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Friday, December 19, 2008

Is Silver a Good Buy Right Now?

The FRN-denominated price of gold had a local maximum of approximately $1000/ounce this summer and in March. The FRN-denominated price of silver had a local maximum of approximately $20/ounce.

After crashing sharply due to money supply contraction, the price of gold is approaching $1000/ounce again. Gold started the year around $850/ounce, and it is again over $850/ounce. For awhile, I was concerned that this would be a year where a gold investment lost money. However, recent money supply inflation has pushed up the price of gold. Gold has kept its purchasing power this year, while an S&P 500 investment lost 37% so far this year. I'm looking forward to updating my Gold vs. S&P 500 post with 2008 price data!

I read an article that added up all State bailouts of the financial industry and other industries over the past year. This includes money explicitly allocated by the Federal government, plus actions by the Federal Reserve. The total bailouts add up to $7 trillion or more. This nearly doubles the money supply. In turn, this should show up as a doubling in the price of gold and silver. There is a time lag between money supply inflation and price inflation. The Federal Reserve is inflating to bail out the financial industry and insiders. The President and Congress are following pro-State troll Keynesian economics, which says "Solve a recession/depression via deficit spending by the Federal government!" Theft by inflation is still theft. You can't solve a problem caused by theft by stealing even more. That is how the virtuous feedback cycle of complete economic collapse works. The nominal value of the stock market will increase due to inflation, but the real purchasing power will be eroded via inflation.

The Federal Reserve has zero accountability, and may do as they please. If the Federal Reserve chooses to bail out certain banks but not others, that is their prerogative. However, the Treasury department managing the $700 bailout has no such immunity. If they chose to bail out the banks of their friends/lobbyists, but not others, then they are subject to personal civil liability or criminal penalties. However, that is merely a legal technicality. Financial industry insiders may do as they please. Anybody with strong enough political connections to win such a lawsuit would have already received their bailout money.

Gold has nearly recovered to its former maximum, but silver is still nearly 50% below its recent maximum. When you talk about the price of gold/$ or silver/$, there's a division by zero error, because the US dollar is intrinsically worthless and continually losing value due to inflation. When you consider the price of (gold/$) divided by (silver/$), you get the price of (gold/silver), which is a quote in real money. The range for gold/silver has been 50-60. When I write this, the ratio is $855.25/$11.29 = 75.75. I conclude that silver is attractively priced relative to gold right now.

The primary demand for gold is monetary demand. The primary buyers of gold are people who desire a hedge against inflation or protection in a SHTF scenario. The primary demand for silver is industrial demand. Silver has useful electrical and chemical properties. Copper is cheaper than silver, and copper is a good-enough conductor of electricity. Most wires are made of copper, but silver is a better conductor of electricity, so certain high-performance electronics require silver.

As the economy slows due to a deflationary recession/depression, the industrial demand for silver is decreasing. Still, I am surprised that the price of silver has declined so much relative to gold. I don't own any metal myself yet, but silver seems attractively priced relative to gold right now.

Silver appears to be cheap relative to gold right now. The price of gold/silver has been in a range of 50-60 and it's now above that range. If your considering buying some metal, I advise silver over gold right now.

As a new precious metals investor, you have to spend $850/ounce for gold. Silver requires a much lower investment per ounce. This makes silver desirable for someone who only wants to invest $100-$200 per month. Gold coins smaller than 1 ounce cost a higher premium to spot, due to the cost of minting the coin.

The only disadvantage of silver investing is that silver is easier to counterfeit than gold. You can make an alloy of cheaper metals with the same specific gravity as silver. This is harder to do with gold. I heard of gold-plated tungsten, but allegedly tungsten is a better conductor than gold and a magnetic test will discover the counterfeit. I haven't heard any stories of counterfeit gold or silver coins being a serious problem, although drilled-out silver bullion was a problem in the 1980s when the Hunt Brothers attempted their silver corner. If you buy from one of the popular online precious metals dealers, you should be safe from counterfeit coins.


fritz said...

I believe in silver. For the primary reason that it is the most useful of the precious metals. It is a great conductor of electricity, and used in many if not all electronic applications. So this alone will keep silver in high demand. Especially since china is in the business of making more computers every year. I believe silver has the greatest potential for sustained value.


Anonymous said...

The less silver there is, the less valuable it becomes as a monetary metal. You've got to check your premises here, it's either valuable because it is a monetary metal or because it is a commodity metal that is being consumed. You can't have it both ways.

If you say that you value silver as a monetary metal, then all your arguments about silver consumption mean one sure thing: The less silver out there, the bigger in proportion to existing aboveground and inground stock is a new discovery of silver producing ore. This means that the silver then is less good as money because it volatility of value increases in proportion to silver consumption.

Of course, if you value silver for it's commodity value, then the less silver there is the more valuable will it become. But, this means that it is nothing like gold, and you should judge silver similarly to your valuation of sugar, steel or oil.

I am not sure if my explanation is easy to follow, but it seems that majority of people can not make this very important distinction. Simply keep in mind, that the value of gold rests not on it's shininess or malleability or weight or even relative rarity, but on the fact that gold is not consumed, and therefore the more gold is dug out, the less of it can be expected to be dug out with respect to already existing stock.

Anonymous said...

You have to take into account the fact that 80% of silver produced is a byproduct of mining other metals. The price of copper, iron, zinc and other metals has dropped significantly and miners have been closing mines. This has led the production numbers way down. If you want to invest in silver, the best buy would be a silver mine stock like SLW, which is the only pure-play silver of that size.

Anonymous said...

You did a good piece on Hunt brothers. And I'd pretty much take silver over gold any day if I had to choose, unless the price was too distorted.

Silver is better because
1. It's industrially consumed
2. It's cheaper (more people buy it)
3. It's been used as money, and you can still buy old coins.

If you're worried about counterfeit, I recommend using a digital scale.

gold said...

indeed gold and silver is a very valuable investment. Who does not know the silver and gold. perhaps from a small child to a parent would know this precious metal. But be careful if you want to buy these metals as part of the investment. first checks to people who are experts.


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