Silver Update


Here is an update on silver.

The first question is, “why invest in silver” and  why “international silver?”

The second question is “how should we invest in silver?”

Should we invest in silver bars?

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Should we invest in silver coins?

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Should we invest in a silver business?

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Should we invest in silver shares or certificates?

What is international silver?  Why and when should we hold international silver versus local silver?

Let’s begin with silver question #1, “why invest in silver?”  Should we invest in silver?

There are three reasons to invest in silver.  Silver can be viewed as a hedge (insurance), as a speculation or as a long term investment.

Silver… like all commodities is a hedge against inflation. We should expect inflation. Inflation is the great tear in the fabric of modern society.  Millions of us in the western world have this problem…inflation.

Just not right now.

Looking ahead we can see that for the past 39 years, since the US dollar was unhinged from silver, the buck has been falling in value versus most currencies.   Yet the greenback’s demise is not just a symptom of US government ineptitude.   As in so many ways, the United States is a leader… doing things bigger and better.   In this case the US government is doing bad better, destroying the purchasing power of its currency more magnificently than most governments.

Do not let this reality blind you to the fact that almost all currencies are losing purchasing power!

Politicization of global currencies  affects us all.

If we are near retirement age, inflation can slaughter our pensions and turn the golden color of our last years to rust instead.

Younger people, raising their children, have it even worse.  Food, clothing shelter…educating the kids, health insurance…taxes not to mention dealing with the stress of an ever faster, more complicated world erode the value of currency.

The really young ones? Who knows what our children and grandchildren face because of inflation?

There are four main solutions to inflation… invest in your own business… invest in equities…  invest in real estate or invest in commodities. That’s all there is folks…commerce fights inflation. All commerce is the process of integrating services, natural resources and real estate.

Gold and silver are the two most liquid, monetary commodities and as such good potential inflation fighters.

The first way to invest in silver is as an investment or insurance (or hedge) against inflation… pure and simple.

Modern society needs a central commodity of value used for exchange of goods and services.   If barter was the only method of exchange we had, the global economy would contract enormously.

Metals were used as the first currencies of human civilization as malleable, versatile metal gained importance as the component of axes, knives, plows, etc.    Bronze became the first universal medium of exchange around 4,000 B.C.  The earth’s four most ancient civilizations — India, Egypt, Babylon, and China — have all left records indicating that bronze and copper were used as currencies.

The important point here is that the first currencies did not merely “represent” items of value — they “were” items of value.  A small lump of bronze could be melted down and combined with other lumps of bronze to make an axe or sword.  People knew how much bronze it took to make such implements, and a lump of pure bronze had definite, universal value.

As time progressed, metals became the medium of exchange in every civilization. Bronze, copper, gold and silver were durable and could be stored for long periods of time without maintenance. They were easily transportable, all qualities required for a commodity to be an efficient currency.

Silver was a base for some of the earliest coinage around 600 B.C. when the Greeks coined silver money stamped with the head of an ox.

Currency Debasement

If it took man many millennia to learn how to create effective money.    Governments took far less time to learn how to debase it.  History is filled with stories of government’s destroying its currency.

The Greeks were responsible for introducing one of the first forms of debasement. They invented gold or silver plated base metal coins.

Rome improved on this plating idea allowing its mints to produce one plated coin out of every seven coins produced. Within a few years, the value of Roman money fluctuated so violently that it was difficult to determine how much anything cost.  In fact, tis was such a problem that the word gratitude comes from the name of a Roman “Gratidianus” who helped restored the value of Roman currency.  He became a hero and people gave him enormous gratitude for this.   This story shows how deeply the value of money affects the common person and society as a whole. People crave stability.

The maintenance of monetary value is vital in our modern society but because severe fluctuations of currency values do not often result in widespread loss of life we do not notice the steady erosion of purchasing power.

But money allows specialization, the ability to trade and this is a major foundation of a modern society.  When an economy’s currency (medium of exchange) is weak, the economy is at risk.  History shows trade to be an essential factor of advanced society. History also shows that stable money is essential to trade. We can conclude that currency stability is essential to society.

However history also shows that there has never been a time when all currencies were stable. There are rarely times when any currency is stable for long. In economic terms, man’s whole story can be told in terms of many currencies and their continual rise and fall.

The US perfected this system of debasing its money and US coins have lacked any gold or silver, or metal of any value for years.

The current version of the quarter is nickel plated copper.  Before 1965, quarters contained 90% silver, 10% copper.

The dime’s composition was 90 percent silver and 10 percent copper until 1966.  Beginning in 1965, dimes also began to be minted with a clad composition of cupronickel; this composition is still in use today.

In 1962, the pennies metal composition was 95 percent copper and 5 percent zinc until 1982, when the composition was changed to 97.5 percent zinc and 2.5 percent copper (copper-plated zinc).

Merri and I continually focus on three solutions to this problem of a dissolving currency.  One step we take is to continually improve our ability to serve.  One is to invest in real estate in Smalltown USA and Ecuador.  One is multi currency investing and we view gold and silver is one form of international currency.

This leads us to the question should we invest in silver as a hedge against inflation?

The charts from www.Kitco.com must gives us pause and suggest that silver is not a good hedge against inflation.  Here is silver’s price movement from 1792 to 2000.  Yes silver was a hedge against inflation… IF… you held it for 180 years and ignored (and did not buy during) the 1970’s spike.

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Here is silver’s rise from 2000 until now.

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Silver only looks like an inflation hedge only if you view the graph from 2004.

Going back a century… gold looks like a better hedge against inflation.  Turning to www.Kitco.com again, here is gold’s price from 1883 to 1999.

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The chart from 2000 to date shows gold effectively advancing with inflation.

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This history suggests that gold is a much more effective hedge against inflation than silver.

The charts above and the 2009 silver chart from Kitco.com shows that the price of silver is volatile.  Volatility can create profits for a trader.

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This silver volatility leads us to Question #2: is silver a good speculative investment?

With silver hitting $18 an ounce and gold having passed $1000 an ounce many investment gurus suggest there may be a great leap in the prcie of silver.

Yet right now the economy is in a deflationary mode.  This deflation may be short term, but one must question how long silver’s price will rise?

Since 2003 there have been six strong silver price rises.  Each lasted seven to 12 months before the price dropped dramatically or entered a dangerous period of sideways motion.  The average upwards period was 8.8 months and this price run that last broke in October has lasted eleven months.

This suggests that the current downturn is the beginning of a strong correction or a period of sideways motion.

Silver’s price is more volatile than gold’s price.  The global economy is seeing a downturn. Silver is more affected by industrial activity than gold and silver has enjoyed a strong run up.   These are all downwards pressures on the price of silver now.

Speculators may be selling rather than buying silver right now.  Plus professional speculators know to never risk more than they can afford to lose.

Chartists note that silver price movements tend to lag gold in the early months of a major price advance and then suddenly sprint ahead, bringing down the gold-to-silver price ratio.  A gold to silver price ratio chart at www.gold-eagle.com/charts/gegsr.html

gold to silver chart

The current gold to silver price ratio suggests an upwards pressure as it stands at around 64 today compared with its long-run average of 15.  This leaves considerable room for a closing of the gap between the gold and silver price.  Owning silver therefore adds a bit of leverage over the gold price but as we have seen with a lot of downside risk.

Most of the analysis above suggests that silver is not a good long term investment.  Instead it is a speculative medium. One way to spot when to speculate is when the Gold-Silver ratio rises.

A November 3, 2009 article “Gold to silver ratio jumps higher to 63.92” at Commodityonline.com says:  Silver is showing as a large down week at current 16.29. The price action is bearish with support not seen until 15.75. We believe significant liquidation will take place on a break of 15.75. The Gold Silver ratio has seen a major jump higher this week to 63.92 from last week’s close of 59.79. Support is now at former highs 62.02 with next resistance at 65.16 (50% Fibo of 71.91 to 58.41 down leg).

The next question is how to invest in silver?

Most of us are not speculators and silver is a tough commodity to trade.  So if not in speculation… what opportunities does silver offer? 

The least expensive way to buy physical silver for investment and to conserve assets is actually by buying silver ingots or bars.

Mint coins is a more expensive way to buy silver. There is a premium or mark up over the spot price of silver. That mark up is less for ingots and bars than for mint coins.

The larger the bar, the lower the premium.

However there is still some premium… PLUS when you buy the physical metal there are storage costs.

There is also a security risk.  If you are buying silver bars from an unknown source  smaller bars and ingots (one and 10 ounce) are safer.  The larger bars can be debased by drilling holes in the side, filling the bar with lead and covering up with silver again. This is almost undetectable.   Smaller bars are not a worth the effort to alter.  In this instance a mint though more costly provides a certificate and seal in a protective plastic capsule that can protect the bar’s value.

Silver certificates or silver ETFs are a less expensive way to buy silver.

Silver certificates are issued by banks and institutions that are in the business of storing gold silver ad other precious metals.  Perth Mint is one of these businesses and details are available from my friend Michael Checkan at Asset Strategy Corp.

What are Silver ETFs

Silver ETFs are a special type of exchange traded fund. These types of funds are only track the price of silver much as gold EFTs track the price of gold. Silver exchange traded funds are traded on all the major stock exchanges including London, Paris and New York.

When a person opens a silver exchange trade account they then buy in silver and their holding is an amount of silver represented by their account. The silver is stored in vaults around the world, usually in 1000 ounce silver bullion bars. If one has paid in say, for example, 5000 USD into a silver exchange traded account, one would own that equivalent of silver expressed in ounces less any charges. Usually a commission of 0.4% is charged for trading in silver ETFs and an annual storage fee is also charged as of course one actually owns the silver.

Silver exchange-traded funds (or ETFs) can be a quick and easy way for an investor to gain exposure to the silver price, without the inconvenience of storing physical bars.

Some silver ETFs are:

iShares Silver Trust (NYSE: SLV), launched in April 2006 by iShares.

Central Fund of Canada (TSX: CEF.NV.A, NYSE: CEF) has 45% of its reserves held in silver with the remainder invested in gold.

In September 2006 ETF Securities launched ETFS Silver (LSE: SLVR) which tracks the DJ-AIG Silver Sub-Index, and later in April 2007 ETFS Physical Silver (LSE: PHAG) which is backed by allocated silver bullion.

Many people feel more secure holding their own silver and storing it either in bullion bars and do not trust stock markets or certificates.  Each person should consider their feelings versus the costs.

Another way to invest in silver is to buy silver stocks.

Silver mines produce around 650 million ounces of silver a year. Plus about 200 million ounces from scrap recycling, and 100 million ounces from investor selling, or government selling. That’s a total of around 950 million ounces a year.

Buying silver shares creates added risk and opportunity of the equity as well as silver market and can range from buying silver blue chips of major producers to shares in the smaller silver producers, or silver explorers that have higher risk and higher profit potential.

This brings us to the most profitable way to deal in silver… to have a silver business.

This can be as simple as being a silver collector.   If you like coins, bars, history and collecting you can enjoy a business that is part  hobby. This can create serious investment potential (if you become good and know what and how to buy).   There are many delightful coins to collect and, over time, you are likely to improve your asset holding in silver more than if you are buying bullion.  Few investments have risen as much as good collections whether they be of coins, wines, art or cars.

Manufacturing or importing silver products is another way of investing in silver that can be profitable.   This is one of the Ecuador silver products our Ecuador export delegates see on our Ecuador export tours.

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This is a business where your inventory will appreciate when silver prices rise… but prices rarely drop when silver prices fall.

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More Ecuador gold & silver art.

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Many of our Ecuador export tour delegates look at…

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silver products on their tours.

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In review, silver does not look like the best inflation hedge. Personally,  I choose gold. See our last gold update.

However for those who feel at any time that silver is under priced… this is a commodity that has sudden price surges (as well as drops).   With slver, good speculators can do well.

Silver has great beauty and attraction so if your love affair is with silver… turn your passion into profit  and consider a business in silver… collecting, manufacturing or importing of silver.

Gary


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