Guest Post: The 2010 Silver Buying Guide

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From Jeff Clark of Casey's Gold And Resource Guide

Guest Post: The 2010 Silver Buying Guide

Silver has been sizzling and causing lots of buzz in the industry. Investors are excited.

Part of the hubbub is due to its current run. Since its February 8 low,
silver has roared ahead 22.4% (through June 21) and has doubled from
its November 2008 low.

This excitement has spilled over into greater investment demand –
especially so for coins. The U.S. Mint sold more Silver Eagles in the
first quarter of this year – just over nine million – than any prior
quarter in its history. The Royal Canadian Mint produced 9.7 million
silver maple leafs in 2009, also a record.

Take a look at the jump in U.S. Mint coin sales since 2007.

Silver bullion ETFs are growing, too, experiencing a five-fold increase in metal holdings since 2006.

There’s plenty we could talk about with silver, but our goal is to make
money. So let’s focus on answering just two questions: Is today’s price
expensive or cheap? And, what are the best silver coins, ETFs, and
stocks to own? 

We have all the answers straight ahead, including lots of actionable info, so let’s jump right in...

Why Should I Buy Silver?

There are several reasons to own silver in addition to gold.

First, it’s cheaper! Known as the poor man’s gold, those with limited
budgets will find it easier to purchase. You might hesitate plunking
down $1,200 for an ounce of gold, but you can pick up 32 ounces of
silver for half that amount.

Second, silver has wide industrial use and this component can help or
hinder its price. As its consumption increases across a growing number
of industries, this should help place a floor under demand. And because
of its unique properties, new uses continue to be discovered.

Third, silver is money and has served this role more than any other
material on earth, save gold. Due to its historical role, silver will
always have monetary value and offer similar protection as gold to the
ongoing global currency devaluations, and will definitely benefit from
the inflation hurricane we see as inevitable.

Silver is more practical as a currency used for everyday purchases.
When the time comes, you can sell the requisite number of silver coins
to cover a specific need, as opposed to being forced to liquidate a
high-dollar-value gold holding. Silver is perfect when smaller amounts
of cash are required.

Fourth and last, silver could possibly outperform gold before this bull
market is over. The market capitalization of silver (and silver stocks)
is much smaller, making its price more susceptible to demand spikes
than gold.

In the latter part of the 1970s precious metals bull market, gold
gained over 700% – but silver soared over 1,400%. If you’ve got a bit
of Gordon Gekko in you, we recommend investing a portion of your
dollars in silver.

Caution - Hot!

Like all things, silver has its drawbacks, two in particular.

First, the price is volatile. Over the past 12 months, silver has seen
gains of 53.8% and 22.9% and drops of 21.9% and 19.6%, all within a
period of months or even weeks.

If you’re going to own silver, you must be prepared for big price
gyrations. The best way to do that: buy it and forget about it. And...

?Make price volatility your friend. Big price swings present the opportunity to snag silver at a big discount. We give some guidance on prices below.

Second is the storage issue. As your pile grows, the advantage to
storing gold will become self-evident. At $1,200 gold and $18.50
silver, $10,000 will get you eight gold eagles that will fit nicely in
the credit card slots of your wallet; however, it will buy 540 silver
eagles, weigh nearly 34 pounds, and fill a small bank safe deposit box.

?How to store physical silver. There are several ways to solve the storage dilemma, even if you plan to buy like the Hunt brothers.

  1. Spread your holdings around.
    Not only is it wise to avoid keeping all your physical silver in one
    place, diversifying your storage arrangements allows you to buy more.
    Hide some at home in several locations (no cookie jars, though), and
    obviously tell only one trusted person. Store some in a bank safe
    deposit box and use more than one bank as your holdings grow.
  2. Buy bars.
    Silver bars take up less space than a pile of coins of the same weight.
    We wouldn’t start out with nor have all our holdings in bars, because
    you want the advantage coins offer. But the larger your holdings, the
    easier it will be to store some of it in bar form.
  3. Use pool accounts and unallocated storage.
    With a pool or unallocated account, you’re essentially getting free
    storage no matter how big your stash. That’s hard to beat. You’ll pay
    fabrication and delivery charges if/when you convert your holdings and
    take delivery, but in the meantime, you save on storage costs. Great
    value for the large holder.
  4. Private storage.
    Store your silver with a private vaulting company. The advantage is
    that it’s outside the banking system; the disadvantage is that it’s
    usually expensive, though it can be cost effective for large holdings.
    Do your own due diligence if you go this route because we can’t vouch
    for any facility, but you could start by checking out
    delawaredepository.com. Keep in mind that using a vaulting facility
    beyond a reasonable driving distance will mean added shipping/insurance
    costs and restrict quick access.

Is Now a Good Time to Buy?

With the gains we’ve seen in silver, would we buy right now?

Let’s first look at the big picture. The following chart shows how far
silver is below its inflation-adjusted peak reached in 1980.

Another clue some investors watch is the gold/silver ratio (gold price divided by silver price) shown below

Since our current bull market in precious metals began in 2001, the
ratio, while fluctuating wildly, has never gone below 45. And yet look
where it went during the precious metals peak in 1980: it bottomed at
17. Even though gold was soaring at the time, silver outran it.

The ratio might show relative strength between gold and silver, but
it’s not a good buying indicator. A falling ratio could mean silver is
rising faster than gold, like it is currently, or it could mean silver
is falling slower. As a result, we’d use the ratio to determine
silver’s upside potential but not necessarily when to place an order.

These big-picture signals tell us silver is undervalued and, at the
moment, a better bargain than gold. And given the currency crisis we’re
convinced is in the cards, we wouldn’t want to be caught without any.
If you have a long-term mindset, silver is a buy today.

Would we wait for a better price?

If you do not own any, and plan on holding what you buy until a mania
develops, then we wouldn’t wait. The risk of buying silver at current
prices is lower than owning none at all.

If you do own some but want to add to your holdings, we’d probably wait
for a drop in price, in part because silver could more easily fall when
the economy is found to be more fragile than what many believe. And
with industrial uses comprising approximately half of silver’s demand,
it would be more susceptible to sell-offs than gold if our research is
correct about global economies. 

Further, summer usually brings pullbacks in prices, and this can be
especially true for silver stocks. This is the tendency, though we
can’t be sure if this summer will follow past trends. Still, our best
guess is to anticipate another leg down this year. If you already own
silver, we’d look for a correction to add to your holdings.

In our opinion, owning no silver in this bull market would be a
mistake. And your first (and biggest) investment in silver should be in
a physical form.

How much physical silver should you have? There’s no right answer and
one size will not fit all. But we do recommend holding more gold than
silver. Our suggestion for your precious metal holdings is roughly 80%
gold and 20% silver.

Like gold, silver comes in different forms. We’d start with the more
popular one-ounce coins and then branch out into other types as your
holdings grow.