I often get e-mails and letters from readers about precious metals, and most of them are wrong. Many of them were about silver:
- In 2001, when I formally called the bottom, for silver, I got taunting letters. Those naysayers claimed that silver was heading down further, perhaps to $3 per ounce.
- In 2005, I started getting whining “I missed the boat” letters. That was when the silver bull was still just a calf. People have continued whining, ever since.
- In 2008, when silver was $9.80 per ounce, I got my first “this is the top for silver” letter. I’m still getting letters like that.
- In 2010, the “silver is soon heading to $200 per ounce” letters began to arrive.
- In early 2011, I started getting “silver crash alert” and “silver bubble is about to pop” letters.
- Today, (with spot silver now around $37.32 per ounce) I got a letter claiming that silver was about to crash, and that it would bottom at around $4 per ounce.
I need to clarify a few things. First, silver is not a reliable investment vehicle. Stop thinking of it as an “investment.” The silver market is too thin and volatile for that. Owning silver is more properly a hedge on inflation and insurance against a Dollar collapse. To illustrate:
- In 1964, $1,000 face value in silver coins could be had for $1,000 in FRNs. (Still “face value.”)
- In 1979: $1,000 face value in pre-1965 silver coins briefly spiked to $25,000 in FRNs
- In 2001, $1,000 face value in pre-1965 silver coins hit a low of $3,600 in FRNs. (3.6 times face value.)
- In March, 2011: $1,000 face value in pre-1965 silver coins costs $26,680 in FRNs. (26.6 times face value.)
Next, I must mention that 1979 (when silver briefly spiked to $48.70 per ounce) was an aberration. This aberration was created when the Texas billionaire Hunt brothers and their Saudi buddies attempted to corner the silver market. They were stopped when the COMEX regulators brutally enacted Silver Rule 7 which effectively raised the margin requirement for silver futures contracts for big buyers to 100%. That move destroyed the futures market. It forced the Hunt Brothers to cover their positions and divest their holdings into a falling market.
Just for the sake of argument, let’s surmise that the current run-up in the price of silver is indeed a “bubble”. Even if the COMEX committee again artificially hammers the market, the subsequent bottom for silver would have to be at least $10 per ounce. Why? Because the underlying stair steps in currency inflation don’t ever go away. The Dollar will never have the same purchasing power of a decade ago.
But I don’t think that silver is yet in a speculative bubble. The true value of silver and gold haven’t changed substantially. Rather, it is paper money that is losing value. I believe that the value of the U.S. Dollar and the world’s other fiat currencies are simply diving into a chasm, following an orgy of government over-spending. The current bull markets in silver and gold are just reflections of the ongoing destruction of the Dollar and the world’s other pager currencies. For this reason, even if there is a major correction in silver, I doubt that the bottom will be any lower than $20 per ounce. The silver market fundamentals support my outlook. Silver is scarce and become more scarce with every passing year. (Which, by the way, is one of the reasons why I recommended that my readers ratio trade out of physical gold, and into physical silver.)
Will a gallon of premium gasoline ever sell for $1.00 per gallon again? Will silver ever be $4 per ounce again? No, not unless they knock a zero off the Dollar. Inflation is unrelenting.
Take Some Profit and Put it in Tangibles
I must reiterate that silver is not a reliable investment vehicle. But it is a reliable hedge on inflation and provides protection from a currency collapse. Don’t be a greedy silver bull. Market manipulations are impossible to predict. When they do come, they will likely be draconian, and they will get the silver longs screaming for mercy. If the future delivery price of silver again approaches $50 per ounce, it is very likely that the COMEX regulators will artificially raise the margin requirements or otherwise change the trading rules in an attempt to crash the market. If there is a price spike, short squeeze and shortage of physical silver, I wouldn’t be surprised to see the COMEX dictate that only industrial users (like Kodak, Fujifilm–both manufacturers of medical x-ray film) would be allowed to take delivery of physical silver when settling futures contracts.
When To Sell Some Gold
Gold bottomed in April, 2001 at $255 per ounce. As I’m writing this, spot gold is at $1,430 per ounce. That is a 5.6x gain! There are few other investments that have done so well. At this juncture, I think that it would be wise for anyone who purchased their gold at $715/oz. or less, to sell one-third of their gold, NOW. (Well, wait for the next day where there is a spike upward.)
Immediately parlay the cash proceeds into additional practical tangibles (such as guns, common caliber ammunition, and productive farmland), and perhaps some silver, if you don’t already have some silver coins set aside for barter. If and when gold doubles again (to $2,860 per ounce), then it will probably time to think about selling another fraction of your holdings.
When To Sell Some Silver
I’m setting an interim target of $41.90 per ounce for silver. That is ten times the 2001 bottom price and almost 30 times face value, for pre-1965 coins.That is a good threshold for preparedness-minded people to sell one-third of their silver holdings. Don’t be greedy and try to “call the top”. If you attempt this, odds are that you will be wrong.
My advice: Start cashing out when silver touches $41.90 per ounce. But don’t sell all of your silver into the rising market. Always maintain a core holding of silver for barter. Here in the United States, pre-1965 silver quarters (25 cent pieces) are the ideal coins for barter.
Whenever you liquidate any of your precious metals DO NOT leave the proceeds in perishable Dollars. Again, parlay the profit into additional practical tangibles.
If you follow my advice, you will have a balanced asset preservation strategy that will leave your family well-prepared. By diversifying into other tangibles, you will sleep better at night.