Put a Silver Bullet in Your Portfolio

Tuesday, 25 September 2012
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Published in From The CEO

It’s time for another reminder about silver.  At today’s close of $33.995 per ounce, and with a current gold:silver ratio of 51.60, we just can’t ignore the gray metal.  And neither should you.

In the precious metals family, gold is the child that just has to grab all the media and investor attention.  As a result, every once in awhile we feel obliged to put forth a wakeup call about gold’s underestimated sibling – silver.  Silver is more volatile, and exhibits more velocity than gold in a bull market.  And silver is more tied than gold to a very conspicuous industry demand.

In the last four years, silver has soared a whopping 211%, 20% in 2012 alone, whereas gold has spiked 108%.  Recently, silver investment specialist, David Morgan, has observed that there was a great deal of short covering in the silver market.  Professionals in the mining industry short silver over a very long period to hedge production; and when they cover or close out their short positions, it’s a strong indicator that silver is on its way up again. 

Fiscal-Cliff

Morgan now feels silver is cleared to go above $35 per ounce, if not $40 per ounce by the end of the year – not an outlandish bet at all when you look at today’s closing price.  Although industrial demand was slightly off in 2011, the year before saw production up 18% due to rising demand.  Silver is being used increasingly in health care, computers, cell phones and solar panels, not to mention clothing, bandages and medical devices.

But investment demand also drives silver.  In January and February of 2011 sold as many dollars of silver as they did gold.  Back then, the U.S. Mint advised prospective investors that it was unable to strike more Silver American Eagles.  It announced “The United States Mint will resume production of American Eagle Silver Uncirculated Coins once sufficient inventories of silver bullion blanks can be acquired to meet market demand for all three American Eagle Silver Coin products.” 

Though not recently, the gold:silver ratio has averaged 16 to 1.  As I’ve often stressed, markets have memory.  If industrial demand for silver increases and that ratio took hold once more, the price of silver would surge to over $125 per ounce, over double its all-time high of $52 per ounce price during the infamous Hunt brothers run up in 1979.

You might ask if that’s realistic, or even possible.  Keep in mind, with unlimited quantitative easing in force, assets inflate.  As an industrial asset, silver can inflate along with all others.  And once small investors get involved with precious metals in a big way, many in dire economic straits will opt for the metal with the lower-per-ounce price for asset protection.

What silver can ultimately be faced with, then, is a simultaneous pull from the investment and industrial sectors with gold giving it a push up in price along the way.  When it comes time to diversify your own portfolio, make sure you put a silver bullet in your portfolio.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

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