To buy Silver or Not

Silver is up 65% since I started writing this blog and lately I have been asked the same question by family and friends who read my blog, IS IT TOO LATE FOR ME TO GET IN NOW?


Short answer NO! But here is the why:


1.Quantitative easing: Can "the Ben Bernank" really stop QE. What do you think would happen to the markets if they stopped, or even raised rates. 

The conventional argument for investing in commodities is based on inflationary expectations, and the conventional argument against investing in commodities is that inflation eventually leads to high real interest rates, which are negative for commodities. 

At this time inflation is being generated by the Fed’s quantitative easing program, and the expectation of the market is that price level increases will be one-time adjustments.

Typically, the mechanism that changes one-time price level increases into a more general and sustained inflationary cycle is higher wages. However, given the slack in the Jobs market I believe that wages will respond weakly, and real wages will erode. Therefore, inflationary expectations should remain less than what the hyper-inflation (end of paper currency) guys are talking about (for now), and though interest rates are rising and I do not expect a rapid rise (spike) in interest rates, gradual rise (for now).



Regardless of the rate of inflation there is simply no denying the fact that credit has become more expensive since the Fed initiated QE. Corporate baa yields are higher so the cost of credit for corporations has actually increased in recent months





And remember, Its not just our FED but Central banks around the world are also pro-inflation and they may not call it QE but they are engaged in bailouts, Portugal, Spain, Ireland, Greece, Japan.

This is the perfect environment for commodities: meaningful inflation with low real rates. 

2.DEBT: When was the last time the US government practiced fiscal responsibility. How is our Debt situation? Why did PIMCO sell all its US paper. Are we paying down debt? How do the charts LTM treasury bonds look right now? 

3.Currency Debasement: How does the dollar index look, looks pretty sick to me. Every time these guys try to talk up the dollar or ending QE, the dollar got weaker. There is turmoil in the Middle east, why are folks not running to the dollar (safe haven?). 

4.CHINESE DEMAND: supply/demand curve for silver is set up to experience a major and extended dislocation. One potential source of demand-driven dislocation is the Chinese middle class, which is growing rapidly in numbers and in wealth. By some estimates, the Chinese tend to save around 40% of their income. Culturally and historically, they have never trusted paper investments. While this is beginning to change, I believe there is a good chance that they will turn to gold and silver as a store of value, especially in a high inflation environment.

They have already begun to do this. Over the past five years, China has moved from being a significant exporter of silver to a significant importer of the metal. After the successful launch of the Industrial and Commercial Bank of China’s Gold Accumulation Plan, it would seem to make sense for a similar silver plan to be made available to Chinese buyers. If this were to occur, there would be an unprecedented increase in silver demand.

5.Suppressed Gold/Silver Ratio: The historical Gold/Silver ratio is 16:1, currently it is 38:1. Most people feel that it is beginning return to historically levels and may even go as far as 10:1, as per Eric Sprott of Sprott Asset Mgt. 

Read more about gold:silver ratio

Industrial Uses for Silver: So even if you don't buy the above argument and a lot of people don't and that is what makes a market, Silver has many industrial uses. Silver is used in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions. Its compounds are used in photographic film and dilute silver nitrate solutions and other silver compounds are used as disinfectants and microbiocides. While many medical antimicrobial uses of silver have been supplanted by antibiotics, further research into clinical potential continues. 


FEAR: Fiat (paper money collapse)I'm not of the thought of a  "MAD MAX" like scenario where the world as we know it, ends. Or as some are predicting, riots, anarchy (like middle-east) where "Posse Comitatus is overridden and there is turmoil in US streets etc (Stansberry Fear Video on Youtube). There are a lot of very smart people who are making plans for just this sort of thing. Buying up Physical Gold and Silver and Farm land, moving out of cities and being completely independent in terms of energy, food, and water.

Silver is cheap at these levels and I'd be buying it but not out of fear. And where will I keep it if had the metal. In a bank? Well if there is no longer any paper money, why wouldn't all the banks collapse and how would I get to my silver. Am I going to keep it in the ground in my backyard like some.  I have to have faith that we (Govt) can come to our senses before something like that were to happen.