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Mail from a reader (Published 5/24/06)
I received an interesting email from a reader this week, with the title of
this commentary as its subject line.This email brings up several points that
are worthy of comment.Here are excerpts from the email:
Dear Optimist,
I appreciate your cheeriness, but I regret the day I ever heard of
silver. It has done nothing but cost us significant money, this most
recent rout is a wipe out.
The bit about the evil silver shorts who are finally going to stop
their nefarious doings someday "real soon" is getting old. I
don't see them stopping, or running out of money...they certainly still have
the power to bankrupt many people whenever silver crosses $15. One has
to admire people like yourself and Ted Butler for sheer tenacity...and an
almost missionary like zeal for spreading the word. But your adversaries are
very established, very rich, and they've been doing this for a long time,
son.
I found myself repeating for a while, until I began to realize: the
investing world doesn't seem to know about it, or care. It is time to
accept that the vast majority of the investing public doesn't think of silver
as a secure investment. It took years for them to accept gold. It is
not a slam dunk for silver. Could that explain why with the recent
rout, that Silver plummeted far faster and farther than any of the other
metals?
I guess I shouldn't feel bad at being wiped out. The investing
road is littered with the bones of better men than I who thought they could
get ahead investing in silver.
Plain and simple silver is bad news, and should carry a big warning
label, like a quicksand hole or poison ivy patch. It looks pretty on
the table and it's nice for cheap jewelry, and that's pretty much of it.To
think of silver as a winning investment you have to be an Optimist indeed.
I wish you luck. You must have deeper pockets than the rest of us.
Honorable Mention
The Optimist is very happy to be mentioned in the same sentence with Ted
Butler.That is a much appreciated honor.
Yesterday was great, but what about tomorrow?
For the record, this Optimist does indeed think of silver as a winning
investment.That is an easy viewpoint for those of us who purchased much of
our silver in the $4 to $6 range over the previous few years, and now have
profits of substantially more than 100%.Since none of us can go back in time
to capture again the great gains we have already seen, the ever pressing
essential question is always what do we do now for the future?Once again for
the record, the Optimist is a strong bull on all precious metals prices in
general, and on silver in particular.As many other analysts have recently
pointed out, the inflation adjusted prices of precious metals today is much
lower than the heights precious metals already reached in 1980.As inflation
continues to escalate, the Optimist firmly believes that silver and gold will
dance ever upward to the beat of a much higher tempo.
All good things must end, but when?
Most readers have only read about the metals rise before 1980, though a
few were investing along side me back then.For those who did not experience
those times, I can only tell you that it was truly exhilarating.I am happy to
confirm that I expect all of us to have the opportunity to again experience
the thrill of victory as silver and gold explode to heights that few today
can even contemplate.
But the reader who sent me the email above seems focused on the agony of
defeat.In January 1980, silver did crash from above $50 to almost $10 in just
a few trading days.Will the future rhyme with the past?The Optimist doesn't think
so, because this time it really is different.The crash of 1980
was precipitated directly by the FED raising
interest rates to significantly higher than inflation.Administering that
type of strong economic medicine to the national economy in its now weakened
condition would surely be terminal for the patient.The Optimist concludes
that the FED will only apply band aids, and perhaps occasionally push on
pressure points in a way that might be temporarily painful, but which will
cause no lasting harm to the economy or to our investments.The result that
seems likely to the Optimist is that inflation will march relentlessly
upward, and that ever increasing inflation will propel silver and gold prices
to unimaginable heights.All games eventually end, of course, but the Optimist
offers the cheery viewpoint that the game of perpetually higher prices for
silver and gold is likely to end only with the demise of the dollar.Silver
and gold will retain their value throughout the end game, while other
investments measured in fiat will lose purchasing power even as their nominal
prices increase but at a slower rate than inflation.
A sure thing investment that can't lose
How's this for an optimistic approach to investing?Buy real physical
silver (or gold or palladium or platinum) metal, and keep it in a safe
place.That's the full plan.Buy the good stuff and keep it safe for a no risk
approach to investing.Long after stocks have fulfilled their destiny to fill
the pockets of bankruptcy lawyers, and houses lose the inevitable battles
with Mother Nature, and T-Bonds revert to the value of the fiat dollars they
will be repaid in, an ounce of precious metals purchased now will still be
worth an ounce of precious metals.This simple sure fire investment plan has
an equally easy timing approach.Buy when you have surplus fiat to invest.If
you must sell, then do so when interest rates rise to significantly higher
than real inflation.Sleep soundly each night without worry about the latest
price quotes for silver or other precious metals, because each ounce of
precious metal that you own will always have the value of an ounce of
precious metal, and your purchasing power will be protected.
Excitement, leverage, greed, and fear do not make an investment
better
The Optimist congratulates the few readers who did not fall asleep while
reading the above paragraph.Yes, the Optimist does know that a simple and
safe investment plan offers little more excitement than watching grass
grow.Every reader of this commentary is aware that the reduced supply and
persistent demand dynamics of silver paint a picture of much higher silver
prices.Each of us is smart enough to figure out that when silver prices go
up, then we can make a lot more fiat for our bank account by leveraging the
gains.Every person has a loud, shrill, and un-ignorable greedy voice inside
that demands that he buy a lot more of this sure thing, and then he will have
more fiat than he would know what to do with.Mining stocks have natural
leverage to rising metals prices, so we reason that those stocks will
increase in price faster than just buying the metal.Since mining stocks will
explode upward with the rising metals price, then greed shouts at us to get
more leverage by using options, and futures, and options on futures to
maximize the amount we have invested.Only after we are using the maximum
available margin and leverage, possibly with money borrowed from other
sources, will the greedy voice inside each of us begin to slip back into the
shadows of our minds.
As the author of the email now recognizes, the next voice to interrupt our
daydreams about all the baubles we will buy with the abundant profits from
our extremely leveraged position is the painful screech of fear.With fear
pounding the drums of panic, the conversation that fear induces inside us
goes something like: "What!Silver prices just dropped a few percent.I
thought it could only go up.The next phone call will be my broker demanding
more margin money, but everything I have was already used to buy my leveraged
position.I can't sell now, because then I will lose a lot, but what if silver
could decline a few more percent?!At maximum margin, I would be wiped out!I
must sell now to avoid losing everything I own.I'll call my broker and tell
him to sell all my positions immediately, so I won't lose more when silver
goes all the way back to zero."
Sincere sympathy, and a warning label
The Optimist understands very well the intense pressure for excitement
through leverage, the irresistible lure of greed, and the devastating terror
of fear.The email writer, and many thousands of other investors who suffered
similar losses, have my sincere sympathy.Losing money by betting in the wrong
direction is painful enough, but losing while betting on the right market to
move in the right direction is especially difficult to handle.
The problem is not that people bet that silver would rise.Silver has moved
sharply higher from the $4 level three years ago to more than triple that
now.The problem is that greed caused those losing investors to use too much
leverage at the wrong time, and then fear forced them out of the game just
when they should have been buying more.The Optimist agrees that there should
be a warning label on those risky investment tactics, but that warning would
be applicable only to the cycle of greed, leverage, and fear which may be the
only way many traders know how to bet and which all too often converts a
correct investment viewpoint into a serious financial loss.
Make money the old fashioned way
The cure for investors whose results suffer from the afflictions of greed,
leverage, and fear, is to take a step back to a quiet, calm, and simple
investment process.Tell the greedy voice inside to just shut up.Avoid
leverage, and there will be no need to do anything about the internal voice
of fear, because there will be no fear.Instead of taking huge risks now to
try to get rich quickly, invest a reasonable amount of funds for the long
term, and let time be your ally to help your well chosen investments to
prosper.The Optimist tries to convey a sense of
perspective over time in his charts.By showing the long term monthly, and
medium term weekly, in addition to the near term daily charts, he hopes to
better illustrate the long term trends without the confusion that the near
term market noise often contributes.
To profit from the coming explosion in silver prices, one needs to have
pockets which are deep enough to hold only a single U.S. FRN dollar.Any
elementary school kid with a dollar of allowance can buy a U.S. silver dime
dated 1964 or earlier for just about one FRN dollar.By simply putting that
dime away in a safe location and waiting for time to pass, one can be assured
of an eventual profit measured in FRN fiat, and of conservation of that much
purchasing power through the years to come.Investors who have more fiat dollars
available to invest need not change the process, but simply buy more silver
and put it away in a safe place.Silver in safety is much better than the
proverbial bird in the hand!
The good news is that investors don't know the silver story
The Optimist notes in the email a great piece of welcome news.The
investment community is not yet on the silver bandwagon, and many people do
not even think of silver as an investment.The Optimist can confirm that in
recent weeks, he heard many news headlines about the rising prices for gold
and base metals like copper, but he did not hear any mention of the rapid
rise in silver prices over the last three years.The news silence on silver,
and the corresponding vacuum of information among the public, bode very well
for future silver price increases.Every person who does not yet know about
the very bullish fundamentals of silver is a potential future buyer, and will
help to push prices ever higher.
The sounds of silence are superb for silver
The Optimist encourages the email writer and everyone else to silence the
internal voice of greed which frequently leads to losses, to quell the near
term confusion caused by corrections and market noise, and to stay firmly
focused on the long term progression of values in silver and the other
precious metals.The Optimist thinks the future for silver looks as bright as
the past, and he encourages readers to share a part of that future by
accumulating real silver metal in a secure place.Cheers!
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