that there has been a lot of double ordering of silver by its users in order to guarantee supplies. Should business demands unexpectedly blindside those users, watch for a glut and plummeting prices. Silver has no, I repeat no, price stability.
Silver may well be the hard money asset of the decade, as Eric Sprott has stated. It may however do that by first presenting a materially better buy-in price than we see today.
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