It’s hard to believe that less than three years ago, silver was $8.80 an ounce. Since then it has nearly quadrupled in value (up 385%) and more than doubled in the last 12 months alone.
That’s great for those who already own the metal – but is it too late for the rest of us to get in?
Crux: Jeff, silver has had an incredible run over the past year or so… Where do you think it’s headed next?
Jeff Clark: Well, that’s probably the most common question we get these days. Silver has definitely been very exciting. The price has basically doubled in a year, and many of the stocks have done much better than that… So you could be forgiven for asking how long that can continue.
I think the bullish case for silver going forward comes down to three main factors.
The first is industrial demand. Everyone knows industrial use is much greater for silver than gold, and that does make it more susceptible to an economic slowdown. But what’s interesting is these industrial uses are growing rapidly.
For example, all of the following uses for silver are increasing: medical, electronics, food processing, water treatment, paper, building materials, wood preservation, textiles, consumer products… the list goes on and on. Every bandage-maker, for example, now offers a silver-based product. You can buy silver-laced toothbrushes, hairbrushes, combs, and make-up applicators. In England, you can buy silver-based soap.
The takeaway is that all these uses are on the rise, so even in an economic slowdown, there is a higher level of base demand. The demand for any individual application could decline, but the total number of applications for silver is increasing. Over time, I think we’ll see increasing levels of demand.
The second major factor is investment demand. Investment demand is soaring and can’t be ignored. The U.S. Mint sold more one-ounce Silver Eagles in January than in any other month since they began creating them in 1986. China’s net imports of silver quadrupled in 2010. Against all this you have the fact that most Americans don’t own any gold or especially silver. So even though there’s already incredible investment demand, the potential for it to increase is still tremendous.
The third factor is supply. Ask yourself what’s wrong with this picture: Total global demand for silver is about 890 million ounces a year. Worldwide mine production is about 720 million ounces a year. Scrap currently makes up the difference, but I think the crucial point to recognize is that producers can’t dig up enough silver to meet current demand.
So what happens if industrial uses continue to rise? What happens if investment demand continues growing? What happens if we do get some type of currency collapse? What happens if Doug Casey is right and we get a true mania in gold and silver?
We had bottleneck issues with physical supply in 2008, where mints across the world couldn’t keep up with orders. A lot of it was due to them being unprepared for the rush, and they’ve since improved some of their operations. That’s great.
But even with all the improvements, even after adding equipment, even after adding staff, even after adding work shifts… they’re still having issues. Over the past three or four months, we’ve been hearing about mints having delays, temporarily running out of stock, etc. So it’s still a problem.
And if all the factors I just mentioned come into play, then I think you could say “Bottleneck, meet desperation.” Regardless of how well prepared a manufacturer might be, demand at some point could legitimately overwhelm the system, and I think that’s a very real possibility. Anything could happen. But the scary thing is, we may not have enough supply to meet demand if we get a mania.
So based on these factors, my view is that silver can continue rising for quite some time. I don’t think it stops until SLV, the silver ETF, is a favorite of the fund managers… until Silver Wheaton is a market darling of the masses… until Pan American Silver is Wall Street’s top pick for the year… That’s when I’ll be looking for the end of this silver bull market.
Crux: Speaking of a mania, just how high do you think silver could go?
Clark: Many people don’t realize this, but silver rose 3,646% in the 1970s, from its November ’71 low to its January 1980 high. If you were to apply the same percentage rise to our current bull market, silver would climb another 500% from here, and the price would hit $160 an ounce.
Those are just numbers, but it shows that we have an established precedent for the price to go much higher.
[article-quote] It’s the fundamentals, of course, that will determine how high the price ultimately goes. Show me a healthy dollar, show me no threat of inflation, show me a responsible government that stops printing money… Show me a repentant Iran and North Korea… Show me that the sovereign debt issues in Europe are resolved… Show me positive real interest rates… Show me that unemployment is plummeting, that bank closures have stopped, that real estate is recovering…
Show me all that and we’ll talk about the gold and silver run being over… But until those things start changing in a big way, I’m buying.
Crux: Silver bears often suggest that a large part of the rally in the last bull market was due to the Hunt brothers, who were accused of trying to corner the market. What do you say to that? How much do you think they attributed to the price rise in the ’70s?
Clark: Well, I’m skeptical that the reason silver went as high as it did was primarily due to the Hunt brothers’ activity in the market. It’s interesting to note that they bought silver primarily because they mistrusted the government, and because they thought silver was going to be confiscated. Remember… gold ownership was illegal when they first started buying silver in the early ’70s.
Yes, they bought a lot of silver… But if you look at the correlation, you’ll notice the price didn’t necessarily move up when they bought. In fact, when the rumors that they were trying to “corner” the silver market really started going mainstream, which was in the spring of 1974, the silver price dropped solidly for the next two years. One would think that the price would’ve risen, not fallen, if silver was being “cornered.”
Secondly, if you look at price charts, silver moved in lockstep with gold back then. They rose and fell pretty much together. They both peaked on the very same day, January 21, 1980. So unless the gold market was equally spooked by what the Hunt brothers were doing with silver, it seems a stretch to assume they were the primary cause of the rise.
Last, as my editor pointed out, you have to consider that it was the mainstream media that largely promoted this idea the Hunts were “cornering” the market. With that in mind, one has to be suspicious that was, in fact, the case.
To be clear, I’m sure they had some effect, but to suggest they were the main impetus behind silver’s tremendous rise doesn’t seem wholly accurate. And look at the price today… It’s outperforming gold in our current bull market, just as it did in the ’70s, and there’s no Nelson Bunker Hunt around.
Besides… who’s to say that we won’t see other “Hunts” come along today and try to buy up large quantities of the metal? I wouldn’t rule it out.
So again, I think it’s more important to look at silver’s fundamentals for any kind of price projection than a one-off event. And those fundamentals are very bullish.
Crux: What are the bearish arguments for silver?
Clark: Well, I touched on it earlier… but if the economy crashes, silver is likely to suffer more than gold due to its large industrial use component. Another factor is that silver is not bought by central banks, so one source of demand for gold is not present with silver. But I think the bigger trend of a currency crisis is going to dwarf those concerns… And I think that silver will do very well in that environment.
Silver is more volatile than gold, but that just means you get better opportunities to buy it cheaper, and probably make more money on it if you sell near the top.
So yes, there are bearish arguments for silver, and one has to be prudent in buying it – you don’t want it to be the only asset you own, for example. But it would be equally a mistake to not own a meaningful amount.
Crux: So… is today a good time to buy?
Clark: Well, how many ounces do you own? And what percentage of your assets do those ounces represent?
There’s your answer. If you have minimal or no exposure, I suggest buying. Don’t rush out and spend all your available cash, because there will always be corrections, but the less you own, the more you want to make a plan to add a meaningful amount to your portfolio.
Remember… silver is a currency replacement just like gold. It’s money… and therefore you want to make sure you own enough for both protection and profit. If you don’t own enough, I suggest going into “accumulation” mode… buying some on a regular basis, like dollar-cost averaging.
Our recommendation in Casey’s BIG GOLD– which is a conservative letter, by the way – is that approximately one-third of your investable assets be devoted to the precious metals market. That includes gold, silver, and precious metal stocks. That may sound extreme to some, but we think the risk to currencies right now is extreme. Therefore, being overweight precious metals is justified. Obviously, each individual investor has to be comfortable with what they do.
Crux: Do you a recommend a certain percentage of ounces in silver versus gold?
Clark: We generally recommend you hold more gold than silver. We suggest approximately 70%-80% in gold versus 20%-30% in silver. Depending on your situation and risk tolerance, you may wish to have more or less in silver, but again the point is to have meaningful exposure.
Crux: For individuals who are new to buying precious metals, what are your preferred ways to purchase silver?
Clark: The options are becoming more and more mainstream, so it’s getting easier to buy both metals. The alternatives are growing, and they’re also improving. You basically have two choices: You can either buy and store it yourself, or you can buy and have someone else store it for you. Ideally, you want to do both… you want to diversify.
There are risks to storing metals yourself, such as theft, loss, or fire. You can put it in a safe deposit box, but then it’s in the financial system and it’s subject to banking hours and could even be susceptible to confiscation, though I’m skeptical that will actually happen. But I do think everyone should have some physical silver handy, at least a couple months worth of expenses.
So the short answer is to diversify what you buy and how you store it. For physical silver, I would stick to buying the popular one-ounce bullion coins – Eagles, Maple Leafs, etc.
You can also buy silver funds and ETFs in your brokerage account or online, and there are definitely some advantages to doing that. They’re easy to buy, sell, and trade. There’s no need to mess with the storage yourself, and it’s especially beneficial for those who have larger holdings. You can put $50,000 worth of gold in the palm of your hand – but $50,000 worth of silver would require a small suitcase, so space is an issue. A lot of online options now have delivery alternatives available, and some even have free storage. Options here include the various ETFs, closed-end funds, online options like GoldMoney or BullionVault, and certificate programs like the Perth Mint Certificate.
So find a couple options you’re comfortable with, diversify your holdings, and just continue to buy on the dips, with the intention to hold until the bull market is over.
Crux: How about silver stocks. Can you give us a favorite?
Clark: Well, it’s pretty clear the go-to stock in the silver industry – in my opinion at least – is Silver Wheaton. It’s definitely been a sweetheart the past two years. It’s given us everything we could want in a silver stock.
The stock suffered badly in the meltdown of ’08, and things did get a little dicey at the time, but I remember thinking that unless the world comes to an end and the silver price never recovers, this company is going to survive and bounce back – in part because of management and in part because of the business model. They have no exposure to mining costs, for example.
Shares back then were around $3… If you bought at the time, they’re now a ten-bagger. So it’s been an incredible run.
The question, of course, is going forward: Since the stock is already at $35, can it be another ten-bagger from here?
Well, the company expects to increase “production” by 70% by 2013. And their costs will basically stay stagnant. Meanwhile, imagine where the silver price could be in the next two to three years, and you can see this company can make enormous amounts of cash. Some of that is probably priced into the stock already, but you can’t deny where this company is headed over the next few years.
In the bigger picture, you have to look at our currency issues – they’re very real. They’re deep. They’re intractable. So when I look at what is likely to happen to the dollar and thus what level of inflation is probable, I think silver will go substantially higher, which means Silver Wheaton is going to go much, much higher. Only if you believe deflation ultimately wins the war and that inflation doesn’t occur do you think silver or Silver Wheaton won’t do well.
Could it have a big correction? Well, it recently dropped as much as 28%, but sure… it could easily fall more than that in a major correction. But if that happened, I’d consider it a big buying opportunity.
In my opinion, the bigger the correction, the bigger the buying opportunity, because I really believe the future is very bright for that company.
Crux: Sounds good. Any parting thoughts?
Clark: If you’re bullish on gold, I think you need to be bullish on silver, unless you think inflation will never come to pass. Regardless of the short-term fluctuations in the market, it’s only a matter of time before the currency issues punch us in the gut and inflation really takes off.
Second, remember that silver will be volatile, but focus on the fundamentals and use selloffs as buying opportunities. Until the fundamentals driving the bull market change, buy.
Bottom line, the bull market is far from over. I think it’s going to go much longer and much stronger… So buying on dips is the best advice I could give anyone.
Crux: Thanks for talking with us, Jeff.
Clark: You’re welcome. Thanks for having me.
Editor’s Note: Readers of Casey’s BIG GOLD can access Jeff’s full list of the world’s best gold and silver stocks, along with Casey Research’s preferred and trusted precious metals dealers. Get your three-month trial with a full money-back guarantee today.