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Silver: Buy, Hold Or Sell? Update #24

IMG Auteur
Published : January 31st, 2013
1000 words - Reading time : 2 - 4 minutes
( 7 votes, 4.6/5 ) , 5 commentaries
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Silverinstitute


1980 to 2013: From bear to bull






In 1980, the price of one ounce of silver reached $ 50. Today, the purchasing power of the US dollar is substantially less than in 1980.


The price of one ounce of silver would have to rise to $ 150 to reflect the value of the US dollar thirty years ago, assuming an average annual inflation of 3.5%.


During the financial crisis of 2008, the silver price corrected 57% from the high of $ 20.79 down to $ 8.95. This correction was followed by a spectacular rise of more than 400% to $ 48.42. A correction was inevitable and a drop of 42% followed that phenomenal rise. So far, the silver price has recovered 14%. The present up-leg started in May of last year and should lead the silver price to a new all-time high.


The long-term picture of the silver price






The bull market of the silver price started towards the end of 2002. On the way from $ 4.02 to the recent high of $ 48.42 (an increase of 1,100%), several significant corrections took place, the most severe one in 2008 when the silver price sank by 56% only to jump 440% to a new high since the bull market started. “The bull market is not over. However, at present, a correction seems to be overdue.” we wrote in March 2011.


During the past ten years, whenever the PMO Indicator shown above exceeded 10 points, we would have been well advised in taking profit. On the other hand, whenever it fell to or below the 0 point line, it would have been opportune to buy. 2008 was of course an aberration or a one-time opportunity – or the opportunity of a life-time as we wrote at that time.


The present correction differs from the previous ones as those were relatively short-lived while this one has lasted for almost two years. When it will end, no chart can tell and some famous investors do not believe that charts offer a reliable guidance. For example, Peter Lynch once commented, "Charts are great for predicting the past." Warren Buffett has said, "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer" and "If past history was all there was to the game, the richest people would be librarians."





Fundamental Considerations: THE RISING SILVER DEMAND


Silver is unique. Its natural beauty is legendary. Its range of applications is exceptionally broad. As a precious metal, it has been a source of human adornment since the beginning of time, such as a component of fine tableware, appropriately called silverware. As a light-sensitive element, it has revolutionized preservation of memories in the form of photographic images. More recently, its unique properties comprising of anti-bacterial qualities, corrosion resistance, malleability, ductility, reflectivity and conductivity have opened new possibilities for a myriad of other industrial applications.


The demand that pushes the silver price higher



World Silver Demand in millions of ounces (Source: World Silver Survey 2011)




Implied Net Investment demand, industrial demand and demand for coins cause the silver price to increase. Without it, the silver price would never have performed as it did. Industrial demand and demand for coins and medals are expected to grow further.


The Gold / Silver-Ratio





In times of a crisis, as in 2008, gold tends to perform better than silver. In times of confidence or hope, as at the end of 2010, silver fares better. At present, the gold/silver ratio is in neutral territory as investors feel uncertain as to which way the major economies will evolve.


As the major European countries struggle to control the debt bubble, some confidence may creep back into investors’ sentiments which could then cause the gold/silver ration to fall back towards the 40 point level. This would cause the silver price to rise toward the $ 40/ounce level with the gold price remaining at the present level of $ 1,650. Should gold rise to $ 2,000 (not an unrealistic scenario), the silver price could move back to the $ 50 level.


Silver in Industry


From non-corroding electrical switches to chemical-producing catalysts, silver is an essential component in nearly every industry. Its unique elemental properties make it impossible to substitute and its uses span almost every sector of industrial application.


The distribution of electric power depends upon silver contacts in switches and circuit breakers. Silver contacts in membrane switch panels are now standard in control panels for machinery, chemical industry processes, railway traffic controls and elevator buttons.


Silver oxide and zinc batteries have twice the capacity of lead-acid batteries, making them the power source of choice for television and film crews, aircraft and submersibles. Unlike other substances, silver performs well at high temperatures. For example, silver batteries are the only kind that can function at the high temperatures found deep in oil wells.


Another important use is in radiography, the use of photo film to evaluate the internal condition of materials. This technique is key for the discovery of structural flaws.


Silver can be bought with little margin ($ 1,000 per units of 5,000 ounces):


If somebody buys silver for USD 150,000 (5,000 ounces) and risks USD 15,000, he could make a profit of USD 100,000 if the price rises to $ 50 and lose his investment of USD 15,000 if the silver price drops to $ 27.


After the silver price rose to $ 49 in April of last year, it corrected down $ 27.07 by December of the same year. It has since recovered to $ 32.


Earlier this month it was published, that the demand for both gold and silver coins has been record-breaking as 2013 began. So much so, that now after selling over 6 million silver coins in 2013 so far, the US Mint has run out of silver eagles and has suspended sales. Furthermore, the Mint is saying that it will not restart sales until January 28th!


Silver is again our preferred precious metal!





 

 

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Peter Zihlmann is an independant Swiss asset manager, who manages the Timeless Precious Metal Fund and the Sierra Madre Gold and Silver Venture Fund.
Latest comment posted for this article
Mr. Zhilmann throws out a lot of stats and charts and concludes that silver is a good buy and long term investment. I question that it is now a good buy, not that it is a good long term investment, which I believe it is. Something in the price of silver  Read more
Jim C. - 2/3/2013 at 7:06 PM GMT
Rating :  10  1
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Comments closed
  All Favorites Best Rated  
What I fear is that one day they'll indict me for fraud because I managed to
obtain that silver with worthless paper.
Rate :   2  4Rating :   -2
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By the way. I managed to get rid of the 1 vote down. I simply voted it up myself. At zero at the moment.
Rate :   2  3Rating :   -1
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Can the "somebody" that arrowed it down explain why he took his time to do that ?
I simply give official information that the US Mint is not capable of meeting it's promises from last year.
They had dates published for each issue. Not anymore ! Why the change ?
Rate :   2  4Rating :   -2
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I simply want to continue completing my collection of America the beautiful 5 Oz silver coins.
Last year the US Mint website had dates published for the issuance of the new coins.
In the new year we now get "on sale date to be determined" ???
2013 America the Beautiful Five Ounce Silver Uncirculated Coin™ – White Mountain National Forest (NH)
2013 America the Beautiful Five Ounce Silver Uncirculated Coin™ – Perry’s Victory and International Peace Memorial (OH)
2013 America the Beautiful Five Ounce Silver Uncirculated Coin™ – Great Basin National Park (NV)
2013 America the Beautiful Five Ounce Silver Uncirculated Coin™ – Ft. McHenry National Monument and Historic Shrine (MD)
2013 America the Beautiful Five Ounce Silver Uncirculated Coin™ – Mt. Rushmore National Memorial (SD)
In need of silver ?
I can provide some.
Rate :   3  2Rating :   1
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Mr. Zhilmann throws out a lot of stats and charts and concludes that silver is a good buy and long term investment. I question that it is now a good buy, not that it is a good long term investment, which I believe it is. Something in the price of silver, or in the price of commodities, is seriously amiss.

My concern comes not from any kind of professional or even amateur expertise, but from experience of what silver was once able to buy in the 1960s and what its equilivant is able to purchase now. Make no mistake, I've been purchasing silver coin in small quantities (without selling) on and off for 25 years -- from $6 to $30 an oz. From candy bars to soup, from automobiles to homes, silver seems to have inflated only 10% (or 10x 1964 value) not the approx 30x of today's value. Excluded are those items (mostly electronic) which have dropped in price relative to 1960 prices.

Re those 1960 prices: take candy bars selling for 5 cents, McDonald's cheesburgers for 15 cents, Campbell's soup for 10 cents, autos for $2,500 and homes for $15,000 -- all are more or less sell now for approx 10x more in terms of today's silver value.

So, either prices will dramatically inflate (at least double) or silver is heading for a massive collapse back to $10 an oz.

I don't know which and won't purchase any more until some direction either way is clear. Should silver suddenly drop, having some cash left to fire at it might be the thing to do.
Rate :   10  1Rating :   9
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