Silver has catapulted to new multi-decade highs as extreme tightness in the physical market, unrest in the Middle East, and accelerating currency debasement create a perfect storm for the white metal.
If you’ve bought silver bullion and held onto it as we’ve been repeatedly advocating since 2006, you’re sitting pretty right now! Owners of mining stocks also have reason to smile.
In our market update at the end of January (“Precious Metals Correction Likely to End Soon”), we alerted you to a probable bottom in the Market Vectors Gold Miners ETF (GDX). Since then, GDX has gained almost 15%, but it has not yet topped its December highs.
We did report that silver, being extended far above its long-term moving averages, could be due for some more consolidation before its next major blast-off. But we also warned – and continue to warn – anyone who may still be sitting on the sidelines with no core position in physical silver should NOT wait for hoped-for lower prices, because they may never come.
Silver is moving on its own internal strength, vastly outperforming the other metals, including gold. There is evidence of stress in the physical market heading into the March delivery month on the COMEX, and some sellers of silver appear to be scrambling to get their hands on the metal they owe. And physical demand out of Asia is reported to be huge.
Aside from a brief period in 1998, silver has not been so strong versus gold since the early 1980s.
At the same time, the gold:silver ratio is breaking down into territory not seen for decades!
Now dropping to 42:1, the gold:silver ratio could ultimately fall to 16:1, where there is much historical precedent, and then perhaps even lower. The ratio will certainly oscillate up and down on that path, presenting opportunities to buy gold instead of silver when the ratio gets overextended to the downside on an intermediate-term basis.
We are definitely not suggesting selling any silver for gold yet. But for those already heavily invested in silver, it might now make sense to look at gold.
Platinum (the Forgotten Precious Metal) is Looking Perky
A step beyond gold is platinum, which is admittedly more speculative. However, platinum is significantly undervalued versus gold – and has been since 2008. The platinum:gold ratio stands at 1.3:1, but has historically hovered around 2:1. At $1,820 per ounce, it’s still well below its 2008 high, unlike gold, silver, and palladium which blew out those levels long ago.
On a historical basis, platinum looks undervalued versus gold.
Platinum, which is used in catalytic converters, was negatively impacted because of declines in global auto sales when the Great Recession began and hasn’t yet fully recovered to new highs. With China and India increasing their demand, record platinum prices are only a matter of time.
One interesting factor about platinum is that more than 80% of it is mined in South Africa, a country which is an increasing basket case. Miners are experiencing major political problems and labor issues, and the power infrastructure needed for deep earth mining is extremely rickety and has failed at times. This could cause a production and supply problem.
We cover the investment implications of the precarious situation in South Africa in greater detail in the upcoming March issue of Independent Living (paid subscribers only).
In the meantime, those hoping for a better buying opportunity down the road in silver may find encouragement in the metal’s seasonality. As the graph below shows, silver has a tendency to form a seasonal high in mid to late February and a seasonal low in late June.
Seasonal trends are just averages. Some years are atypical, and 2011 may well be one of them.
Don’t Bet on Lower Silver Prices, but Consider Other Inflation Hedges
The move we expect silver ultimately to make as a consequence of the unprecedented monetary situation and the sheer scarcity of physical stockpiles will be of epic proportions. It will defy cycles and blow through any and all conventional indicators of over-boughtness, which is why you shouldn’t sell silver based on such signals.
A runaway type of move could be occurring now, though we think it more likely that the “big one” is further out in time. The best advice we can give in this situation to investors who already have a substantial silver position is to consider, at least for now, favoring gold and platinum. If silver goes to the moon, the other precious metals won’t be far behind.
On the other hand, if we get a normal seasonal decline in silver, then gold and platinum may temporarily hold up better since they’ve had much less of a recent run-up to correct.
Bottom line on silver: Get some if you don’t have any; hang on to what you do have; and be prepared to back up the truck for more on any seasonal spring weakness.
For more information about buying and selling precious metals plus a report on the markets, please access Independent Living Bullion‘s FREE client newsletter, Precious Metals Quarterly. Another great way to play these markets is to dollar cost average into precious metals, through a monthly accumulation plan.
Ask Lee Now: Answering Readers’ Questions
Dietmar B. writes: I know that there is a risk to a consistent pullback on the silver price. Anyway, I do not want to sell since I believe that in the long run silver will outperform most other investments. Can you please suggest some strategies to hedge against such a pullback, for instance option strategies, and describe them in some detail?
I also believe in hanging onto core silver investments through pullbacks, especially with regard to physical silver. People who try to go in and out of the market tactically risk being out of the market when a sovereign default, a currency devaluation, a billionaire’s attempt to corner the silver market, or some other some “black swan” launches the silver price. (And nobody can know exactly when the next major market-moving event will take place.)
If you do want to hedge an existing position, you can certainly do so via put options on SLV or silver mining stocks. But you must be intimately familiar with the mechanics of options or else work closely with an advisor or broker who is, as there are more ways for option trades to go wrong than right. (David Morgan, editor of our Money, Metals, and Mining subscription newsletter, occasionally advises his subscribers on how/when to use options to hedge silver positions.)
Silver corrections tend to be sharp in magnitude but brief in duration, giving only the most adept (or lucky) hedgers/speculators a window of opportunity to capitalize on them. In the end, I suspect that those who simply hold onto their existing silver and use pullbacks to add more will outperform most of those who attempt to trade or hedge their position on the way up.