Q: In looking at the short, medium and long term charts of silver there appears to be tremendous resistance at about $5.00 an oz. There also appears to be signs of double bottom and reverse head and shoulder trading patterns in the metal.
What are the buying signs for silver other than the DJIA to silver ratio being extremely high and the Gold to Silver ratio is historically very high. Are there some supply and demand situations that are not obvious to someone that has not historically followed silver?
In looking at the charts of the metal and the producers it appears that if silver could break out above $5.00 the metal and the producers shares could have a huge run.
A: Silver above $5.00 is a massive breakout!
Going back to 1980 there was around 2.5 to 3 billion ounces of silver above ground and the COMEX warehouses contained above 300 million ounces of silver and yet silver was able to break above $50 an ounce!!!
Today above ground stockpiles of silver have dwindled to almost nothing and COMEX warehouse inventories are down to 106 million ounces of which 66 million ounces are already spoken for.
Silver consumption has been outstripping supply for 14 consecutive years!
I think that we are very close to a silver crisis unfolding. Silver is absolutely essential to industry and to the build out the infrastructure of countries.
When the price of silver really begins to take off it is important to know that it is price inelastic. As an example, very little silver is in a computer keyboard. So if the price rises from $5 an ounce for silver to $50, the producer may go from having 12 cents of silver in a keyboard to $1.20. They simply raise the cost of the keyboard by $1.00 - big deal. The same applies to telephones, refrigerators, etc.
Also, most all of silver supply is a result of being a by-product of other metal mining such as lead, zinc or gold for instance.
As the price rises, the mining companies won't necessarily respond with more silver mining because their business plans are focused on other metals and silver is just a simple by-product of their core mining functions.
Q: Which of the producers do you think represents the best pure play on a silver run above $5.00 an oz? How would you prioritize investing in the silver mining industry? Who has the best leverage to capitalize on a higher metal price?
A: I am a value-oriented investor and for you and others I am going to come clean about why I trade gold and silver stocks but am extremely hesitant to make any significant bets on miners (outside of trading).
I believe that the majority of these mining companies are run by crooks (but not all of them).
I also think many of their balance sheets are scary at best.
I also have a hard time figuring out the real earnings and cash flow of these companies which I believe is extremely important in determining the "true" value of any company.
Benjamin Graham and his disciple Warren Buffett believe in determining the "true" value of companies before investing and I just think it is very difficult with mining companies.
Also, Warren Buffett placed his bet in 1997/1998 by purchasing 129.8 million ounces of physical silver. I doubt you will see Berkshire Hathaway take any position in any mining shares.
I do not believe I am more intelligent than Warren Buffett and therefore have followed his lead by purchasing (so far) over 3 tons of physical silver.
I recommend physical silver over silver stocks for that reason.
Having said all of that, of course there is more leverage in silver stocks, but also more danger, an example being CDU which was recently more than chopped in half going from a high of $2.69 to 55 cents (ouch)!
I hope that helps you understand where I am coming from on silver stocks.
Q: I admire your persistence in sticking with silver even when others doubted-including RR. Since physical industrial demand would fuel the rise in silver price, rather than its use as a store of value, I would think Silver bars would be best investment, rather than coins? For a small time speculator-myself, what would your advice be? Where to store in house, bank or storage unit (with old medical charts)? 1000oz bars or 100 oz bars? Who to buy from and who would you sell to? Each bar would have to be assayed before selling?
A: In the end, investor demand will make the price of silver really explode. I think any silver is good silver. Having said that, I believe 1,000 ounce bars are the best way to invest in silver for the reason you mentioned. When the silver crisis emerges I believe industrial producers will pay a premium in order to get ready to use 1,000 ounce bars as COMEX defaults on deliveries will be rampant. Also, with 1,000 ounce bars you can buy them extremely close to the spot price of silver.
Q: Perhaps coins like Eagle, would be easily traded, with known value, due to standard and recognizable coin related traits, unlike items which could be of variable quality, i.e. bars.
A: Both coins and bars are extremely liquid. The advantage of Silver American Eagles over bars is that in a meltdown situation the coins would be much easier to barter with vs bulky bars.
Having said that, Silver American Eagles must be purchased at a healthy premium at say 35% over spot price. 1,000 ounce bars on the other hand can be purchased at pennies over "spot" and the bid/ask spreads are narrow.
Either way I believe investors in physical will have magnificent gains before the bull market in silver is over.
Q: My one question is, I've seen comments from time to time, mostly on the gold sites, by those who seem keen that everyone should have some bags of "junk" silver coins, probably stored at home for emergencies.
Like you I think it's unlikely (though not impossible) that gold and silver will be confiscated (even less likely in the case of silver). I also don't think things will get to the state that one will need to barter for survival. That being the case, what are your thoughts on owning a bag or two of old U.S. silver coins? Or would it make more sense to just own the bars as you say and perhaps some silver American Eagles as a supplement?
A: Junk bags of silver is a great idea. They can be purchased with a relatively small premium over spot price and are an excellent idea. Junk silver bags for those who don't know are pre-1965 silver U.S. minted half dollars, dimes, etc.
Let me just say there is nothing wrong with Silver American Eagles either, one of the most beautiful coins ever minted, I just wanted to point out that there is a hefty premium (roughly 30 to 35%) above the spot price.
Having said that, with where the price of silver is most likely headed (much, much higher) in the coming bull market, investors buying any silver will be extremely happy in the long-term.
It is also very easy in an estate to pass on precious metals to children or grandchildren, etc.
Q: Thought these bags might be a problem in case one wanted to sell?
A: Bags, bars, coins all extremely liquid.
Silver Where to Keep It?
Some have asked where to store silver, home, bank, etc? That is a very personal choice and it varies from person to person.
For myself, I have vault privileges at one of the safest banks in the United States, according to Weiss Rating Systems, and this is where my silver is stored. No, the bank doesn't lease or swap silver. So I choose to pay to have my 3 + tons of silver stored at my bank.
I did not want the silver stored where I live in case I am robbed.
There were 9,000 bank failures from 1929 to 1933, so if you choose this option for yourself, please make sure that you pick as solid an institution as possible. In the book Conquer the Crash, Prechter shows the 2 safest banks in each state as rated by Weiss.
Having a small amount of silver at your house in case of emergency is not a bad idea either.
If you choose to store silver or gold at your house please put an intensive amount of thought as to how you will hide it from thieves. I don't have any advice on this as I did not choose this option.
I would not leave my silver in a co-mingled situation in an institution that engages in leasing or swapping. I will not go into this any further except to say that you may find your silver is not there when you request it, so in the end you are stuck with paper and a lawsuit in what may be a crumbling institution.
Obviously paying to have your silver or gold stored even in a safe institution can still end badly if the government chooses to confiscate individuals gold and silver. This would make the home option or overseas storage a better option. I do not anticipate that the government will confiscate either gold or silver so that explains my personal decision with my own situation.
Having said that always keep in mind that the United States or another nation may choose to "appropriate" or "nationalize" it's own nations mines so that could even end badly for investors.
Hope that helps whoever was asking.
Silver, one final point
Silver went up roughly 38X in price during the last bull market in precious metals.
Nobody knows how silver will perform in the coming bull market, but the fundamentals have never been better for silver than they are today.
Folks who decide to purchase physical silver should take delivery and SHOULD NOT USE LEVERAGE in their physical purchases! Always pay in full.
Eric King
July 8, 2003
Courtesy of
www.silver-investor.com