The Rise of the Silver Surfer 36 comments
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I have a new sector, a new weapon in my arsenal, an area of the market that I’ve ignored for over 10 years due to the lack of quality pure-plays. I’ve been trading and investing in various gold ideas forever, but a lot has changed with the white metal, and now I’m happy to report that Daddy’s become a Silver Surfer.
Before I continue, I want to remind my readers that I don’t make trading recommendations, market calls or give any investment advice whatsoever on this site…I get paid to do that in the real world, not for free on the internet. There is no simple, one-size-fits-all advice that makes sense for everyone who reads my stuff. So don’t trade based on anything I say on this site.
OK, that’s out of the way, now let’s talk about the silver sector, and why I think it’s an interesting idea to at least be familiar with.
It’s been said that Ben Bernanke and the Federal Reserve will stop printing dollars when he runs out of trees. We still have deflation in autos and homes, but that’s because the Chinese don’t want our split-level ranches or Pontiac Sunfires. What they do want is the material to run their economic go-faster machine, and with the trashing of our dollar, hard asset prices have been headed higher this Spring.
As these factors coalesce, the classic inflation hedge that gold offers will be heavily in demand. Everyone knows that gold should work under an inflationary scenario as people switch out of dollars that are losing their purchasing power, but how many people are aware that silver has the potential to move even more than gold percentage-wise, and at a faster rate?
Silver is a precious metal just like gold, and has been used as a form of currency going back to the ancient Sumerians. In addition to its use as a store of wealth or as jewelry, silver has something going for it that gold doesn’t…it has real applications in both industrial and technological products and processes.
Silver was always involved in traditional photography, but it’s also an important component in many newer, eco-friendly technologies. Photovoltaic solar cells as well as hybrid and electric car batteries are two examples of this. Silver is so important and irreplaceable to the manufacture of these items, it has recently picked up the nickname “the green metal“.
Let’s talk valuation. An ounce of gold had historically traded at a ratio of around 15 to 1 versus an ounce of silver for many decades. This was not a man-made ratio; there is, in fact, roughly 15 times the amount of silver as there is gold in the earth’s crust, so this ratio was more of a geological truism. Gresham’s Law, however, brought this ratio into focus. Named for a Tudor-era English financier, the law held that as either gold or silver got ahead of itself in price, you could just buy the other one as a form of arbitrage, so this 15 to 1 thing was fairly solid. That all changed between the 1960’s and 1980, a period of time during which silver was largely de-monetized.
The yellow metal is trading at around $950 an ounce as of this post and silver’s at slightly above $14. The gap right now between gold and silver shouldn’t be anywhere close to that historical 15 to 1 spread, but should it really be at 70 to 1? The smart money may be looking for a reversion to the mean with the gap this wide. There could be a ton of ground for silver to cover while narrowing that gap, and that brings me to the exciting part…The Slingshot Effect!
At current gold prices on the spot market of around $950 an ounce, a more traditional ratio of 50 to 1 would look more like $20 plus for an ounce of silver, a gain of 40% in the commodity itself. Now, picture the price of gold finally cracking above the $1000/ oz mark that it’s been flirting with for a year…and staying up there! The torrent of buying that could come in would probably be ferocious enough to wrench the price of silver higher at a much faster rate than gold, as silver is a much smaller market.
It’s been posited that the silver market is so tight and unaccustomed to speculators (compared to the gold market), that if someone calls for physical delivery of the metal (which a contract enables them to do) the entire mechanism could break down, triggering an explosion in prices due to the physical scarcity.
Picture the stored potential energy of one end of a rubber band being held back (representing silver prices) as the other end of the rubber band is being pulled forward (gold prices). The further you stretch the “gold” end of that rubber band, the more the potential snap you’re going to get when you finally release the silver end. That’s what we could be looking at with a 70 to 1 gold to silver ratio and a tight market with few ways to get exposure. That’s the Slingshot Effect.
Gold is within spitting distance of its 2008 peak price as well as its all-time high price. Silver, on the other hand, has been cut in half from its 2008 high. As far as the all-time high for silver? We’re talking $50 back in 1980, not adjusted for inflation.
I alluded to the fact that silver is a smaller market than gold and that there aren’t many ways to play it. There are a few, however, but I’m going to speak very generally here so that my words are not construed as an endorsement of any of these vehicles.
You’ve got 4 decent-sized publicly-traded silver miners of varying degrees of corporate quality. Coeur D’Alene Mines (CDE) is an Idaho-based concern with a $1 stock price and plenty of debt…I’m not even looking at it. There is also Pan American Silver (PAAS) and Silver Standard Resources (SSRI) and these appear to be better-run companies. The fourth is the one I’ve done the most work on, it’s called Silver Wheaton (SLW) and it has a very interesting business model…it’s a miner without a mine!
70% of all the silver that is produced in this world comes out of a mine as a byproduct of gold or copper mining. The largest mining operations in the world, Goldcorp (GG) for example, end up with a large supply of silver while mining for other metals and they don’t necessarily want to deal with selling it. Instead, they contract with Silver Wheaton Corp, to take it off their hands at a predetermined price. SLW’s all-in cost across their portfolio to buy the silver from these miners is said to be between $3 and $6 per ounce, so whatever they can sell it for above that price on the spot market is theoretically a profit (they do not hedge).
They don’t have cap-ex or physical mines, no labor disputes, geopolitical issues or technical problems…again, they are the miner that doesn’t have the hassle of owning a mine, pretty cool. Jim Simons of the $30 billion hedge fund Renaissance Technologies has bought almost 4 million shares of SLW as of his latest filing. Another large buyer of the company’s stock is Canadian fund manager and commodities expert Sprott Asset Management, who’ve recently made SLW shares their largest holding. The market cap is about $2.5 billion, making it the largest of the pure-play silver miners.
The point of investing in metals miners is to get a leveraged play on the commodity itself, but many market participants these days have more of an interest in owning the commodity itself. There are two different ETFs that are silver only, but discussing them here (or even mentioning their names) would trigger a tornado of disclosures and disclaimers that I don’t feel like dealing with. You know how to find them if you want to.
To sum up my new-found interest in the silver story, I believe that the longer we keep nominal interest rates at zero, the higher potential there is for inflation. I also do not believe that Bernanke will have the independence or the guts to begin raising rates when it’s time to (at least not quickly enough). The unemployment rate will make it politically unpleasant to do so, and Bernanke’s no Paul Volcker.
If our dollar is going to be a global rag doll, the demand for precious metals should balloon, and I think silver has more room than gold for appreciation if I’m right. I also like the metal’s involvement with electric car batteries and solar cell technology. The price is pretty inelastic for what silver does in these things as it cannot be substituted with anything else.
If you are interested in the ideas I’ve discussed in this piece, I urge you to do your own homework. There is still a lot that I wish to learn about this metal and the way it trades, so if I missed any important points, please feel free to give me a shout.
Full Disclosure: I currently manage both client and personal accounts that are invested in or trading securities related to both gold and silver. My commentary here should not be considered as research, nor should it be viewed as an invitation to buy or sell any securities. I have enough to worry about, so please don’t make any investments based on anything you read on any blog, especially this one. See my Terms & Conditions page for a full disclaimer.
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This article has 36 comments:
The ProShares Ultra Silver ETF (AGQ) seeks daily investment results that correspond to twice the performance of silver bullion, as measured by the U.S. Dollar fixing price for delivery in London.
The ProShares UltraShort Silver ETF (ZSL) seeks daily investment results that correspond to twice the inverse (opposite) of the performance of silver bullion, as measured by the U.S. Dollar fixing price for delivery in London.
The UBS E-TRACS CMCI Silver Total Return (USV) seeks to reproduce the performance of the UBS Bloomberg CMCI Silver Total Return. The ETN measures the collateralized returns from a basket of silver futures contracts. The commodity futures contracts are diversified across 5 constant maturities from 3 months up to 3 years.
There are also British ETFs.
See etf.stock-encyclopedia...
Bring it.
Using a Historic, Manipulated price adjusted for Inflation is not justifiable.
Apparently you do not keep up with the markets either. Silver is not "slightly" above $14.
Gold was at $1,000 and silver at $20 last year, thats a 50 to 1 ratio just like the CEF ratio which has been maintained for DECADES also.
If gold were adjusted for Inflation, some have pegged a fair current Value somewhere North of $2,000. This correlation should apply to Silver as well. Working Backwards, The $850 Gold price of acheived in the Last go around gives Silver "An all time" 1980 price of $17 and correlates quite well with what occurred in 2008.
To me, that Translates into a minimal current Price Of $19/oz. given that stupidity reigns in the Silver Markets and the decline in production has been A Known since last year, Silver should have the capability to Overshadow the price of Gold on a percentage basis by at least 2 to 1.
That Manipulated All time High of $50 may actually be reached on a self-fulfilling basis.
But please do tell, if silver is not currently trading slightly above 14, then where is it? Am I looking at prices from an alternate universe or something?
I didnt discuss manipulation or the attempt to corner by the Hunts in my piece but your commentary of such was a welcome addition to the discussion here.
On May 22 10:38 AM one eye wrote:
> I do not have a clue as to what the ACTUAL price of silver would
> have been Had the Hunts not made their bid to Corner the Market.
> You don't either.
>
> Using a Historic, Manipulated price adjusted for Inflation is not
> justifiable.
>
> Apparently you do not keep up with the markets either. Silver is
> not "slightly" above $14.
>
> Gold was at $1,000 and silver at $20 last year, thats a 50 to 1 ratio
> just like the CEF ratio which has been maintained for DECADES also.
>
>
> If gold were adjusted for Inflation, some have pegged a fair current
> Value somewhere North of $2,000. This correlation should apply to
> Silver as well. Working Backwards, The $850 Gold price of acheived
> in the Last go around gives Silver "An all time" 1980 price of $17
> and correlates quite well with what occurred in 2008.
>
> To me, that Translates into a minimal current Price Of $19/oz. given
> that stupidity reigns in the Silver Markets and the decline in production
> has been A Known since last year, Silver should have the capability
> to Overshadow the price of Gold on a percentage basis by at least
> 2 to 1.
>
> That Manipulated All time High of $50 may actually be reached on
> a self-fulfilling basis.
At least equities can have good leverage to the metal, ETFs have nothing that you can't better get buying and holding the metal itself.
Buy a contract and strip the Comex stocks don't waste your time on paper silver of any kind.
Harammph, I don't consider 5% as being Slightly either.
Keep tabs of the real world. Gold Is not slightly above $900 when it trades at $950.
On May 22 10:33 AM Frank P wrote:
> I think the reason Silver has fallen out of ratio is it tends to
> swing much wider than gold. So, yes, you can do well with silver
> but you can do worse too. The SLW model is likely to do even better
> in a good environment but in a bad one they'll be paying more than
> what they can sell for, which could finish them off. The miners have
> the same risk which is why they sell to SLW, but at least they own
> mines and so-forth than have value and could be sold.
Do also have a look at Silvercorp Metals (Amex: SVM).
They are a Canadian company with mining operations in China.
Their Ying deposit has extremely high grade ore. They may be THE low-price silver producer having produced 4.2 million oz. in FY09 at a net cash cost of
here's the important part:
Cash cost of NEGATIVE $2.77/oz net of byproducts.
$65 million in the bank, no debt, so many mines to develop, so little time. Oh, did I mention that they already pay a small dividend...and just doubled it...partly, the company says, they just want to "prove" that they can pay a dividend from China...
Worth a look, perhaps.
disclosure: long position.
Why doesn't anyone ever respond when They are wrong. Not even a bloody ooops.
silver is out of whack with gold. it does seem to be a side effect of the hunt brothers. there does seem to be an explosive potential.
i appreciate the tips on silver miners and slw.
anyone got any favorite explorers? (sabina noted) i have had good luck on gold explorers and mines. any suggestions on silver would be appreciated and researched.
i tend to take a steer clear attitude on funds and promises to pay except as trading paper like any other stock.
one of my favorite miners is bhp because they seem to mine and drill for everything and are now even well into desalienation. their broad approach and size give some security. the dividend is nice too. right now i am out of bhp but will go back when opportunity seems good.
slw seems an interesting idea.
Because they're not a pure play on silver?
I like HL, and own lots of it.
HL is moving up very well lately.
Much better than CDE.
NG too.
I like SLW for a ten bagger over ten years.
CDE has watered the stock to stay alive. I think the management of Great Panther is better connected locally and is not exposed in Bolivia like CDE is. Reverse splits never work out too good for the shareholder and CDE is about to go 1 for 10. In my opinion CDE's management are good financially, but not so good operating mines. Just my opinion..... For full disclosure, I have owned both CDE and HL from time to time since 1979. I currently have a few thousand of each, more of HL. GPR I have low five digits of. I think all investors are best with the physical. I like USA Silver half dollars , pre 1964,and USA silver dollars., 1935 and earlier. Average Circulated is the grade to buy. I do not like bars and ETFs are just another paper obligation likely to be defaulted on if the price goes up a lot. It never hurts to have some real silver. It is getting late in the game and there is not much time left to get a position.
Not doing so allowed the criminal element into our system, and it grew like a virus. Worse than any natural 'bug', the 'greed bug' effected almost everyone. All were happy to allow the prices of homes go up, and no one gave a thought to the consequences. [Which we are living now]
The result of the folly of the last few years, no matter whose fault it was or wasn't is how we are digging out. We are not digging out, and that is the problem. We are digging deeper by giving money to the same people who stole enough from us in the beginning to cause this mess.
You cannot give money to someone who has never learned to handle it properly, and expect your gift to make them do the right thing. You, in fact, enable them to continue their wierd and warped ways of economics.
The result of this, [when] sooner or later, {and I think sooner} will be inflation. It cannot go any other way unless the 'FED' calls in a lot of money somehow, takes it off the table. Who is gonna give it to them?
Everyone, only way to get it back is taxes. Unless you can show me how the FED can get it back legally some other way.
So, if u need an economics 101 lesson here it is: When prices rise, the only things that will rise accordingly, is art, antiques, real estate, {in this case R E will not participate for a long long time} It already got artificially inflated, and is now coming back to earth.
Other things that do not "pay interest" precious metals for one, will go up in price with everything else, and the only way to keep up is to have an inflation hedge, and that is the short list {minus leveraged Real Estate BTW that is RE with a mtg attached. Now if you have paid for RE, then you are in better shape if u have something left to pay taxes with.
This is coming to what I termed long ago as "DECESSION" Go look at my old postings, and you will see I said this long ago. We are, in my humble opinion, at the end of decession (If you didn't catch my definition of decession, it is the midway point between recession and depression) and depression will begin after the S&P goes down to about 766, in another 4 weeks, after that, I fear we will be heading south.
You think there is high unemployment now... Wait a bit, the newspapers are full of want ads, and no one wants the jobs, soon there will be so few if any jobs offered you will not believe it.
Watch out then. it will be too late to reorganize anything but your self defense mechanisims.
Buy as much small silver as you can, get in self defense systems, and freeze dried food, lots of it hidden, and a coupla three real good charcoal filters for drinking and cooking water, then get ready to hunker down.
I am ready except for the freeze dried food and that is next.
Good luck, I hope I am crazy loony mad and totally wrong, if I am, then fine, the rest of my plan will allow me to live nice.
Capt Brian
PS How could we allow this wonderful country to be let go like this. Shame on all of us!
arabianmoney.net/2009/.../
For muslims, if we have savings held for at least 1 lunar year amounted at minimum equal to 20 gold dinar or 200 silver dirham, we must pay zakat (2,5% of savings). 1 gold dinar is made of 4,25 grams of 22 carat gold and 1 dirham is made of 2,975 grams of silver.
Assuming price of gold is $1.000 , price of silver should be more than $130.
2. The author (J.M. Brown) mixes good sense with nonsense. There is more of the former, but watch out for the latter. (a) What is the history of the gold: silver 15:1 ratio? Gold has been used for millenia. Silver for how long? I don't know. So this statement is completely unsubstantiated. (b) How long have people known that the ratio of silver to gold in the earth's crust is 15:1? vs. How long have people been buying, selling, and minting silver and gold? (c) Gresham's law is: "Bad money drives out good." (d) The "slingshot effect" is ridiculous. It shows that Mr. Brown has an excellent imagination. If he uses ideas like this to sell to his clients, I'm glad I'm not one.
3. One can find lots of junior miners on the Agora.com website. Then you can do your own homework.
Disclosure: long Energold Drilling (EGDFF), FNX Mining (FNXMF), ECU silver mining (ECUXF). These all trade under different symbols on Canadian exchanges.
I loaded up on these folks last year and added somemore just recently. They are currently sitting on 300 mil ounces in reserves. They expect 5.5 - 5.9 mil ounces for 2009. There cost per ounce is right at $5.00. They have even started stamping thier own coins and selling them retail. Most of their concentration is in Mexico.
I would like to own 2 silver investments ( no ETF ) and thats it.
I do however have a question. Does anyone know what the $1 "silver shots series A, B, C" are? They are suppose to be some kind of new silver investment that are tightly regulated by the U.S. Gov.
Any help on this question would be greatly appreciated.
I hope you are not right but there is some evidence to what you are saying. However I do hope and pray that our savior comes for us before it gets that bad.
New government-regulated "silver shots" move in line with silver prices. However, because of their unique composition, "silver shots" move exponentially higher than silver itself.
This means even a small move in silver prices generates explosive appreciation in "silver shots." Take a look at the chart below comparing silver bullion gains to "silver shot" appreciation:
Silver Shot Series A-2009: 900% in 1 day on a 5% move in silver bullion
Silver Shot Series B-2009: 350% in 3 days on a 3% move in silver bullion
Silver Shot Series C-2009: 125% in 4 days on a 6% move in silver bullion
Silver Shot Series D-2009: 200% in 3 days on a 7% move in silver bullion
Silver Shot Series E-2009: 325% in 1 month on a 37% move in silver bullion
Silver Shot Series F-2009: 240% in 1 month on a 21% move in silver bullion
Silver Shot Series G-2009: 236% in 1 month on a 36% move in silver bullion
Source: The Wall Street Journal/MarketWatch
Allow me to substantiate some of my "nonsense", I'm in a good mood so what the hell...
The Slingshot Effect is a very real phenomenon. Silver maven Ted Butler has written a great deal on the subject, as have many other metals watchers who are infinitely more educated on the subject than you or I. Here is another example of the Slingshot Effect being quoted, so you don't just chalk up this possibility to "my imagination":
seekingalpha.com/artic...
Silver has been a form of currency dating back at least to Ancient Sumeria, as I mention in the article. This is one of the oldest major civilizations on record. Is that a long enough time back for you?
Gresham's law is multi-faceted, and does indeed have important ramifications for the gold to silver price in currencies and commodities
I do not recall indicating anywhere in the article that I have a degree in geology, yet 10 minutes worth of research or 10 days worth of research will likely lead you to the conclusion that my 15 to 1 ratio of silver to gold is widely-accepted and fairly accurate. If you want to refute that, take it up with the Natural History or Minerals and Metals scholars, that's not my debate.
Lastly, I don't need to push anything on my clients, but I appreciate your attempt to get nasty and personal with me...very nice. I am sorry for the frustration this world must cause you, but trust me, you do not have to worry about ever being one of my clients.
Thanks for reading.
On May 24 05:41 PM socphd71 wrote:
> 1. Low commodity prices are a danger for SLW. The miners from
> whom they are buying will reduce their output in response to low
> prices for their base metals. Thus, they have less silver to sell
> to SLW.
>
> 2. The author (J.M. Brown) mixes good sense with nonsense. There
> is more of the former, but watch out for the latter. (a) What is
> the history of the gold: silver 15:1 ratio? Gold has been used for
> millenia. Silver for how long? I don't know. So this statement
> is completely unsubstantiated. (b) How long have people known that
> the ratio of silver to gold in the earth's crust is 15:1? vs. How
> long have people been buying, selling, and minting silver and gold?
> (c) Gresham's law is: "Bad money drives out good." (d) The "slingshot
> effect" is ridiculous. It shows that Mr. Brown has an excellent
> imagination. If he uses ideas like this to sell to his clients,
> I'm glad I'm not one.
>
> 3. One can find lots of junior miners on the Agora.com website.
> Then you can do your own homework.
>
> Disclosure: long Energold Drilling (seekingalpha.com/symbo...),
> FNX Mining (seekingalpha.com/symbo...), ECU silver mining
> (seekingalpha.com/symbo...). These all trade under different
> symbols on Canadian exchanges.
AXU is a Canadian silver miner with an environmental services company thrown in for good measure. Currently developing the Bellekeno silver mine in the Keno Hills mining district in the northern Yukon, which they were AWARDED (exploration & development with NO prior liabilities) by the Canadian government, in addition to a multi-million dollar mine cleanup/remediation contract in the same area. Anyway....why YOU want to own some of their stock:
May 14th - AXU dips to $1.27
May 22nd - AXU hits/closes @ $1.97 (Today it closed at $2.04)
POTENTIAL PROFIT: .70 per share or 55.1%!!!!!!!!!!!!!
www.alexcoresource.com...
Not just nonsense. Galactus, Papa Bear, Hyper Inflation, The Greater Depression, Global Monetary Meltdown...whatever. Silver is one of the Fantastic Four ways to invest against the US$ (and the devaluing of currencies globally). Silver, Gold, Oil, and basic commodities (like food).