Thoughts on 2011 Silver Investing, by Texas Tony

Disclaimer:  This  article represents the opinions of one individual.  Keep in mind my views are more extreme than the mainstream.  For example, I am anticipating significant worldwide financial upheaval in 2011, which could include any combination of collapse and bailout of European economies (Ireland, Spain, Portugal, Greece, or Italy); devaluation or collapse of the Euro; loss of faith in the US Dollar as a worldwide trading tool (note that Russia and China recently agreed to price trade deals in their sovereign currencies, not dollars); further “bailouts” and “Quantitative Easing” in the US Economy;  and widespread municipal bond and municipal pension collapse.  None of this may occur, or only a small and isolated portion; however, all the things listed would further bias silver prices higher.

The successful silver investor in 2011 will need good discernment to separate fact from fiction.  Silver has historically been among the most volatile of investments, and although we sit near $31/oz. today, it could be $8 or $80 in six months.  Silver should be only a small portion of an overall investment strategy.  Having said that, in the last four months of 2010 my stocks returned around 9% and my SLV ETF, which I entered in late August, returned 41%.

Although I am invested in the SLV ETF stock I have stopped adding to that investment and am buying the physical metal instead.  Reasons why are below.

Resources I use, with comments:

  1. The Silver Bear Café:  A good clearinghouse for a variety of (sometimes hilarious) commentary on precious metals investing, Federal Reserve issues, general investing issues, etc.  They also have updated prices and sell silver. 
  2. Zero Hedge Blog:  Another blog which is updated daily with silver and financial articles.  The comments, if you have time, can be enlightening.  These are the folks putting out those funny talking bears videos.
  3. Survival Blog:  Although many articles are geared towards surviving societal and financial collapse, they frequently link to articles on silver investing and appear convinced that silver is headed higher.
  4. KITCO:  I run this in the background when the markets are open:  continually updated quotes, including the gold-silver ratio, charts, etc.  I have not bought silver from them.
  5. APMEX:  I have purchased bullion from APMEX and was very pleased with their service and shipping.  They charge a 3% premium for credit card orders.  Their selection is second to none.  I highly recommend them.
  6. Lear Capital:  they have some of the lowest spreads and cheapest bullion prices on the web; although I haven’t used them, I love their prices on Canadian Maple Leafs.

I also have found pawn shops and antique stores to be sources for economical silver:  some operators appear open to negotiation and/or ignorant of the true value of their wares. (I recently bought 20 2009 BU Silver Eagles for $500 from a pawn shop!)  Remember, though, caveat emptor:  Be ready to walk away from dealers who are unwilling to negotiate.
My main holdings are in one-ounce American Silver Eagles, although I have no bias against generic silver rounds like Engelhard, APMEX, or Sunshine Minting.  Call it a personal bias, but I don’t have much interest in junk silver or mining stocks.

What I’m Anticipating from My Silver Investment:

  1.  I plan to at least double my money from my entry point of $19. on the SLV ETF and $27 (dollar cost averaged) on my physical holdings.
  2. I do not plan to add to my SLV or FGDCX silver and gold funds.
  3. I do plan to continue to purchase physical silver (not gold) as long as the gold-silver ratio stays above 25 and the price per ounce stays below $50.
  4. I would start liquidating my silver purchased at $25 if it breaks above $60 or the ratio drops below 25.
  5. My goal is to own 500 ounces of physical silver.
  6. My best guesses for 2011 target price per ounce are:
    1. Low price (no political and minimal financial upheaval):  $42/oz.
    2. Mid-point price (QE3, failure of one or more European economies, bankruptcy and default of 3-5 midsize American towns): $55/oz.
    3. High-point price (collapse of dollar, collapse of Euro, widespread financial upheaval): no limit to how high it could go, easily over $100/oz.

 

My Opinions on the Various Rumors About Silver:

  1.  The Gold-Silver Ratio has been around 16:1 throughout all of recorded history.  It is out of whack right now, being as high as 60:1 earlier in 2010 and sitting at 46:1 at the end of 2010.  Silver is totally underpriced right now:  if the ratio reverts to its historical norm, with gold at $1,425 per ounce silver should be around $90 an ounce right now.  This is the one paradigm I most believe in.  Given the manifold industrial uses of silver, including applications in medicine, solar power, electronics, and computing, I don’t see how silver’s price will not slowly continue to revert to its historical norm.
  2. A major bank has a tremendous naked short position in silver: buying physical silver will create a short squeeze and cause parabolic, explosive upwards price appreciate in silver:  I rate this a big fat maybe.  It sounds too good to be true and thus doesn’t pass the smell test:  it sounds too conspiratorial.  But, then again, a Major bank just took a position in 80% of the copper reserves in Europe (as a hedge against their silver short??!!) so we’ll need to wait and see.
  3.  The SLV ETF is nothing but a Ponzi scheme; since that “major bank”  is their custodian, and we know “major bank” lies about their naked short position, it stands to reason that the SLV ETF also fudges their numbers and does not have the physical reserves they claim they have.  As such, SLV holders are going to be left holding an empty bag.  Possible, but doubtful.  Although there is historical precedent:  isn’t our $1 deposited into the bank allegedly loaned out to 4 other people who have a claim on it?  Still, I’m not selling my SLV or gold mutual funds over this rumor.
  4. Based on #3 above, you must hold your physical silver in your possession and not take the word of a custodian.  Although I’m not convinced about rumor #3, I do believe in the power of an ounce in my hand.  If we get into a SHTF or TEOTWAWKI situation, having silver in hand to barter can mean the difference between getting out of trouble or letting trouble get the better of you.  Some of my holdings are in ½ ounce rounds, just in case I need a loaf of bread post-EMP.
  5. Silver and precious metals in general are just the latest bubble.  The bubble will burst soon and silver will go back to $4 and all the silver bugs will be toast.  Although I don’t deny that the price can go down, and that I am psychologically prepared for a 50% correction to $15 an ounce, I just don’t see it.  Go ask 20 of your friends and family if they have bought silver or gold in the past 6 months, and you’ll likely get 19 puzzled looks.  Also, silver is not tulip bulbs or insertdomainnamehere.com:  it has a millennium-spanning role as currency.

SUMMARY:
In closing, although I do not advocate taking a second mortgage or liquidating a 401(k) to bet the farm on silver, I am very bullish for 2011 to replicate the returns of 2010.  I hope these thoughts and opinions can serve as a springboard to further research and success in your silver investing efforts.