And yes, I still feel the same about my $100 per ounce silver call!
Let me begin by saying that I purposely kept my first article brief, limiting my supporting arguments for higher silver prices to just the five that I listed. I could've written ten, but I didn't want to get too long-winded and risk losing your interest. That said, CNBC.com actually ran a headline article on Monday morning that addresses another reason why silver will likely continue to rise, and also provides a lead-in to my response to one reader's question. Here's a link to the full article - Silver Prices Surging to Near Record Demand, and there are two things that I want to highlight from it.
"Silver prices have soared 60 percent in 2010, driven in large part by a strong investment demand, particularly strong buying of exchange-traded funds, or ETFs, backed by the physical metal."The fact that there is strong demand for ETF's (exchange traded funds) backed by silver is very significant. Here's the key, and this is true for both silver ETF's like SLV, as well as silver futures contracts. When you buy shares of SLV, or buy one or more futures contracts, you are also buying the right to take delivery of the physical metal. In the case of futures, one standard contract (as opposed to a mini contract) is equal to 5,000 ounces of silver, and in the case of SLV, purchasing one share equates to purchasing the right to take delivery of 10 ounces of silver. So why is this important, and how can it impact price?
1. Theoretically, the custodians for SLV are supposed to keep reserves of the physical silver on hand to cover the outstanding shares.
2. As more and more people invest in SLV, new shares are issued by the custodian to cover the demand.
3. Additional shares require the custodian to increase the amount of silver they hold in reserve. In order to do this, they need to buy silver on the open market.
4. This additional buying acts as a catalyst to drive the price of silver even higher, which in turn makes more people take notice of the potential profits, so they too go out and buy shares of SLV, which then causes the custodians to purchase even more silver for their reserves, which leads to even higher prices.....you get the picture?
Interestingly enough, the CNBC article doesn't talk about this at all, but when you consider that the SLV custodians are currently holding over 10,000 metric tons of silver (at least they say they are), it is easy to see how much impact these holdings could have on the overall market price.
The second thing I wanted to highlight from this CNBC article is the following quote:
"...the increase in silver prices has also been spurred by a rise in industrial demand, which is up 18 percent year over year. A hike in demand for silver from solar panels and pent up demand from the industrial sector is helping to push up prices."which helps substantiate what I said in #4 of my original post, as a reason that we will see the price of silver continue to rise.
Okay, now on to the next comment/question....someone who signed their comment MB asked what I meant when I said that I'm concerned that the silver futures market and/or ETF's like SLV could get wiped out. Well, as mentioned above, by purchasing SLV shares, or futures contracts, you are actually buying the right to take delivery of the silver. Essentially you own a paper (or electronic) IOU for the physical metal. When times are good, most people don't care to take delivery of the actual metal. The average investor is merely using these products as a way in which to speculate on the rise or fall in price of the metal. In case you haven't noticed, times aren't particularly good right now, which is prompting more and more people to diversify their wealth into actual physical assets....gold, silver, farm land, etc. On top of that, the US Fed continues to print money, making our US Dollars more worthless by the day, which is also causing investors to flock to precious metals. The problem comes, when too many people at the same time decide that they no longer want to hold their paper claims to silver, but would rather exercise their option to take delivery. You see, many people in the market place don't believe that SLV is holding anywhere near the amount of silver in reserve that it says it has, or that it should have, so if/when the time comes where enough customers demand the physical, SLV will have to default. For those still holding SLV shares will be screwed....you may get paid out on some or all of your holdings in cash, but you can forget trying to take delivery of the silver. The same goes for the futures market (Comex, Globex)....contracts expire in March, June, Sept and December - if/when too many investors (or one large investor) decides to take delivery instead of rolling the position or taking cash profits, the futures market will default as well. That is why you should own the physical metal and keep it your possession (not a bank, or an agent/custodian's facility) if you truly want to use silver as a protective hedge against a falling currency and failing economy. The same goes for gold.
MB's second question asks why holding the physical silver would even matter, if the futures market were to crash. Simple - there will always be a market for silver and gold, and just because the Comex blows up due to sloppy accounting doesn't mean this fact will change. Could there be a suspension in trading? Yep, absolutely. We might see trading suspended for a week or a month, but eventually some form of structured market will reappear. If things get really bad...i.e. a crash of the Comex coincides with the failure of the dollar, you'll probably be able to use your silver as money.
And to answer MB's final question, and one that I received in a couple of emails....I currently own silver bars in 5 oz and 10 oz sizes. Below is a picture of what these look like
As you can see, they are relatively small in size and come individually packed in a plastic sleeve. I chose the smaller size on purpose, as it will allow me greater flexibility when the time comes to start cashing some of these in....you'll have a lot easier time selling these to a coin dealer or small precious metals dealer than you would showing up with a 500 oz bar. Buying silver dollars is also a good alternative, but don't buy the special commemorative coins...they have too much premium associated with them. At APMEX you can buy bags of old silver dollars, and can get these at the best price.
Okay - I've been saving the best for last. An anonymous poster thought SingleMalt was nuts for predicting $100 per ounce silver. Well dude (or dudette), you may be correct. I'm just calling em like I see em, but I said up front, that I might be completely off base with that call. As for your comment about the 15:1 ratio between gold and silver going the other way...not only is that an incorrect interpretation of the original standard, which was based on the price of gold, not silver, your comment would also imply that gold should now be trading for around $400 an ounce, and I just don't believe that is correct. Gold was trading that low not too many years ago, but it has appreciated significantly from there for all of the same reasons that I have listed for silver. If Bernanke and the Fed continue to print money....i.e. QE3, QE4.....I guarantee we will see gold trading at over $5k an ounce, and silver will appreciate right along with it.
I think I've addressed all of the questions, but if you have more, please don't hesitate to drop me a line.
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