Prepare for silver’s shaky take-off
We’ve recently paid a lot of attention on the argument to buy gold bullion, with the occasional after thought to mention silver. But worry not, we haven’t forgotten about it. Many prefer silver investment rather than choosing to buy gold and, after reading our recommended read below, you’ll soon see why.
A note by long term silver analyst (and silver bull), Israel Freidman published on Ted Butler’s internet site contains some true gems which will be manna to the ears (if you can have such a thing) of silver investors everywhere. Leading off with the comment that silver is, in Freidman’s view, the best raw material of all for the investor to hold, he says he held this opinion 30 years ago (when silver was under $5 an ounce) and holds the same view today (at $33) and that for the investor in bullion, silver remains one of the few commodities that the average person can actually hold in his possession (gold is another but the price precludes the ‘average’ investor holding all but a tiny amount in comparison).
And he waxes enthusiastic, particularly about the US Mint’s silver eagle coin which he describes as the most beautiful, and popular, coin in the world. He is convinced that it is so popular that one day the US Mint will not be able to keep up with demand (we have seen occasional times in the recent past when the Mint has had to ration sales) and that premiums on the coins will explode if, and when, the Mint has to stop producing them.
In part he bases this premise on what he sees as the hugely growing demand in the industrial usage of silver – notably in the electrical sector where silver is perhaps the best conductor of all – and with electrical power taking over the world, as Freidman sees it, demand growth for silver will expand dramatically along with global population and GDP growth. He adds in a huge global increase in solar panel manufacture and usage as another key new market for silver. There are, of course a host of other new uses too as we pointed out here in our recent article: New innovations boost silver demand.
This aside, silver has managed to maintain its price growth despite an enormous, seemingly adverse, change in its industrial usage. For most of the 20th Century silver’s industrial demand was dominated by its use in the photographic field – a usage that has been decimated in recent years by the virtual takeover in the general photographic sector by digital photography which does not require silver in film, or in general reproduction and processing. That the silver price has, for the most part, continued to rise strongly in the face of such a drastic fall in consumption in what used to be its most dominant industrial usage sector could be seen as indeed a sign of huge, and ever-growing, underlying strength in demand for the metal in other fields.
For the most part silver demand has been particularly strengthened over the past decade through investment growth – both in terms of physical bullion purchases (as with the U.S. Silver Eagles noted above), purchases from specialists who organise vaulted holdings of allocated metal on an investor’s behalf and in the ever growing off take into silver ETFs. On the price front silver has largely tracked gold with the occasional wild short, but extremely sharp, differential – notably on the downside which some observers put down to price manipulation by some very large short position holders.
As with gold, while fundamental supply/demand factors tend to basically underpin the price, it is this investment interest which is currently holding the key. Freidman’s premise is that this investment demand “will compete long term with the silver users who must have silver as a raw material. This is a potential buying combination that is not present in any other commodity. That’s what makes silver so special.” he notes. With industrial demand in a major growth phase through the new technology uses and in medical usage too where silver is an important bactericide and also in water purification, Freidman’s long-held view is that at some stage silver will be seen to be in hugely short supply (a contrary position to many analysts who see it in potential surplus – at least at the moment).
Where perhaps Freidman’s views might really be considered a little over the top is his conviction that one day silver will be more valuable than gold based upon its importance as a raw material in industrial use as well as as an investment metal. While few even of the most ardent silver bulls would anticipate such an enormous change in role, Freidman reckons that if shortages do occur and the big silver short positions on COMEX have to be unwound and thus put into a massive short squeeze situation – then the sky’s the limit, although this probably does not take into account the likely big fall in industrial usage if prices were seen to be rising this sharply. Perhaps such a day will come, but even so for silver to surpass gold in price does seem in the realms of fantasy to this writer. But stranger things have happened!
But overall Freidman’s views are indeed interesting and represent one end of the spectrum on likely silver price performance countering those who reckon the price will crash – with the most likely scenario being somewhere between the two – in other words the status quo. So will silver see massive price rises because of the industrial and investment demand combination?
Probably not in the writer’s view, although some improvement (from the silver investor’s point of view) in the gold:silver ratio is certainly not outside the bounds of probability in a rising gold price scenario. This would see silver rise faster than gold in percentage terms – that does tend to be the general pattern. But even the ultra-bullish Freidman warns “..it is clear that there are some big shorts that do nothing but try to knock the price down. Try to be prepared for sharp sell offs and use them to add positions at times when the price is down.”
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Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.
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