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Background

The recent pullback in commodity prices has presented buying opportunities in various asset classes. While the mainstream media concentrated mainly on the gold pullback, the more precipitous decline in silver received little or no attention. This drop has provided a rare opportunity to pick up physical silver.

What Caused the Pullback

Two factors appear to have set the selloff in commodities. The first was economic data out of China depicting a slowdown and the other being an article from Goldman Sachs stating gold had peaked. Goldman came out a week later and reaffirmed that gold was in a long term decline.

This caused frenzy in the commodity markets as retail speculators began selling gold and other commodities. The small futures and ETF traders sold their positions. Evidence indicates that these same speculators and are now taking new short positions.

Investors who attempted to buy physical commodities were faced with a different situation, they could not find supply. The physical market was overwhelmed with purchases and many investors are still waiting to take custody of their physical metals.

Reasons to Own Physical Silver

  • Inflation
    • The US Federal Reserve just announced that they will maintain their Quantitative Easing program, which dilutes the existing US money supply by more than $1 trillion annually. The link is here. The Bank of Japan recently announced its intentions to continue on their already unprecedented money printing operations. The link is here. Finally, the European Central Bank (ECB) cut their main interest rate by 25 bps to 0.5 percent. The link is here. These actions will push up all commodity prices.
  • Scarcity
    • Endeavour Silver (NYSE:EXK) recently announced it is deferring 20 percent of its planned capital investments as non-essential in 2013. The link is here. While management stated none of the cost reductions were expected to change its mine plan or silver production forecast for the year, the cutback in capital investments will likely postpone exploration discoveries of new reserves.
    • Newmont Mining (NYSE:NEM) recently announced that in response to reduced metals price expectations, they are deferring 20% of capital investments, reducing non-core exploration expenditures by 25%, and minimizing operating costs. The link is here. This will postpone exploration discoveries of new reserves. Other miners will make similar reductions, so future supply will be lower.
  • Goldman Sachs Closed Short Position on Gold
    • Goldman exited its bet on lower gold prices after issuing a sell recommendation on April 10. The link is here. The bank said gold's decline has been "surprisingly rapid." This indicates that Goldman lacks confidence in the continuing decline in gold, as well as other commodity prices.
  • Silver Prices Have Yet to Recover
    • The chart below (courtesy of Yahoo Finance) compares the price of physical silver to physical gold using the Sprott Physical Silver Trust (NYSEARCA:PSLV) and Sprott Physical Gold Trust (NYSEARCA:PHYS) as proxies. While gold posted a 20% decline, silver posted a 25% decline. Silver has also been slower to recover than gold. This appears to indicate more buying interest in gold than silver. Eventually silver will gain attention as the ratio widens between the prices of these two commodities.

(click to enlarge)

Summary

Commodity-centric investors likely already hold physical commodities as part of their portfolio, but the decline in silver offers a unique opportunity to add to their positions.

Other investors can also benefit. Shareholders of mining companies can divert some of their quarterly dividends to purchasing silver. Freeport (NYSE:FCX) and Newmont are excellent examples of mining companies that pay healthy dividends that could be utilized in physical metals purchased.

Source: Reasons To Own Physical Silver