The Pros And Cons Of Going Long Silver

by: Simit Patel

With silver's big drop and the consolidation that has ensued since then, I thought it would be worth taking a look at the simple pros and cons of silver, so that investors and traders can make a more informed decision.

Arguments From the Bulls

Here's a short list of what the bulls say:

1. Many bulls believe the global sovereign debt crisis we are in the midst of puts us on a trajectory towards hyperinflation, in which all confidence in central banks that manage the fiat currencies of nation-states/economic regions caught in the sovereign debt crisis is lost. This is bullish for metals and puts us on the path towards their re-monetization.

2. Equities are in a secular bear market, and commodities are in a secular bull market. Assuming this cycle started in 2000, and that such cycles typically last in excess of 15 years, we still have a few more years left in this bull.

3. Reports of a shortage of silver

Arguments From the Bears

1. While the global sovereign debt crisis may create hyperinflationary episodes as confidence in fiat money continues to be eroded by monetary and fiscal policy of indebted economies, this is not necessarily bullish for silver. It could be bullish primarily for gold, with silver dragging. Gold and silver are related, but their ratio has historically gone has high as 100:1; with gold currently at around $1650, a 100:1 ratio puts silver at $16.50. From this perspective, gold would need to reach at least $3,000/oz while silver does not rally in order for a deeply bullish case for silver to re-emerge.

2. The return/resumption of a strong bear market could destroy industrial demand for silver. If industrial demand for silver is destroyed and gold receives the majority of monetary demand (which a rising gold/silver ratio suggests), then silver may have further room to the downside, or may be rangebound.

3. Technically, silver is creating a pattern of lower highs and lower lows; after the initial run up past $49, it fell to around $33; it then rallied to $43 -- lower than the previous high -- before falling to around $26 (lower than the previous low). Trendlines on the weekly chart have also been broken. For those who like to move with the trend, the case for the trend being with silver has gotten much weaker.

I've changed my opinion significantly in light of the recent drop, and am in the process of liquidating the majority of my silver in exchange for gold. One of my cardinal rules is to never trade against what I perceive to be the primary trend, so silver's second collapse this year suggests the trend is no longer with the metal. I may re-enter if silver can make new highs (breaking the pattern of forming lower highs), if the gold/silver ratio soars and seems set to reverse, or if silver falls to remarkably low levels where downside risk is limited.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.