Silver has been on fire over the last three years, substantially outperforming its spotlight-grabbing cousin, gold. Because we believe this bull run is far from over, we advise investors to always maintain exposure to precious metals markets. Even if you haven't yet participated in the run-up of both gold and silver, I'm glad you're ready to look at the investment potential of silver.
The question every investor faces in a bull market is: Do I buy now, anticipating prices will continue higher, and chance getting clobbered if a correction arrives? Or do I wait for a pullback and possibly miss out on big gains? There's risk either way.
Our goal in this report is to suggest various ways you can invest in silver, while underscoring the importance of patience and discipline. Investors must remain patient to avoid chasing silver, overpaying, and draining their cash. Instead, we recommend that you use temporary price declines to steadily accumulate the best silver stocks and your preferred form of bullion. Looking back after this bull market has finally run its course, we think gold and silver will have amply rewarded those who bought smart, had meaningful exposure and stayed the course.
Silver: The Lay of the Land
There is ample data on the silver market to consider, but there are two specific issues regarding supply and demand that are critical to understand.
The first is industrial use. Demand from a number of industries that use silver has been flat or falling. Household demand for silver like cutlery, flatware and candlesticks hasn't risen in 10 years. Jewelry fabrication is up but a blip. With the shift to digital photography and image storing, use in photographic film processing continues to fall. And yet, total demand from industrial users keeps climbing.
So what's driving industrial demand?
Since 1999, consumption in electronics has increased 120%. Silver use in solar panels began in 2000, and usage is up 640% since. Silver was first used in biocides (antibacterial agents) in 2002 and, while a small percentage of total silver use, it has grown sixfold.
The point is that not only are the number of uses for silver growing, the demand within each of those applications is rising as well. This is important to keep in mind because, traditionally, the industrial component of silver tends to keep the price soft in a poor economy—and Doug Casey is convinced we're on the cusp of the Greater Depression.
However, these increasing sources of demand are now more likely to keep a floor under the price in the future. In fact, the Silver Institute forecasts that total industrial use of silver will rise by 36% over the next five years, to 666 million troy ounces/year. That's a lot of silver, meaning this portion of demand, which is roughly 60% of all fabrication, isn't letting up anytime soon.
The second issue is mine supply. Silver mine production has been increasing over the past decade, largely due to rising prices, allowing companies to ramp up production and bring more metal to the market. In fact, global mine production is up 33% since 1999. Meanwhile, total demand, as you'll see in the chart below, is also rising.
Mine Production Can't Keep Up with Demand
So what's the concern? In spite of miners digging up more and more silver, production alone can't meet global demand—and the gap has to be filled by scrap silver coming to market.
And there's a catch with scrap. While scrap metal comprises about 20% of silver's total supply, many of these new applications are difficult to reclaim. Some applications contain such small amounts that they're uneconomic to recapture, such as many biocidal and nanotechnology applications. With others, it'll be a long wait. Solar panels, for example, have a 20- to 30-year life. Still others are waiting on more-effective recovery programs; more than one-half of all silver in cell phones, TVs, computers and other electronics, for instance, still ends up in landfills. In other words, a growing portion of the silver that's consumed won't be returning to the market anytime soon.
KMG Gold Recycling and Refining
Why It's Too Soon To Buy The Dip! June 17, 2011.
After six straight down weeks the S&P 500 is down only 6% from its April peak.
That’s not near enough to factor all the negatives into stock prices. Those negatives include the rapidly slowing U.S. economy, sharply rising global inflation, plunging global markets as central banks raise interest rates to ward off inflation, the cuts in government spending yet to hit the U.S. economy as Washington and individual states tackle their record budget deficits, and the end of the Fed’s QE2 stimulus program.
Yet already Wall Street is assuring investors that the correction is over, and the lower prices are presenting a buying opportunity.
After six straight down weeks the market is short-term oversold and due for a brief rally off that oversold condition.
But it’s strictly a technical situation. The market doesn’t move in a straight line in either direction. In strong rallies it periodically becomes short-term overbought and pulls back some to alleviate that short-term overbought condition before the rally resumes to new highs. In market corrections it periodically becomes short-term oversold and rallies back up some to alleviate the short-term oversold condition before the correction resumes.
Meanwhile, although all financial firms have a staff of technical analysts keeping up with the market’s technical condition, Wall Street grabs onto simple non-technical explanations when making its attempts to keep investors buying.
So on Thursday, it explained the market’s positive day as being a response to the reports that new claims for unemployment fell by 16,000 in the previous week, and new home starts were up 3.5% in May, claiming those are signs the economic slowdown is bottoming.
They know that reasoning is ridiculous. Unemployment claims jump up and down week-to-week for a variety of reasons. Five weeks ago they declined a much larger 29,000 for the week to a total of 409,000. They’ve been up and down since, and this week they declined 16,000 to 414,000. But that’s more total claims for the week than there were in mid-May.
And new home starts rose 3.5%, but that was after an 8.8% decline in April, leaving them lower than in March and still scraping along a depression-like 25-year low.
On Friday morning the market continued its technical rally off the short-term oversold condition. Wall Street said it was in response to French President Sarkozy’s remarks that the EU will probably consent to a new bailout package for Greece. A market strategist on a TV financial show said, “This is the catalyst a lot of people were looking for to jump back into the market.”
Huh? That Europe will kick the solution of the Greek debt crisis down the road again, with another temporary bailout payment, has no connection whatever to slowing global economies and rising inflation.
Meanwhile, Wall Street ignored the reports that were important this week.
The Housing Market Index, measuring the confidence of home-builders, plunged to just 13 this month (on a scale of 1 to 100), a nine-month low. Inflation at the consumer level (CPI) was up 0.2% in May, now up 3.6% over the last 12 months, more than double what it was a year ago. The NY State Mfg Index, and the Fed’s Philadelphia Mfg Index, both plunged again this month, this time into negative territory. The Philadelphia Index, often a precursor of the national reports, plunged to -7.7 from +3.9 in May, +18.5 in April, and +43.4 in March. It was the largest three-month collapse in the history of the report.
Meanwhile, as global central banks raise interest rates and tighten monetary policies to fight the rising inflation, slowing their economic growth, their stock markets have been in serious corrections. And historically, global markets, including the U.S., move pretty much in tandem with each other in both directions.
The world’s ten largest economies behind the U.S. are China, Japan, Germany, France, the United Kingdom, Brazil, Italy, Canada, India, and Russia. As a result of their concerns about their slowing economies and rising inflation, their stock markets are down an average of 12%, with most hitting new lows every few days, no bottom in sight.
And Wall Street is telling us the correction in the U.S. market is already over with a decline of just 6%, and U.S. economic reports still coming in more negative each month, and with more roadblocks to recovery still ahead?
Buy the dip?
I suggest continuing to sell into any short-term strength that develops, and taking positions in ‘inverse’ ETF’s and ‘inverse’ mutual funds, which are designed to move opposite to the market and thus make gains in market corrections.
In the interest of full disclosure my technical indicators triggered an intermediate-term sell signal on the market on May 8, and I and my subscribers have had profitable positions since in two ‘inverse’ ETFs, the ProShares Short Russell 2000, symbol RWM, and the ProShares Short S&P 500, symbol SH. And it is my intention to add to my downside positions in selected ‘inverse’ funds in any short-term rally that develops.
These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.