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In the
world of precious metals, silver spends a lot of time in the shadow of its
big brother gold.
Gold,
with its high price-to-weight and distinctive yellow tint, has always
occupied a special place in the human psyche. To many people across many
ages, gold is simply the ultimate form of money - and, as a long-term, stable
store of value for one's personal wealth, I agree it's hard to beat.
However,
rare circumstances are aligning today that I believe will make silver the
true champion of this bull run.
WHAT'S
DRIVING PRECIOUS METALS?
Gold
and silver are both benefitting from a perfect storm in the sector.
Dollar
devaluation means that much of the 'gains' we see are really just losses by
people holding dollars. In other words, if your dollars lose 50% of their
value, it's going to take twice as many of them to buy the same ounce of
gold.
But
the rally is based on more than simple inflation. Precious metals are
regaining their role as the ultimate reserve asset. That means many, many
more people are buying and holding these metals than at any time in the last
thirty years.
Another
factor is the rise of emerging markets and decline of developed markets. As
billions of poor Asians, Africans, and South Americans lift themselves out of
poverty by embracing the free market, the US is plunging itself into poverty
by rejecting it. This means there are a mind-boggling number of new customers
for jewelry, savings, and industrial products that require precious metals -
and that we are becoming less and less able to outbid them for these
resources with our dollars.
SILVER'S
DRIVING FASTER
If the
world were going to hell in a hand-basket, then I would expect gold to
outperform silver. However, it is only the developed economies that are on
the rocks - and only the US that faces true catastrophe. Thus, we have seen
silver outperform gold for the last eight years.
The
market is telling us that while uncertainty reigns supreme, the global
economy will prosper in the years ahead. While gold most effectively insures
the investor against economic devastation, silver offers both a shield
against monetary turmoil and exposure to market growth.
THE
KEY: INDUSTRIAL DEMAND
This
is because silver is both a precious metal and an industrial metal. Gold is
mostly precious, copper is mostly industrial, but silver strikes a fine
balance between the two. And it seems as if this moment in history is
perfectly suited to this balance. We are facing not only the prospect of the
collapse of the international monetary order, but also the largest
industrialization process the world has ever seen.
While
in a past era, wood, steel, or oil would have been the most critical
commodity, today silver is used in everything we hold dear: iPhones,
flat-screen TVs, batteries, solar panels, etc. Asia - the new heart of the
global economy - is accumulating gold, but they're consuming
silver. That makes both metals good bets, but likely gives silver the edge.
It's
safe to say the future depends on a steady supply of silver. This burgeoning
demand is reflected in the latest figures: global demand for silver is about
890 million ounces a year, while global mine production is about 720 million
ounces a year. We're actually consuming scrap to make up the difference. And
unlike gold, which tends to remain in a recoverable state as coins or
jewelry, a large quantity of silver is ending up in trash dumps - where it is
essentially lost forever.
As
long as the emerging markets continue to trend toward freer markets, and
consumers the world over continue to demand computers, electronics, and green
tech, silver should only become more scarce - and thus more valuable. I think
these assumptions are pretty safe to make.
CAN
THE WORLD THRIVE EX-US?
Of
course, if everyone agreed with me, silver would already be worth hundreds of
dollars an ounce and there wouldn't be any profit to be made on the trade.
Fortunately, there are a couple of bogeymen in the financial media scaring
the majority of investors away from silver so far.
First,
some analysts still believe - bless their hearts - that the US is really
going to pull through this time into a sustainable recovery. After being
duped by dot-coms and then housing, they are all aboard the Treasury Express
back to Bubbletown. Unfortunately, as in the previous two cases, the current
low interest rate environment is merely masking an underlying economy that is
vastly more rotten than it was even a decade ago. The unemployment rate is a
key signal that this time, Bernanke's magic medicine won't work.
A
second cohort sees that the US is doomed, but still thinks we will drag the
rest of the world down with us. This is the school that holds that despite
our persistent current account deficits and monumental external debt, the
world economy "needs" the US consumer to drive growth. As I alluded
to in my book, How An Economy Grows And Why It Crashes, this is like a
plantation master claiming his slaves need him around to consume the fruits
of their labor, or else they wouldn't have anything to do. Well, the results
are in: after an initial panic rush into dollar-based assets, emerging
markets are back at full sprint while the US is still limping along.
SILVER
IN A DOLLAR COLLAPSE
Just
like a Hollywood celebrity, we in the US spent our time at the top of the
world - and soon let our status get to our heads. And like a celebrity, our
adoring fans the world over will be quick to forget us as we fall from the
limelight and deal with our powerful addiction to partying and cheap money.
To survive the next decade in America, you are going to want an asset that is
in demand globally, but is also free from counterparty risk here at home.
I
recently did an interview with a group that is making a film about living in
America in the year 2019. The premise is that inflation is rampant, the
economy is in shambles, and groups are springing up that do all their trading
in silver rounds. While I think their timeline is quite generous, this is a
fairly accurate picture of what lies ahead.
Not
only does silver appreciate while sitting in your safe due to overseas
demand, but it also comes in units that are ideal for use as a common trade
unit. Two or three ounces of silver can buy you groceries for a week. By
contrast, just try to eat an ounce of gold's worth of vegetables before they
spoil. There are fractional gold coins and bars, but they carry very high
markups.
None
of us have had to think about these things in our lifetimes, but it is not
abnormal in history. Soon, understanding precious metals will be as much a
survival skill as knowing how to change a car tire.
THE
GOLDEN RATIO
I
always say that every investor should have at least 5-10% of his portfolio in
physical precious metals. Of that, the proportion allocated to gold vs.
silver depends mainly on risk tolerance. Silver tends to be more volatile
than gold, so silver investors must have the discipline not to liquidate
their stash at the first sign of a correction.
I
generally advise a ratio of 2:1 gold-to-silver in the average portfolio. More
aggressive investors can push it to 1.5:1 or beyond.
Year-to-date,
silver is up 5 percentage points more than gold, and I expect that
trend to continue. It's important to understand that in this fast-changing
world, silver is no longer runner-up.
Peter D. Schiff
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