Hedge Inflation with the Silver ETF

Silver and gold lead inflation by 14 and 12 months, respectively. SLV should be considered as a hedge against inflation. The U.S. government is printing so much money and does not appear at this time to be accomplishing two key tasks:

1. Stabilizing the banking sector and increasing inter-bank lending (see LIBOR rates);
2. Stabilizing home prices.
   

The government has, and will continue, rightfully or not (this remains to be seen) to inject money into the system. At some unknown point in time, a bubble somewhere else in the economy will result from the excessive and damaging monetary policy. This excess cash will need to flow somewhere. Ultimately, the global economies and most especially the U.S. will experience inflation.

There are two places for which this excess money supply will flow:

1. Currency
2. Metals/Commodities

Only ONE currency has proven itself in the interim. The US dollar has held up against all other currencies (and most especially the euro, Canadian dollar and yen). The currency trades inverse to commodities. In essence, the US dollar and silver/gold will be in a 'battle' to absorb the excess cash flow. It appears at this time that the US dollar is winning.

Over time, however, I believe that the debt level, severely depressed home prices, unemployment, and weak consumer demand for goods will impact the strength of the US dollar. Global investors will seek other "safe" havens for investments. Note that "safe" is a relative term, and that gold and consequently silver will have a greater appeal to store wealth. After all, investors have 40% of their mutual funds in cash. That cash is truly safe, but inflation will be its enemy. Metals are a hedge against this and belong in anyone's portfolio, albeit at a small allocation (see below for details).

Predicting the timing of inflation would be foolish. We cannot even predict the state of the economy three, or even six months from now. Beyond that time frame, however, there will be inflationary risks. A prudent investor will accumulate silver to prepare for this. Why not gold? Why silver, and not gold? The investment is not to be in one metal or the other, it is to be in both.

The US dollar is currently at a multi-year high. Monitor this. This currency will eventually need to reverse course. Perhaps another currency will be more appealing (yen). This decline will be positive for silver and gold.

My opinion: Buy SLV.

Day traders: 0-25% allocation of portfolio

Long term investors: hold absolutely no more than 5% of portfolio.

Technical Analysis:

The SLV ETF has not been around the market for very long. It was launched in 2007. For your amusement, read this thread on the discussion of the metal.

On post #659 (posted by dacrunch), the user writes:

Well, it all comes to show that in a relatively stable financial environment, technical analysis has its value... but when TSHTF in the financial, economic realm, "fundamentals" and "available cash" are the winners...the "patterns" of market trading will persist, but anything "long-term" is quite a gamble...

See the most recent chart for silver.

Fundamental Analysis:

The value of silver and metals is really up in the air right now. The rules keep changing for economy because the government keeps making new rules, especially in its attempt to save such companies as Bank of America (BAC), Citigroup (C) and AIG. It is certain that the housing and auto sectors will continue to be very weak for 2009. In fact, GM will likely be bankrupt. While this will devastate the sector, people will still need to drive. Other companies will take the slack for a bankrupt automobile company.

The ongoing unknown variables are the actions taken by the U.S. government and the global banks. Just how far are the banks going to go to save capitalism? The answer is scary, but the actions must be taken. I would not bet against the government, because they are the only key right now in restoring stability in a downward market.

\There has also been most recently some headline distractions about China. China has a stimulus package to stir up domestic demand. While this may aid in increasing the value of the precious metals, the best way to invest in this news is through OIH or OIL. Investors ought to maintain a focus on the US dollar and any hints of inflation when assessing the investment in SLV.

Conclusion:

I suggest maintaining a small position in silver with a downside target price of $9.55 - $11 and an upside target price between $16-$19. The reason for a wide range in the target price, and a price target for both losses and gains is due to the inability to assess the impact of cash infusion into the market.

My advice: Accumulate. Enter a stop loss of 10-20% to minimize losses.

Note that this report has similarities to SLW, since SLW and SLV are positively correlated to each other.

Disclosure: Author holds a long position in SLV.

Comments

[Sakata:]

You say:
"I suggest maintaining a small position in silver with a downside target price of $9.55 - $11 and an upside target price between $16-$19. The reason for a wide range in the target price, and a price target for both losses and gains is due to the inability to assess the impact of cash infusion into the market.

My advice: Accumulate. Enter a stop loss of 10-20% to minimize losses."

I think this is a guarantee to lose money. A stop loss set at 10% is extremely dangerous. Silver is highly volatile, much more so that gold, and the chances of this stop loss being triggered is very high. You should not be in silver if you cannot absorb a loss of at least 30% but, of course, long term you are likely to make a profit of much more than 30%.

Also, I beleive there are better options than SLV, which is coming under a lot of scrutiny recently. While the doubts about it may prove to be false, it is a risk I don't want to take. My recommendation would be to invest in CEF which is approximately 50% silver and 50% gold. It is audited and the metal is guaranteed to be there, unlike SLV.

Mar 15 11:41 AM

[PeteK:]

Just look at some of the silver mining co and they are
mostly on the up-side lately.

Mar 15 01:20 PM

[HonestMoney:]

SLV is a scam. Stop playing the paper game and get some physical silver.

seekingalpha.com/artic...

Mar 15 09:23 PM

[mr freddo:]

I agree with the Mr. Lau that Silver will be a good play over the next year or so as inflation starts to roar. I also believe that his portfolio allocation percentages are reasonable.

Silver coins should also be considered for emergency backup to cash in case banks close and credit cards are not operative.

Mar 15 11:23 PM

[MikeW.:]

I agree,and that is exactly what I am doing,about $100 to $300.00 a month,buying silver eagles and some morgans when I can find them at a reduced price--morgans are only 77% silver,eagles are .999%.Also selling items from home that I do not use or need and converting the dollars to silver.

MikeW.


On Mar 15 09:23 PM HonestMoney wrote:

> SLV is a scam. Stop playing the paper game and get some physical
> silver.
>
> seekingalpha.com/artic...

Mar 15 11:42 PM

[Kaleb22:]

It seems that SLV and GLD are for the less experienced gold investors. Why buy SLV and GLD when you can hold the metal in your hand. If you want stock exposure to silver try SSRI.

Mar 15 11:59 PM

[Chris Lau:]

To put some context in investing in actual silver bars (as compared to the SLV ETF):

In Canada, silver coins/bars were issued for sale by a major bank. They sold out in MINUTES.

Two things may be concluded from this: people are scared (maybe excessively) of seeing currency devaluation and 2) the underlying physical metal itself has appeal. For everyone else who invests via a trading account, there's SLV (# Sakata, I'll look into CEF).

Mar 16 01:17 PM

[loaddown:]

I agree with Sakata on CEF for a secured PM investment. Read the disclaimer for SLV. I am also highly into silver stocks and am buying junk 90% slowly via ebay.

Here is my only question; I remember the ripoff artists in 1980 that were buying, as now, your silver and gold; how are you going to sell your coins when you feel the high is reached? Are you going to mail them to reputable dealers? How are you going to shop for sell premiums? Forget graded coins, unless you have years of experience, they will always downgrade even slabbed coins when you sell.

Any experienced coin sellers out there?

Mar 16 04:29 PM

[phybrr1:]

On Mar 16 04:29 PM loaddown wrote:

> I agree with Sakata on CEF for a secured PM investment. Read the
> disclaimer for SLV. I am also highly into silver stocks and am buying
> junk 90% slowly via ebay.
>
> Here is my only question; I remember the ripoff artists in 1980 that
> were buying, as now, your silver and gold; how are you going to sell
> your coins when you feel the high is reached? Are you going to mail
> them to reputable dealers? How are you going to shop for sell premiums?
> Forget graded coins, unless you have years of experience, they will
> always downgrade even slabbed coins when you sell.
>
> Any experienced coin sellers out there?


I advise holding (junk) silver coins temporarily to buy goods if there is a currency crash (devaluation).

To protect your assets buy bullion held in insured and protected vaults. As the author above stated, you will get screwed trying to buy and sell silver and gold coins as needed by high commissions.

You will pay 6-20% to buy and sell coins from dealers.

Look up bullionvault.com. They only charge 0.6% on small quantities and less as you buy more. All your bullion is bought and held in NY, London, or Zurich (your choice.) It is insured and protected. When you want to sell; you sell at bid prices on the internet to other bullionvault buyers at very low cost. The proceeds are held in a major bank account until you ask it to be transferred to your bank. Simple and safe!! You have the protection of gold without the worry of storing it and cost of trading.

Mar 16 08:39 PM