Silver Prices Are About to Fall 82 comments
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Don’t get me wrong. I love silver. As a very long term investment, you cannot find anything better. If you ignore short and medium term volatility, and simply hold your metal for a long term of years, you will probably do okay. The world is running out of silver. The painful part of this "buy and hold" strategy, however, is in watching prices get periodically clobbered.
Another strategy is to keep a “core” long term portfolio, while, at the same time, keeping a non-core or speculative portfolio. In the speculative portfolio you attempt to profit by buying and selling on the price swings. In both cases, you will buy on the lows, but, instead of just holding for years, you buy low and sell high on a regular basis.
On March 6, 2009, I wrote an article which was titled “Silver Backwardation: Prices About to Soar.” That was the time to buy silver. Now is the time to sell. One of the silver stocks I mentioned was Hecla Mining (HL), and it was selling for $1.27 per share, back then. If you had bought Hecla, at that time, your profit now is immense. Don’t get greedy. Greedy investors who cannot part with their investments often lose money. Silver is now much more likely to go down than up, as I will explain.
Gold is mined primarily in specialized gold mines. It is getting harder and more costly to locate new gold mines. In contrast, 60% of all silver is a byproduct of base metal mines, which are abundant. Another 10% of silver is produced as a byproduct of gold mining. After having been devastated in the wake of the post-Lehman Brothers metals crash, base metals mining has made a remarkable recovery, and has ramped up again, by leaps and bounds. Silver production is up again. If base metal prices go down, again, it will take time before mines start closing again, and for silver production to fall. That means there will be a temporary end to the shortages which culminated in the recent big price rise.
Many people will point to the U.S. dollar and use its inevitable implosion as a reason to buy silver. That is true, in the very long run. However, we will not see high or hyperinflation in America until we have a currency event involving the U.S. dollar. There will be no implosion of the currency, right away, in spite of our irresponsible Federal Reserve. The Fed has certainly set the stage for a catastrophic dollar collapse, but European bank demand for dollars, for purposes of covering debts relating to imploding dollar denominated assets is preventing immediate implosion of the currency itself. This same foreign demand will fuel a dollar rally as soon as the Fed slows down its printing press. All assets, including gold, silver and stocks, have been artificially lifted since last March, by an influx of Fed liquidity (newly printed dollars).
Recently, the Fed's FOMC got a bit of "religion", and promised to stop monetizing Treasury bills. It has also slightly reduced the amount of agency debt it will monetize to $175 billion from $200 billion, and it has announced that it will buy agency bonds over a longer period of time. In addition, the rumor is that they will attempt to drain some of the excess reserves in the next few months. I don't think Bernanke and his minions have the stomach for financial Kaopectate, over a long period of time. But, a lot of the "liquidity" that has been driving Wall Street's rally-party could temporarily dry out. I am sure that when the pain starts monetary diarhhea will return. But, in the meantime, silver could fall very deeply.
Interest rates, like LIBOR, are going to start to rise. Most important to precious metals prices, however, is the fact that the steady stream of funny-money dollars is about to slow down. That, in turn, means that fewer newly printed bucks will be making the journey to Europe. European banks will have fewer dollars to buy for purposes of fulfilling their obligations to American banks, on defaulting dollar based assets. This means more will be paid for the dollars that are still available. All the big banks analysts are saying that the dollar will continue down, and most of the banks that are not connected to the Federal Reserve are short on the dollar. However, it seems to me that the dollar is about to go up dramatically, NOT down, at least in the next few months. While I think this will have a marginal effect on gold, it will probably have a profound effect on silver prices.
Normally, gold and silver prices travel together. I feel that this relationship is going to change very shortly, at least for a while. Sovereign demand can potentially support gold against both artificial price suppression, and its inverse relationship to the dollar. There is no sovereign demand for silver, however, and industrial demand continues to be depressed. I do not believe that investors, alone, in the face of a massive rise in the dollar, will be able to stop it from falling substantially. So, while I believe that gold may drop somewhat from its current record high, silver is going to drop much more in percentage terms, both because it is inherently more volatile, and because new fundamentals will be affecting both metals.
I believe we are about to see some temporary carnage in the stock and commodities markets, and that will deeply affect silver prices. There will be a lot of selling to cover margin calls, for example, over lengthy periods of time. I may be overly pessimistic, but, based on charts I've examined, the way I see things, silver prices could temporarily fall to $11 per troy, again, or even lower, before March 2010. Prognostications as to exact prices, of course, are seldom accurate.
All of this being said, in the very long run, silver will be a good investment, regardless of what happens over the next few months.
DISCLOSURE: Author is long gold. Mostly short silver, but with some long-term "core" long positions.
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How can that be bearish for Silver? Hmmm!
"Lover of silver", eh? If that's true, then I think your article is a great example of the old phrase, "can't see the forest for the trees".
Beyond fiat currencies, beyond discerning what's real and what's not (money-wise), besides the fact that they don't call him "Helicopter" for nothing... you did not mention the "elephant in the room": JPMorgan short 190 million ounces of COMEX silver futures.
There is going to be a High Noon moment before this month is over with CFTC Commissioner Bart Chilton and Chairman Gary Gensler baring their six guns.
Silver to $11? You're a funny guy, Mr. Goodman. A very funny guy.
For those wishing to get a better view of the forest, I recommend a visit to the mind of Ted Butler: www.investmentrarities...
On Nov 05 09:25 AM EE wrote:
> You are ignoring the huge illegal short position of the few concentrated
> banks which may be just JPM. The move to correct illegal futures
> manipulations by the SEC could release info at any time that would
> extend silver & gold much higher. However, the right thing to
> do would collapse JPM and the treasury will try to prevent that.
> So only 1/2 way measures will likely be done, but silver is primed
> for a surprise up move at any time. You guessed it, I follow Ted
> Butler. You can read him at www.investmenrarities.com The
> silver spot trade has been a $16-$18 range and I figure a pop to
> $18-$20 is the next range before the big bang up. If silver drops
> as you think, and your points are valid, it is a buying opportunity
> that won't last long.
On Nov 05 09:15 AM xearther wrote:
> Whenever I see an article begin with "don't get me wrong" the caution
> light glows bright. Same with that subtly manipulative word "clearly"
> (takk for not using it).
>
> "Lover of silver", eh? If that's true, then I think your article
> is a great example of the old phrase, "can't see the forest for the
> trees".
>
> Beyond fiat currencies, beyond discerning what's real and what's
> not (money-wise), besides the fact that they don't call him "Helicopter"
> for nothing... you did not mention the "elephant in the room": JPMorgan
> short 190 million ounces of COMEX silver futures.
>
> There is going to be a High Noon moment before this month is over
> with CFTC Commissioner Bart Chilton and Chairman Gary Gensler baring
> their six guns.
>
> Silver to $11? You're a funny guy, Mr. Goodman. A very funny guy.
>
>
> For those wishing to get a better view of the forest, I recommend
> a visit to the mind of Ted Butler: www.investmentrarities...
What if JPMorgan, one of, if not the, largest silver dealer and market maker on the planet, holds physical silver in New York and London, equal to, or even close, to the 190 million ounces they are short on COMEX. London warehouse statistics are not reported, so they could have silver there to cover their "Commercial Trader" a.k.a "hedger" short position in New York.
If the CFTC decides that JPMorgan has to close their shorts and JPMorgan says "fine, we'll just deliver against all our shorts" and they move 100 million or 150 million oz from London to NY (it costs about 6 or 7 cents to move it by ship). Then all those who are long are going to get delivered against and many are speculators who sure don't want five 70 pound bars of silver to have to deal with and pay for. Who do they sell to?
What if?
A long term "core" position is very different. Long term, you may choose to hold stocks, bonds, metals, and so on. You've determined that the long term positions are worth sticking to for a very long time, regardless of whether they move up and down a bit, while you are holding them. Income can be generated from long term holdings in the form of dividends, and/or by selling covered calls at appropriate times.
In contrast, speculative trades are short-term ones that have a reasonable likelihood of resulting in a spectacular gain. You take a big chance, and are willing to lose the value of the entire investment in exchange for the prospect of a big gain. You should not bet any more money than you can afford to lose on speculative trades.
Acting on the opinion that silver was going to soar, back in March, and, now, acting on the opinion that silver is about to go down substantially, are both examples of speculative trades.
I think silver will go higher, than break lower. If the dollar strengthens, silver will fall, too.
However, the Fed may not slow down the quantitative easing for some time, especially if unemployment needs a boost. Additionally, granted that banks and hedge funds have artificially lifted the stock market to unreasonable heights, the commodities and gold prices have been rising due to the lack of confidence in the U.S. dollar. The two are separated by intent and may show a divergence if the market begins to fall with gold and silver going higher.
Sometimes wishes do come true.
Short term possibility, but long haul silver on a tear.
On Nov 05 12:27 PM doubleguns wrote:
> Rumors of a collapse of the dollar carry trade are starting and that
> will cause exactly what this article says. I love silver but if this
> starts to happen I suggest stops in your paper silver and wait patiently
> with an eagerness to back the truck up.
>
> Sometimes wishes do come true.
>
> Short term possibility, but long haul silver on a tear.
I've sold my AGQ and am now waiting for the big pullback with more cash than I've had in quite a while.
Personally, I won't wait for 11 per ounce. I'll buy some at around 14.50 and more if it moves a couple dollars below that.
But, damn, it's painful to hold cash.