Silver Prices Are About to Fall

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.

Comments

[Laurence Hunt:]

That is a great analysis. Very independent thinking displayed here. I differ with you as to timing. That is, I expect seasonal strength to carry silver through to March 2010. Also, the developments you speak of are likely to develop relatively slowly, as is the case with macro events (think about bond prices for goodness sake! They are lagging the USD by maybe a decade now!). I'm not saying you're wrong, but I suggest a lag of several months before these concerns play out.

Nov 06 09:24 PM

[Laurence Hunt:]

Re: The lengthy silver vs. gold debate.

Silver will follow gold if there is sufficient investment demand for silver. Period. Investment demand is the only factor that matters to this debate.

Gold is built on investment demand, and silver is its volatile second cousin. However, it's hard to imagine significant weakness in silver if investment demand in gold stays strong. I am most confident in gold for all of the obvious reasons, but I certainly believe that strong gold supports the silver price, regardless of industrial demand, new supply, etc., in the silver sector.

In other words, in the face of rising investment demand, the supply of gold and silver are both very limited compared to what...? Dollars, Euros, Pounds, Yuan, Yen, etc.? For sure, the supply of silver is limited in this context.

Nov 06 10:33 PM

[drbob66:]

"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. "

Well, according to MY chart analysis, silver may pull back to around $14.50 (NOT $11)...and then continue upward to $20. Sure, I could trade around that and attempt to avoid a maybe 10-15% decline in paper gains...but instead I think I'll take the opportunity to ADD to my silver position on weakness.

"Prognostications as to exact prices, of course, are seldom accurate."

At least you got that part right. Still, I say silver will hit $20 before it sees $11.

Nov 06 10:41 PM

[Scott Reeser:]

I agree. I think Goodman is full of crap. the only way silver will go down is if JPM is about to short 1000s of contracts again.


On Nov 05 08:39 AM Mike Landfair aka Mover Mike wrote:

> The indicator that led you to be bullish on Silver, backwardation,
> hasn't changed for the better it's gotten more narrow. Yesterday
> according to Bill Murphy's column at Le Metropole Cafe, "There is
> only 1 cents of contango in silver NOV/DEC contracts and only 2 cents
> NOV/JAN contracts. The contango in gold NOV/DEC remained at only
> $0.6 and $1.2 for NOV/FEB."
> How can that be bearish for Silver? Hmmm!

Nov 07 12:33 AM

[User 366480:]

The chart of silver certainly is ominous, this could even signal something bad for gold although gold looks set to keep climbing.
The dollar also appears on the verge of rallying very strongly but it has continued to disappoint those expecting a reversal, the Fed's last statement makes it obvious the dollar will continue down in the short run, too obvious perhaps. Maybe markets will just frustrate both sides sides for a few months.
Disclosure: long gold, long dollar against aussie, kiwi, loonie .

Nov 07 04:06 AM

[Echute88:]

The guy who wrote..."Two words. Beijing put" is right on the money. China has advertised on TV for its citizens to invest in silver/gold. Mr. Goodman obviously knows nothing about Chinese culture or losing face. China WILL support/maintain the price of gold and silver at certain levels.....and trust me.....they won't let it go to $11 bucks and piss off the peasants.

Nov 07 09:15 AM

[Daryl Montg...:]

Silver at $11??? This reminds me of the Elliot Wave people who predicted late in the spring that gold would fall to $600. Instead it turned around and went to $1100. There are a lot of, "I believes" in this article, without specific date ranges or hard numbers. People can believe anything (and they do). What are the probabilities of each of these beliefs happening at the relevant points in time? Once you multiply all those probabilities together is the overall number much greater than zero? Where are the hard facts to back up the predictions? Charts? Numbers? The contents of this article appear to be nothing but a bunch of baseless suppostions.

Nov 07 09:33 AM

[ManAboutDallas:]

You'd be AMAZED at the number of so-called "educated Americans" who somehow, amazingly, still believe the world starts at the Statue of Liberty and ends at the Golden Gate Bridge.

China is still taking batting practice; for them, the game hasn't even begun.

For the U.S., the game is long-ago over, and the "team" is still on the field trying to figure out how they lost.


On Nov 07 09:15 AM Echute88 wrote:

> The guy who wrote..."Two words. Beijing put" is right on the money.
> China has advertised on TV for its citizens to invest in silver/gold.
> Mr. Goodman obviously knows nothing about Chinese culture or losing
> face. China WILL support/maintain the price of gold and silver at
> certain levels.....and trust me.....they won't let it go to $11 bucks
> and piss off the peasants.

Nov 07 11:27 AM

[Tim Roller:]

Avery, YOU NEED A NEW JOB. Even Wikipedia is SMARTER THAN YOUR ANALYSIS! Silver is the BEST INVESTMENT in the WORLD today. Have you ever looked inside a LAPTOP? No more gold-plated anything except the hard drive connectors. Everything is SILVER. SILVER, SILVER, SILVER, SILVER!!!!!
-Tim Roller (available for employment) [e-mail]


On Nov 05 11:48 AM Avery Goodman wrote:

> This piece was intended as presenting some thoughts on a speculative
> trade. It was never intended as a primer on investing strategy. A
> very limited part of anyone's portfolio, in relation to overall wealth,
> can be devoted to speculative trades. The risk of being wiped out
> is too high to devote a large part of your portfolio to this type
> of activity. Remember, your family must eat, regardless of whether
> you win or lose in the market.
>
> 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.

Nov 07 01:41 PM

[Avery Goodman:]

Silver is likely to go up in price over the very long term. I have very clearly stated, many times, in this article and others, that silver is an excellent very long term investment. It is better to buy it when it is cheaper, however, rather than when it is more expensive.

As a long term silver investor, you will need to grit your teeth as it gets periodically clobbered. The reason for the volatility is a topic for a book, or, at minimum, an article, because historically silver and gold are the most stable commodities. Not anymore. Without a long explanation of why, we can simply say that lack of effective regulation of the futures markets casino clearly has something to do with it.

Decent men do what they can to make the world a fairer place. But, practical men will also deal with the world as it is. Practical men will not engage in swordfights against windmills. It is not always pleasant to deal with reality.

One reality that an author on seekingalpha must deal with is the requirement of disclosing long or short positioning, I DO NOT endorse the idea of people taking short positions in silver. Generally, that should be left to people who have the knowledge to do it without putting themselves at risk. One can be both hedge existing silver investments, or become overtly short silver in many ways, including buying puts.

The essence of this article is simply an explanation of why I reversed my opinion, temporarily, on a bullish speculative trade suggested in an article I wrote in early March. Nothing more.

Nov 08 05:00 AM

[Just gotta ...:]

Mr. Goodman thinks the US$ shall rise after the new year comes, yeah, but it shall be at the cost of the price of oil going up; since, this dollar rally for 2010 is to allow Americans to get their housing conditions stablized. However, this 2010 rally for the US$ shall not necessarily bring back jobs for the working classes! In full contact sports we believe a three point blow is one fundamental for driving the opponent, in physics we work with three dimentional
objects on graphs etc. What I am trying to say is that after 2010 there can be more bear movements in the markets because I don't think our economy can properly rebound without our exportations improving and that shall be after the C.I.S. of Moscow joins the WTO!
Piece of cake, praise unto the Lord, Amen.

Nov 08 11:12 AM

[Just gotta ...:]

Pardon my weak analogy, only I agree that we are in for some serious inflation and the resulting precious metals boom should be just as serious! Nice reply, A.G.!
I believe one expert has stated the law of averages for gold prices comes out something similar to every 82 days for a bear, and every 95 days for a bull. Could someone please correct my poor sense of recall?

Nov 08 11:28 AM

[bfarms:]

Farmland is good if you can find and afford it / and i own physical gold and silver. Farm land is getting harder to afford. good luck everyone.

Nov 09 02:41 AM

[Joe Curry:]

I agree I will sit tight. I am torn between a defation camp with the aging baby boomers saving instead of consuming,and all of the debt deleveraging. And the inflation camp with the printing press in warp drive,along with 1.4 trillion deficits. What trumps what? Is there more weight to a full speed printing press or a spent baby boomer consumer?


On Nov 05 09:41 AM Jimbo wrote:

> As a holder of physical silver and an investor in a broad collection
> of miners, You arguments sound plausible to me. I plan to sit tight
> since I believe the destruction of the U.S. currency lies ahead.

Nov 10 06:49 PM

[FreeStateYank:]

As a newcomer to holding metals I've done a lot of reading. Maybe my comprehension needs some work but this is the way I see it:

1. In times of panic, thoughts turn to gold, which is useful as a preservation of wealth in an inflationary period [or dollar depreciation period, which by all accounts has been going on since 1913]
2. Gold, Silver and most miners will prosper and good for them.
3. If the SHTF, loads of folks will be sitting on a mountain of gold, which if it becomes an alternate currency, could be interesting. Seems a lot more gold has been hoarded over the years, so it may not be quite as scarce as the pundits would have you believe.
4. Silver has been IGNORED [as have the pgms] Why?
5. Methinks that the bankster/FED mob wants the sheeple in gold and they are going for silver. Has a lot more room to go higher and historically [pre-1913 Fed at ratios of 15-20:1. Seems grossly under-priced to me. Once silver spikes, perhaps some institutions will have their own mystery hoards that will help bail them out from their devastating balance sheets [Including the Treasury?]
6. While silver industrial use has dropped, its decline was due in part to less folks buying wedding silver AND decline in traditional photo film processes as people went digital. Currently, it's been proven effective for water sterilization [have a silver ionizer in the hot tub!] and emergency wound treatment. Both of the aforementioned have a market and excellent potential growth. Coupled with investor demand which has been significant, I don't think the miners can get it out of the ground quickly enough.

So maybe a fall back, but I don't see a tumbling price to 11 or so, nor do I see any fallback position lasting long.

Even if the dollar has an immaculate rising, ask yourself, 'If the fed has been debasing the greenback for 90 years, why stop now?' All they would do is slow down the rate of descent. Frankly at this point, enough people are just too well-informed and will not trust the paper.

I foresee folks hiring contractors for work around the house and paying in silver coins.

Another note, I read that SA is shipping fractional Krugerrand in rather large quantity to the States. A first in this sort of volume.

Now I'm going to throw darts at the board to make my next commodity forecast, lol.

Nov 12 01:02 AM

[User 429609:]

I am an upper middle class middle aged working guy , I do pretty well I guess , Have a 401k and 2 IRA Roth and traditional make my monthly contributions, but I did not start saving for retirement until I was 40yo , so I have 25+/- years to get some retirment savings going, Silver imo is going to be my saving success, I buy 10-20 ounces of physical silver every 2 weeks , On payday, on my way home from work, I stop ay my local coin shop and pick up 10-20 ounces of silver, been doing it for over 5 years now, since my 40th BDay, I buy silver eagles , high grade rounds & bars, even 90% usa coinage, my local guy always has something different at good price, I enjoy the experience, I have bought for as low as $6 ounce and bought as high as $22 ounce over last 5+years , Silver has many advantages over cash stocks bonds, mainly it is of course "undeclared" in the small amounts I purchase and pretty much a hidden asset , I can buy (or sell) 10-20 ounces and no one in the govt has to know , I enjoy that , The flucuations in price have been good for me , when price is low, I will but the full 20 ounces, when it is higher I buy the 10-12 ounces, Long term I plan to have 10000+ ounces minimum over 25 years. I have 2 very secure simple safes at home and also use an off site insured safe deposit type box, The cost of storage is extremely low, $240 per year fpr box and insurance, well add $400 if you include my home alarm system but that is for more then just the silver, My Kids love the silver and all of my friends and family love my Christmas and BDay presents of various silver coins, bars, rounds. Usually and ounce or 2 at most. I have created a few other silver bugs along the way. Silver is better then money, it is always in demand in certain growing circles for investments, it is a safe store of wealth, it has increasing industrial and medicla uses, high tech uses and in the end it is safer then cash, it will never be worth zero and if something Bad does happen in society, USA currency, you will be well served to have some phyical silver on hand. IMO Price flucuations ARE made to buy , buy the dips hard , and long term holders, buy the rallies, but buy smaller amounts, Dollar cost average , IMO everyone should have a long term Silver cache for your future, your families future, and it is really fun to shop and buy silver, give silver as gifts , teach your kids the value of metals, I have found so many postive forces have come from my silver investments, IMO dont get all caught up in the short , longs , BS paper silver products, buy HOLD physical silver assets , maybe own a few minders like HL, CDE, PAAS, but stay away from the COMEX and all that short paper silver , SLV intrigues me until I read about them using leverage and hedges and lending out the silver so it is not a true hard asset buy any longer , that paper Silver is going to crumble under the forces of manipulation imo , I remember paper silver was $12 ounce, but phyical silver was $15 ounce or more last year , I have seen that a few times over last few years, shorts crumbled price "on paper" but NO ONE could go buy phyical silver for the artificially created prices.... I enjoy Silver and silver related articles , Enjoy the silver threads here , If you buy paper silver be ready to LOSE money IMO , if you buy Hard asset long term silver you WILL be rewarded....

Nov 14 10:37 AM

[User 429609:]

Very Interesting Article:
www.marketwatch.com/st...

Nov 14 11:55 AM

[tradrmick2:]

The squeeze is on! Thanks Ben!

Nov 16 05:46 PM

[tradrmick2:]

Silver generally out performs gold in bull markets and under performs in bear markets. There are some wild days ahead for those of us who trade metals, especially silver.


On Nov 14 11:55 AM User 429609 wrote:

> Very Interesting Article:
> www.marketwatch.com/st...

Nov 16 06:01 PM

[El Qadi:]

I think we need go back to silver's and gold's definition
btwos.com/silver.html
btwos.com/gold.html

Nov 17 04:24 AM