Precious Metals Update: Focus on Silver

Econophile's picture

This article was written by DoctoRx for the Daily Capitalist. He is a successful investor with 30 years of markets experience.

By DoctoRx

As I take a break from the Corzine testimony before the House Agricultural Committee, I'd like to briefly comment on the prospects for the precious metals vis-a-vis the U.S.D.

The first thing I notice, as someone who always looks at charts to see if price action is in line with my view of the fundamentals, is that a closed-end fund that is half gold and half silver, Central Fund of Canada (CEF) has just tipped into a bear configuration, with the 50, 150 and 200 day simple moving averages aligned so that the shortest moving averages are weaker (lower) than the longer ones.  Thus if one doesn't want to differentiate between gold (still by those criteria in a bull market) and silver (clearly in a short- and intermediate-term bear configuration), and go "halvsies" by owning equal dollar amounts of each, the message of the market has begun to tilt against one.  

Briefly, my record on silver has been good, probably because it has been short and with few calls, thus allowing randomness to work in my favor.  I announced quite bullish sentiments in September 2010 around $20/ounce and turned bearish on silver in early May around $40. After the collapse carried it to around $33, I issued a qualified trading buy but after that reiterated that I was staying "risk off" for all commodities other than gold.

I began to raise bearish questions this spring about the trend for the price of silver based in part on the persistent high price premium of the Sprott Physical Silver Trust (PSLV).  I admire the fund's construction from a tax and redemption standpoint.  I also admire Mr. Sprott's investment acumen and his forthright stand in favor of transparency and soundness in monetary affairs.  I have owned PSLV shares and those of other metals funds and "believe" in their value.  On the other hand, I was naive enough after the bubble markets peaked in 2000 to think that some ebullience in pricing would be differentiated from bubble pricing, but irrational exuberance has returned.  In my view, the continued high teens premium of PSLV to the value of the silver the trust owns (i.e., its NAV) is worrisome.  Yes, the overpricing may not matter much if silver in a year or two is going to $200/ounce from the current low-$30s price.  But we are in a world that if one were to buy PSLV and one year later, the value of its assets were to rise 10% after expenses, the investor in PSLV could easily lose money because the premium to NAV could shrink much more than that.  By comparison, a virtually identical Sprott fund owns gold rather than silver, stock symbol PHYS.  This fund has settled down from its early near-20% premium to NAV to trade in the 1-4% premium range.  PSLV in my view should trade roughly in line with PHYS.  That is does not do so worries me.

For some time, I have read a variety of precious metals-oriented blogs and position papers. I perceive a high degree of certitude and often very bullish price forecasts for silver that I never see for the non-monetary precious metals or a base metal such as copper.  I put that confluence of circumstances together and get cautious.  Thus I plan to buy PSLV or one of its relative should despair in PSLV's fans (acceptance of financial reality, in my view) become more prominent.

I'm one of those people who would rather buy at $40 on a breakout to the upside on a one-way trip (one would hope) to $70 or $100 rather than buy at $32 and bail if the price drops because I really think that $20-25 is a realistic trading target at some point next year.

Readers should understand that these comments are trading comments.  In the long run, my guess is that physical silver is a "good", sound investment at today's price, and that a great way to own silver is in a bank vault or in a basement, where the cost of storage is respectively minimal or zero.  My observation though is also that silver is probably trading well above its fully-burdened cost of production, whereas I read this week that the cost of producing an ounce of platinum by one of the South African producers is slightly above the current spot price.  I "get" that in a Mad Max scenario or in a hyperinflationary depression, there won't be much demand for platinum while silver may become the go-to transactional money, at least for a while.  But that's not today's reality, and in the U.S., I don't think it's going to be a 2012 reality either, recession or no recession.  Are the markets already reflecting the likelihood of something such as those disasters?  Of course, that's possible, but that's not my expectation, and these are the sorts of interesting issues that, as they say, make markets. 

Finally, while recessions and expansions (busts and booms) come and go, and given that much of Europe is now acknowledged to be in or tipping into recession, much may already be priced into the metals and other commodities markets, neither China nor the U.S. are in acknowledged recessions.  If they go into recessions, then since recessions tend to be disinflationary or deflationary (price, not Austrian definition of those terms), and in this highly-leveraged world, there is just no telling how far a spike down in price any commodity might (or might not, of course) have should one or both countries be seen to be in that economic state.

In conclusion, I'd feel a lot better about the many calls that silver is finishing a major consolidation and is ready to break out to the upside in a major way if I saw stronger price trends in the non-oil general commodities markets and if I saw less inherent confidence in the pricing of such vehicles as PSLV.  Note I am not making a directional "call" at all today.

As I've been saying for a while, sometimes sitting quietly in cash or other relatively stable assets and watching trends evolve with which one is comfortable may be wiser for many people than betting real money in what I view as unusually uncertain times.  That's what is working for me right now, and of course nothing said here should be construed as anything other than my personal views, and should not be construed as investment advice in any way.

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Grand Supercycle's picture

My long term indicators have continued to warn of USD strength and EURO weakness and these signals have increased since 2009. The overdue dollar rally should be substantial.

akak's picture

We do not like green eggs and ham

We do not like them, Spam I Am.

apberusdisvet's picture

Let's see the degree of difficulty that Sprott has in obtaining millions of ounces in a very scarce bullion market.  Plus, PAGE opens for business in 6 months; perhaps the biggest of game-changers.  Then there is the position limit rules which, at some point, will have to be implemented, especially given the present heat on the corrupt CFTC re MFG.  BTW, I'll lay 5:1 that we will never see $20 again in our lifetime; there is far less recoverable silver left on the planet than most people realize.

Conceptwizard's picture

You would have to believe that we are in a cyclical bust period. I firmly stand in the camp that we are in a structural global financial reset. A lot of pain will be experienced by those not prepared.

The thing is that silver's upside is expontential and everyone should own some. Whatever direction comes out of this sewer will be based on commodities. The problem I have is that you cant eat or barter silver in this senario. The upside on duct tape or garbage bags, bic lighters, whiskey etc during the "phase in" will be more valuable. Silver/metals will come to play on the scramble to reposition lives on the other end.

just a thought...

vamoose1's picture


    My take on the PSLV premium is different. Imagine if a year ago some relatively obscure canuck took  flinty eyed  note of the paper silver game on Comex and decided to challenge the paper shorts.

    The issue went out the wimdow for 580 million in physical silver  to universal  horror, and 5 months later  Silver had rocketed from  18 to 50... very possibly rendering JP Morgan.insolvent in the process.

    Well,  if 580 milllion  in PHYS Silver can triple the price God for bidd that Sprott or other parties should come with a follow up issue   for a billion  5  which in  fact (its holding period being up)  is here this month.

    One perverse loss leader strategy bu the shorts would be to  jam PSLV to a ridiculous premium either side  of 20  percent which works to  price the follow up issue out of the market since who would buy it at such a price.

   Would this UPSIDE manipulation cost? Tens ,  maybe hundreds of millions, but,  its preferable to a loss of 20  billion or outright  insolvency. Thrn you raid like the foul criminals that you are and try and beat the price back while holding the issue killing premium.

akak's picture

If you're buying for the long haul (several years of more), none of this will have the slightest impact on your savings, except inasmuch as it might provide for those with a steady income to buy more at a lower price sometime in the near to intermediate future.

For those who are determined to trade silver in the short term, all I can say is .... good luck.

Anarchyteez's picture

I do see what you're sayin old man, and I'm sure you do just fine with your dough, but nowadays we call gold and silver money. Paper is known as currency.

Econ 101, no? He sounded really smart though.

Flocking swans's picture

YUP...."of course nothing said here should be construed as anything other than my personal views, and should not be construed as investment advice in any way"....Ubetcha.

Maestro Maestro's picture


You expected us to say buy silver when it's the best investment around?

Look at our minions above.  Recommending "trading" silver, buying silver when it's $10 lower than it is now.  That's what we pay them for.

Stupido.  It's not about inflation nor deflation.  How could either occur in the absence of money?  The euros and dollars that we foist upon you are not even currency per se.  It's not that they are just fiat but - stupido - they are not even defined as to what they are; nor even legal, in the case of the Federal Reserve Notes.

With the 99% out there who are total morons, we can get silver below $10.

We'll give you your selling opportunity soon.



Huna's picture

and of course nothing said here should be construed as anything other than my personal views, and should not be construed as investment advice in any way


James T. Kirk's picture

When silver "price" is continually discussed using FRN's as the yardstick, I get pretty twitchy. Any investment advice that does not acknowledge that all fiat is rapidly approaching a terminal event horizon, well, I just ignore it. Sorry, but for the life of me, I cannot see how we are going to avoid this monster. Let me see - 15 trillion FRN's created out of thin air to stabilize the world economy three years ago. And now its worse than before. In plain English, this means that there is no discipline left in fiatworld.

Huna's picture

Real Money? doh... Wuz dat?

Bansters-in-my- feces's picture

I can see why not many stoped by to read this shit.

Ive been eCONEDofiled

Bansters-in-my- feces's picture



FUCK YOU FuckTard......

Get a fucking job.

Tegrat's picture

I only buy Ag/Au/Pt to get my cash out of my bank as it arrives. There really is no better alternative. And yes I work for the bank. I am a co-author of hedge bots.


PulauHantu29's picture

Why is everyone now buying tons of silver? The local coin shop says,"silver coins are flying off the shelf in bars."

Don't these folks know that Buffet would probably feel the same way about silver that he does gold..."you can't eat silver."

Go figure.

Freddie's picture

Warner Buffer is a Democrat aka friend of Corzine and our little midwestern waif's old man was a Repub Senator back probably during Democrat FDR's kleptocracy.

The point is the old fkkk is a liar.   He probably owns tons of gold.   He told poor avg Joe saps to buy Bank of Amerikka.  

batz's picture


There is one thing that has been missing from the argument about metals as stores of value. The reason bitcoin, for all its failures, was even considered to be serious at all was the concept of Proof of Work.

Gold and silver cannot be "debased" by manufacturing more of it. Of course the price may get high enough that people will be melting down cutlery and that would increase the amount in circulation to keep it from running out of control.

The basic problem of proof of work is what separates gold (and silver)  from "tradition" and makes it a viable store of value.



jackinrichmond's picture

put your savings in metals, buy stuff with fiat and use bitcoins for internet transactions..  

i want freedom to select the money that i want to use for different types of transactions..  what is so evil about that ?

i'm with ron paul - lets get some competition in the currency markets..  why should the fed have the monopoly on money ?

stacking12321's picture

"sometimes sitting quietly in cash or other relatively stable assets and watching trends evolve with which one is comfortable may be wiser for many people than betting real money in what I view as unusually uncertain times.  "


that begs the question, what is "real money"?

are you referring to FRNs?

maybe you should question that underlying assumption.

gold and silver are real money.

toilet paper from the fed is not.


El Oregonian's picture

It doesn't matter. I'm taking the silver train and I will enjoy the scenery while I'm on the journey and will not get off the train until this baby reaches the station on the other side...  Just as any journey they'll be mountains and they'll be valleys so what If you bought a ticket, Relax... Enjoy the ride. It will be worth it.

Nage42's picture

What happened to Silver after the Lehman event is still pretty fresh in my mind.  Then there was Platinum and Palladium when the various auto manufacturers started announcing that they were bleeding from all their orifaces with losses (what a hideous visual!).  For these industrial metals, more than half their movement is dictated by industrial downturn and the only boyancy they have at present is speculative (weak hand) longs that have nowhere else to put their money.

Don't get me wrong, I've got 5% net-worth allocated into Ag/Pt/Pd, but it's there as a "white swan" hedge against my >40% Au "black swan" hedge.


There's granite-bedrock floor at $17.5, and combination psychological and re-tested $30 looks pretty strong... but what with the market turd circling the bowl, I'm thinking it'll dip well into the low 20s when the big liquidate to cash flush occurs.  I'm 1/3rd into my Ag position and waiting on the sidelines to see where it's heading.  When tSHtF I'll be poised to see where the "buy when there's blood in the streets" people start to step in with buy volume, I'm betting it'll be $21, and if things just keep melting up with printing inflation, I'll prolly be a buyer if we see it head north of $35 with steady momentum into another 1/3rd tranche, but I'm really hoping for that down-to-the-twenties slaughter so I can get my hands on more physical (GoldMoney @Swiz)  [it's easier to say swizzeland! :D].


theMAXILOPEZpsycho's picture

22.50 or thereabouts then back up into the high 30s buy the end of the year

Nage42's picture

Bet proposal

Within the next 4 months, silver will suffer a massive flush and go down to the region of X for less than a month, and be followed by steady rise with a duration of less than two months taking it well north of $30 (read that it stays north of $30 for more than a month).

Me: 20-21.0

You: 22.5-23.5

If it's between 21 and 22.5 we both meet up and buy each other a bottle of our favorite whiskey (mine is Middleton's limited reserve barrel).  If it's between the others' respective ranges, and follows the proposal north of $30 within the 3 month limit, then the "winner" gets a single ounce silver Canadian Maple or American Eagle (buyer's choice).

In reality, we'd both be substantial "winners" because we would have accurately priced _and_ timed the market correctly.

What do you say theMAXILOPEZpsycho?  We've both been around here about the same amount of time and it's time to stop talking our book and start playing it.  :D

Deal is off if it:
falls south of 20
doesn't dip below 23.5
takes longer than two months to climb from X to $30
civilization as we know it breaks down and we need to wait a few years before we can meet up to share that drink in "reasonable" safety.

Message me if we're on and we'll draw up something solid, give the ZH's here something to cheer on as the rollercoster takes us all for a ride.


Quinvarius's picture

Ignorant stuff like this is how you know there isn't much downside if any left.  "The price is down, so I'm bearish".  Whatever dude.  You can't read anything on the current chart when it comes to silver.  If you need to me to explain why, then you have not been paying attention.  What matters is massively skewed COT report, worse than the 2009 lows, and depleted inventories.  Both of which are easy to see.  Silver is ready to blow up.

COT at the bottom of this chart:

Inventory at the COMEX:

There is always a reason things get this compressed.  It doesn't matter what it is.  It always decompresses.  This is unsustainable in this money printing environment.

Tapeworm's picture

FWIW, I will pass along some on the ground experience from a highly valued dealer that I have known for a long time.

 He says that silver is not flying off of the shelves except to melt for sterling. He moans about some real beauties in high end sterling going to scrap because there are no buyers that will pony up for more than scrap melt. I told him that I am picky as I have enough of the sterling bought at mostly 5.00-8.00, and some as high as 13.00. I only want to see high art going to the furnace.

 As for me I found this article to be balanced and agreeable to what I see.

 In the recent past I have pointed out just how high the silver price is in comparison to goods. I did buy a car in silver coin this past month. It was priced way below anything ever seen prior to this year. I did miss the top, but not for lack of trying. I paid 1230.00 in US coin for a car that would have cost me much more than 30,000 to build. I did have the coin for a very long time- more than thirty years, and it was picked and collected from circulating currency.

 The silver rah-rah crowd should look at purchasing power parity to get a real handle on what "junk" coin buys right now. The best thing is when a buyer will take the coin direct with no intermediary. It then is a straight cash deal in legal tender. I have no worry in that as they cannot claim cap gains on quarters and dimes sifted from the coin base of decades ago.

Long-John-Silver's picture

The MF Global collapse purchased the COMEX a few more months before they default on physical Silver delivery’s.

qussl3's picture


Like it or not paper silver is still vulnerable, without the threat of a physical delivery for a couple of months, who knows what can happen in the paper games.

I'm itching to buy, but i think there's one flush in this bottoming yet.

Markets havent even begun to digest the prospect of a US recession of slowdown yet.


FluffyCone's picture

What is he trying to say?

HungrySeagull's picture

Condense it into three doctrines.


Buy and hold (Take delivery) physical silver.

Selling at lower than what you paid for is a realized loss. (Your fault)

One day, paper will finished cremation and Physical is all. Everything else is wishy washy and bull.