by Jason Hommel, January 10, 2008
I received a lot of questions in response to yesterday’s report on silver:
Silver Keeping Pace with Gold; Set to Outpace Gold
Where can I get silver, and what kind?
–asked by about 10-15 people.
A Brief Guide to Buying Silver:
What kind of silver, and where to get it.
*Alan interpolates* – I might add that another good way to own silver is in the form of e-currencies such as Phoenix Dollar, Goldmoney (despite the name it offers silver as well), and also maybe e-gold‘s silver offer as well. Incidentally Phoenix Dollar also sells silver coins and bullion bars.
What kind of silver do you like best?
I prefer 100 oz. bars, because they are easiest for me to count, and stack. But really, just get the most silver for the least money. About $.50 over spot is an excellent price, but in a fast rising market that is moving $.50/day, about $1 over spot may be more realistic.
Please refresh us soon on your advice for whether to hold silver wealth in the metal itself versus stocks, particularly the better prospector silver stocks.
Answer: I hold about 25% of my net worth in the form of physical silver. About 60% is in various mineral exploration stocks, ranging from silver, to copper, zinc, gold, and uranium. About 15% is in real estate. I’m aiming to double my physical holdings of silver before silver prices get too high.
Although I would like to sell some stocks for silver, and that is my plan, it’s not so attractive at these prices, because the stocks are so cheap.
Just a quick little comment on your calculations for the $6120 price of au. It’s just a small correction and I’m probably wrong anyway. But, doesn’t your calculation assume that the quantity of au is the same today as it was
in 1980? The growth of M3 has to take into effect the growth in the quantity of au mined since 1980 doesn’t it?
I sincerely believe that the growth in the quantity of gold does not matter. Why not? Because the rate of growth of gold is less than 2%, and the rate of population growth is also about 2%.
This same question can also be asked with regard to the “increased size” of the economy. No, you don’t need “more money” with a larger economy. A larger economy should merely drive up the value of a limited quantity of gold. Or, in other words, a larger economy is generally more efficient and productive, and the prices of items, in terms of gold, should be going down, which should be called “deflation”, which should be a good thing for savers, and was typical under the gold standard.
Ordinarily and usually we use to agree with your writings. It can be said that many things you have said are true.
Yet in our country we can’t have it both ways. What is meant by that is you simply cannot tell people to buy silver and think they will get rich while confiscation laws have not only been written they exist in the Acts of the congress and signed by the chief executive.
Want citations and proof, read the Patriot Acts. This person has the information as the section was kindly pointed out by others and sure enough – its in black and white. We just don’t agree with your assessments. You create a target of yourself if you tell the world about how much silver you have since you pointedly do that in you writings Jason. For us – no, Silver is not going to make you rich, your friends in Washington are gonna knock on your door when the ratios you suggest come true. Silver will be deemed an important strategic metal by then – since you point out — that 2 billion ounces no longer exist. At least that is our opinion.
This link talks about the danger of confiscation:
The Patriot Acts, and Executive orders, are pre-written laws that say they can take anything and everything you own; whether cars, houses, clothes, and even your body to put you to a work camp like Hitler did.
There is not enough silver for them to confiscate to make a difference to the government budget deficit. Even if we assume there is 1 billion ounces of silver left in the U.S, which is doubtful there is that much, it’s not enough to make a difference to the government. But it can make a big difference in your life, if you have some of it.
Silver would have to be $1,000/oz. to help out the government. Do the math. The annual budget is in the trillions. That’s 1000 billion. Thus, there would have to actually BE 1 billion ounces, and the government would have to get all of it, to make any difference, and it would only help for 1 year.
The confiscation of gold in the 1930’s was more like a recall, as they do with defective cars. Just as you bring your car to the dealer to get it fixed, they paid you dollars to bring gold to the banks. There were no searches or prosecutions.
The amount of gold actually “confiscated” was far less than 1% of the public’s gold. The same benefit to the government could have resulted if they revalued gold to something like $35.25/oz. instead of $35/oz.
I am a long-time silver investor and have been interested in your Silver Stock Report. What are your thoughts about buying silver on the Comex and allowing them to store the physical.
The one problem I find with silver ownership is the physical storage issues. The Comex will store my silver for about $17. per year per contract (including insurance). Thanks Gordon.
Answer: Don’t store your silver with anyone else; and especially not with the largest banks and brokerage houses, which admit that they practice fractional reserve silver holding for clients as a standard business practice. They admitted to charging storage fees for holding non-existent silver!
And if ever they did confiscate silver, I would assume it would be the easiest for them to take it from the public stockpiles, such as at COMEX, or the ETF, or they would raid institutions that pledge to hold silver for clients, such as at kitco, or Brinks.
Remember that the entire purpose of owning precious metal is that it is hard to confiscate, because you can easily hide it. Precious metals prevent government confiscation through inflation, which is running at about 10-15% right now. Even in the “worst” confiscation of all, the 1930’s, they got less than 1% of the people’s gold, and never even touched the silver.
I think your silver will be plenty safe if you get a large gun safe, and bolt it to your garage floor. If you are paranoid, then build a wooden cabinet around it, and put a tiny $10 lock on the outside. People will assume you are “protecting your rakes and shovels, nuts and bolts, or tools”.
So, I’m generally against buying silver in the ETF’s.
Information seeking Question: Any idea on where to get charts of M3 in other currencies, or charts on the Euro gold price, or charts of inflation adjusted copper prices?
Answer: There are hundreds of great charts at sharelynx.com, but it’s now a pay site. But very worth it.
Confrontational Question: A very interesting story. However, the simple fact is that gold was “fixed” by Roosevelt in the early 1930’s at $35.00 per oz when silver was at $1.29 per oz. That ratio is 27.132, say 27 to 1.
Therefore, silver should be 890 divided by 27 or $32.92. you don’t need to go into inflation calculations to figure where silver should be. So, by a long stretch silver was a bad investment for the long run if you bought it back then or when Americans were once again allowed to buy gold in the 1970’s.
What say you? Regards, E.B.
Yes, and as we know, price fixing does not work.
That former fixed price of 27:1 is also based on two things that I did mention in my article.
1. The demonetization of silver started about 60 years before 1930, which created a glut of silver back then.
2. That was also long before silver was used up in electronics, which created the current scarcity of silver.
But I’m not advocating taking the action of going back in time to buy silver back then.
I’m saying to buy silver today, when the ratio is even better now for silver buyers at 56:1.
I started saying this in 2000, when the ratio was between about 70-80:1. Look at my archive:
I think I was about right on the mark, timing both the ratio correctly, and the gold bull market right at the beginning.
What say you?
Question: How will you know when it’s time to sell silver, and what do you buy?
Answer: I will sell silver when there is another asset that is cheaper and poised to go up farther, faster. For example, let’s say that I think silver will go to $10,000. By the time silver is $3,333/oz., then I might only expect silver to increase another 200%, and we might be in the “middle” of the silver bull market. But if I encountered another investment, with all the properties of silver today, that it is a neglected investment, a hated investment, a misunderstood investment, something you can buy for at or close to the cost of production, something scarce, with potentially high demand, and something that I could confidently predict would go up by about 2000%, then I’d sell out the silver early, and buy that other thing. That could be real estate in about 10-15 years.
As you know, governments must surviving by taxing people. After the people lose faith in paper money, and they can’t print money to survive, they will levy taxes in terms of gold and silver. And what will they tax? Probably property. Imagine they levy a property tax in terms of silver. Some holders of real estate, paid in full, with no debt, could lose their homes if they don’t have enough silver or gold to pay that kind of tax. Under those circumstances, the government could be confiscating and selling a lot of real estate that people cannot afford to hold onto. Real Estate could be the next “hated” investment class by then.
Silver is languishing because the world was flooded with silver
by sovereign liquidations since the 1990s
Demand vs supply
Too much silver physical out there to make a big move.
Answer: Wrong! Silver sold by nations was tiny, like 10% of annual silver mine supply. Silver is low because of lack of demand, because people have forgotten that silver is money, and they do not know how rare silver is, such as that most of it has been consumed by industry, and there is still no monetary exchange use, and thus, not much monetary demand.
Question: Should I buy rare coins?
Answer: I don’t think so. Rare coins, like diamonds, lack the fungibility to be money. Rare coins also have a high spread, a high dealer markup, and so you get much less when you sell them back. Rare coins are much worse than penny mining stocks, in that regard.
Question: What about leveraged silver, I can own about 2.5 times as much silver for the same price, and I’m guaranteed to make more money? –About 3-4 people asked.
Answer: If you are going to buy leveraged silver, then buy a futures contract, or option on a futures contract through a reputable broker, and get 5-10 times the leverage. Those “bucket shops” that give you less leverage are scammers, in my opinion. One outfit is even using my name and likeness to promote silver. I don’t mind, just don’t buy their leveraged product! I hear horror stories of of those “leveraged” guys all the time.
I strongly recommend that you avoid leveraged silver in any form, even on the COMEX exchange. Why?
Silver can never go to zero value. But a contract can, and even cost you more money than you invest!
Silver can never expire, we still have coins from the Roman era 2000 years ago! But silver futures expire, and options expire and become worthless 90% of the time.
Buying options is a very bad bet. It’s a good bet that you will lose money in options and futures, even as the silver price moves up, because the silver move up is very volatile, moving up and down with frightening speed.
Or, if you time it right, and buy futures now at $16, and silver moves to $30 in short order, futures contacts can default, and you could get a delayed cash settlement.
Futures contracts used to be guaranteed by the other party, and then the broker, and finally, by the exchange. However, now that COMEX has gone public, and since the public shareholders have “limited liability”, I think that just removed the final source of protection. But the corporate officers, and perhaps the public regulatory agencies might still be held liable, but you can’t squeeze blood from stones, nor conjure silver from the pockets of crooks. They might end up in jail, but that wouldn’t help you get silver that you were promised, that does not exist.
Question: What about the silver to oil ratio?
Answer: It was about 2:1 at the low of $10 oil and $5/oz. in the late 1990’s. It was about 1:1 at the high of $40 oil and $50/oz. in 1980. Silver’s much better than oil right now, in my opinion.
6 Questions from one man:
A couple of points that may counter the silver move:
3. New Funds
Question 1: Film
Film was a massive consumer of silver. This has largely disappeared and will continue to do so as other industries convert from film to digital [not just personal camera’s]. Yes silver fibre is gaining momentum and its use in nanotech as well – but this is minor. And as silver does increase in price, these uses will decrease as will other industrial uses.
Answer: Film is already a small part of the market. But most film silver is recycled anyway. So, if less is consumed, less also comes back as recycled. Film thus does not “consume” much silver.
Question 2: Mining
Although this is not a product of supply and demand and may be argued, I believe it is still a factor, albeit minor. The cost to extract silver and the silver price can not become too excessive. I.e., the margins cannot get too large.
Sure it can. History has shown that silver mining can be among the most profitable investment on earth. This was widely recognized in the 1800’s, of course. The family fortune of the Hearst Family, of Hearst Castle, and Hearst newspapers fame, which was parodied in the film, “Citizen Kane” by Orson Wells, was built on silver mining.
Economics will balance this to a more reasonable margin.
Answer: I assume you are saying that if silver mining gets to be very profitable, then more people will mine silver, and more silver will be produced, and then ultimately lower the price. I agree. This cycle can take up to 100 years or more to play out. After all, the world has used up nearly 6000 years of silver in about the last 60 years.
Question 3: New Funds
This is an interesting one. When a meta l starts to rocket, then we see new issues/funds arising. We have this with uranium [several including participation fund by Denison], Molybdenum [sprott], new gold funds appearing [just got into CMP myself]. I haven’t seen many silver funds jumping out of the gate. This argument, though, may be a lagging indicator [possibly, funds will pop up after silver breaches 50$]
Answer: Well, there is the silver ETF. There are several silver stock funds, but they have less than $5 million invested. But this just goes to show that silver is still cheap. Several times in the past, the gold/dow ratio returned to 1:1. We have a long way to go to hit either $3000 dow/gold, or maybe it will be $15,000 for each.
Question 4: Jewelry
Silver in jewelry will not become popular until gold is out of reach. I.e., silver will lag gold. People will not buy silver jewelry until gold gets out of reach. Therefore jewelry demand will not increase significantly until gold/PGM’s get out of reach for most people. I expect this to occur when gold hits 2000$.
Answer: No, silver in jewelry is already popular, which is a “consuming force” in the silver market, as I described, because a silver ring is purchased at a cost of $125/oz. of silver. Thus, that silver does not come back to market in any “economic” way if the silver price rises a bit. Silver and gold generally do not move up due to jewelry demand, they move up due to monetary demand. IE, when the owners of silver hit such hard times, that they have to melt their rings for money, that’s when silver will be much higher. Not when people are turning in silver coins to make silver rings. You’ve got this force backwards.
Question 5: Unbalance
Why compare silver with gold at its peak valuation? I’d prefer comparing silver to a basket of natural resources including oil at various times in history when we were not on the gold standard and world economic outlook was similar to today.
Answer: Why compare at the prior peak? Because we just passed the prior peak in the gold price, and because that’s what people were asking about.
I’ve compared silver to oil in the past. It shows that silver, now, is much, much, much better than oil.
In 1980, silver was $50, oil was $40. 5:4 ratio, silver over gold.
In late 1990’s, silver was $5, and oil was $10. 1:2 ratio, but close to oil.
Today, with silver at $15, and oil at $100, silver is very, very cheap relative to oil.
If a mere 1% of oil profits were sold for silver, the silver price would surely more than double. That’s kind of what drove silver prices last time, as the Hunts and Arabs were oil money.
Question 6: Drivers
What is driving gold is the currency crisis. This is also driving other nat. resources. Silver is in the awkward position as being too expensive for industrial use [very useful industrial metal no question] and too imperfect or revered enough for jewelry [who wants a tarnished necklace??].
Answer: I agree that currency is driving gold, but it’s also jewelry demand from China, India, and Asia. But for silver, you are misinformed. For most industrial uses, silver is not replaceable. Silver is used in switches, rather than copper, because silver dissipates heat better, and is a better conductor of electricity. More silver is used in jewelry than gold. 7 times as much silver is produced as gold each year. Jewelry demand is about 250 million ounces of silver. Only 80 million ounces of gold is produced each year.
Question 6B: Summary
I do not disagree with you, I believe silver has a way to go but trading at 15X less gold is ambitious.
I fail to see why the historic ratio is “ambitious”. Especially in light of the new change that silver has been consumed, and there is much less silver around now than ever before, and thus, the ratio should easily exceed historic norms, and you have not refuted this.
A valuation of 30x may be more reasonable.
Answer (counter question): Why would that be “reasonable”?
Question 6C: I am not a gold bug, and cannot conceive that the gold standard will return, but do believe in most of the gold story [which, to some extent includes silver]. John Exter’s inverted pyramid theory makes sense to me.
The silver story is significantly different than the gold story.
I like your emails, and do appreciate them, and hope you read this. If you can easily refute my arguments above with hard numbers or historical events, then what an awesome investment opportunity. I am always doubting the gold story and desperately look for arguments against. This is the best way to gain confidence in the metal I like most.
Answer: I hope I’ve succeeded in refuting your arguments. Yes, silver is an awesome opportunity. I think it’s the kind of opportunity that has never existed before in all of human history, except maybe for the grain boom in Egypt when it was ruled by Joseph, in Genesis.
New Question: What about the silver “surplus” I’ve read about?
Answer: That is a disingenuous report, and deceptive. What is meant by “surplus”? In silver accounting terms, a surplus refers to silver ounces that are purchased for investment demand, to be held long term by the public, not to be consumed by any of either industry, jewelry or photography. The word “Deficit” is a term that could indicate that mine supply is not keeping up with total consumption and investment (surplus) demand. Since mine supply is about 650 million oz./year, and since total consumption is about 900 million oz./year, the real deficit is about 250 million ounces. This deficit is made up by scrap recycling and national selling, such as from the government of India. If investors are selling more than buying, that, ironically, is called a deficit, because investor selling is filling the gap between mine supply and total demand. But if investors are buying, they call that a surplus, because there must be “surplus” silver for investors to be able to get any.
If you think about it, it makes sense. You cannot buy silver, unless you have surplus money. Even your silver bars at home represent “surplus” wealth. The world “surplus” does NOT indicate that silver is unwanted, or that there is any “excessive” silver. For example, if industry consumes 10 million fewer ounces next year that they could not find or afford because it is purchased by long term investors, then those who report on silver will say that the “silver surplus” increased 10 million ounces.
Thus, the term “surplus” is a necessity in the silver market if investors star buying. Note, the surplus is very small at about 50 million ounces. That’s not much silver to go around, and that’s a tight market.
Ironically, the article does conclude that if investors stop buying, the silver price could fall. But in this inflationary environment, where silver investors are both protecting their wealth, and making good wealth, why would they stop buying?
Very ironically, the article’s bearish tone is from Barclays, who runs the Silver ETF. This is just one of the many reasons why I do not trust the silver ETF. It’s run by the big bankers who do not want the precious metals to perform well.
New Question: Why is the market treating the silver stocks so badly? One just came out with an excellent drill report, and yet the market treated it like a day old peanut butter sandwich on dried out Merita bread.
Answer: I don’t know what Merita bread is, but I think that goes to show we are at another market bottom for silver and the stocks, and on the verge of a big move up.
Tip: China just opened a futures market in gold, and prices in China are way up, to almost $1000/oz. for gold!
Answer: Very interesting. This should be watched closely in the next week and months.