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When To Eject From The Silver Rocket

The price movement in silver has been dramatic since September- doubling over the last six months. Friday's action was more of the same. This leaves many trying to call an intermediate top, or even looking for a quick buck by shorting silver, convinced that the trend can't last. 

My advice to them: be sure to understand what you are shorting.

Silver is not only poor man's gold. It is in fact rarer than gold in bullion form, and has become that way because government and official stockpiles have been dumped on the market and consumed. This dumping of official stockpiles (including from the U.S. government as well as from Chinese banks- who used to own billions of ounces of the stuff) essentially gave those who went short the metal an easy ride between the early 1980s and around 2007. Now, without any backing from further dumping of stockpiles from the U.S., China, or any number of other places, those who want to play the short side in the casino called the COMEX are likely in trouble.

But this is only the beginning. Not only is silver rarer than gold in bullion form, but we have several new etfs or closed end funds which allow people from all over the world to simply hop on their online brokerage account and buy silver with a mouseclick. Once  upon a time you had to go to a bullion dealer or hunt down silver certificates. Plus, 20 or 30 years ago, in many parts of the world people were forbidden from hoarding hard assets. Now, with the internet revolution and the spread of day trading and capital markets all over the world, the number of potential new silver investors has risen by an order of magnitude. 

How much silver is there to go around for all of these new investors? About 1 billion ounces, or roughly 35 billion dollars globally. The number of silver ounces are less than 1/6 the number of people on the planet. How much new bullion for investment is produced from mine supply each year? Less than 100 million ounces globally, or 3 billion dollars, give or take. Not much, and it is hard to increase these numbers. As the price of silver moved up over 5 times between 2000 and 2009, the reserve base of silver (what miners think is in the ground) increased maybe 40% (roughly 13-17 billion ounces). Again not much when you consider that millions of ounces a year are consumed by electronics, and industrial demand for silver is over 500 million ounces alone per year and set to rise dramatically with demand for solar technology. 

All of the world's silver bullion or coin is worth less than many individual stocks on the New York Stock Exchange. In fact, silver is valued at less than a tenth of the value of Exxon Mobile. But once upon a time, silver accounted for over 20% of the value of the world's base money (a number that today would be in the hundreds of billions). I would view silver as a once small cap stock (when it was worth 4 billion dollars) on its way to at least equaling the value of many large cap stocks. The end result for the white metal is a price that even from here could move up ten times. This is all the more true when you realize that silver was once thought of as money, or something to cling to when you could not trust government paper. And while I don't wish for the U.S. Dollar to go to zero, you have to be asleep not to see what another round of quantitative easing might do to the once mighty greenback.






Disclosure: I am long SIL.