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The Silver Conundrum

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March 16, 2011 – Comments (3)

Board: Macro Economics

Author: yodaorange

One of the tenets of investing that I try to follow is to “Know what you don’t know.” The investing landscape is so vast, personally I think it is difficult to be an expert on everything. At least in my case, even if I spend 25 hours per day on investing, there are vast areas that I still don’t understand. I generally try to invest in areas where I think, maybe naively, that I understand something about the macroeconomics, sector, industry, equity etc.

In the last few weeks, I have concluded that “silver” fits the “I don’t know enough” category for me. I am posting this on the off chance, that it might be pertinent to other METARites. Assuming that you have properly analyzed the macroeconomic factors that lead you to own silver, there are more decisions to make.

If you decide to invest in silver, there are several different aspects to decide on.

1. Physical versus “paper” silver

2. Personal possession or “trust” possession of physical silver

3. Allocated or captive physical silver in trust

4. Form of physical silver to own: coins, 100 oz bars, 1,000 bars, scra

5. ETF’s- “paper” trust SLV versus physical trust PSLV

6. Own the metal or own the miners

7. Miners who mine or “streamers” like Silver Wheaton

8. Others too numerous to mention

I came to the conclusion that I was a silver idiot based on a few pieces of information:

A. Financial Sense Newshour podcast with four silver “experts”. This was a companion interview to the one with Silver Wheaton CEO Peter Barnes. The podcast is about 45 minute long and half way in, I declared myself a silver idiot. There are many points that I learned, but two the large ones were:

1. There is NO shortage of physical silver. A lot of the financial media keeps talking about this, possibly to try and inflate silver prices due to a perceived shortage. IT IS NOT TRUE. As one of the guests said “How many truck loads of silver would like delivered?”

2. The most cost effective way to buy silver currently is in a form called “scrap silver.” Don’t ask me what it is or how you buy it or where you store it, but there was widespread agreement amongst these silver bulls that it is currently the cheapest form of silver.

3. I think all four of the admitted silver bulls expect a pullback into the twenties for silver.

B. Another piece of information relates to the Sprott Physical Silver Asset Trust, symbol PSLV. This is a Canadian based trust run by well respected analyst Eric Sprott. The claim is that they have physical silver that underlies each share you purchase. Only one problem. Investors are so hades bent on owning physical silver, they are paying about a 20% premium over the spot silver market. Pretty much a textbook case of irrational exuberance IMO. Eric Sprott is no idiot, so he has filed to sell his 20% over priced shares to gullible investors willing to pay that premium. He can use the money to buy more physical silver himself. There is an excellent write-up about this at:

http://kiddynamitesworld.com/pslv-sprott-files-to-sell-sold-...

BOTTOM LINE for me is that silver is an asset class that I don’t know enough about to invest intelligently. If you are in the same boat, you might consider listening to the podcast as a start towards getting a PHD in silver. NOTE that I have not discussed the macroeconomic rationality of whether you should own this asset class or not. Those questions are about inflation/deflation, sovereign debt default, fiat currency and a few other trivial factors like that.

Thanks,

Yodaorang

3 Comments – Post Your Own

#1) On March 16, 2011 at 2:32 PM, jesusfreakinco (28.93) wrote:

Bet against silver at your own risk.  Top callers in silver have been around for the past few years and have all been proven wrong.  Seller beware...

JFC

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#2) On March 16, 2011 at 9:24 PM, ChrisGraley (29.95) wrote:

If you can't hold it, you don't own it.

In other words, get physical silver and store it yourself.

As far as bars or rounds it doesn't matter. Just buy it as close to spot price as you can.

Scrap silver is basically a bag of of old coins that contain silver and the bag is sold for the melt value of the coins.

It is usually the cheapest way to get silver, but if you are investing large amounts, storage soon becomes a problem.

I hope that helps a little in your DD, and I agree  that you shouldn't invest in something until you understand what you are investing in.

 

I wish you luck,

Chris 

 

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#3) On March 17, 2011 at 12:52 PM, leohaas (33.49) wrote:

It all depends on why you want to hold silver.

If you expect the world as we know it to end (due to hyperinflation, governments collapsing, Nostradamus effect, Armageddon, end of Mayan calendar, and so on), then Chris is absolutely right. For large amounts, you'd have to obtain physical gold.

If you don't hold silver because you'll use it when the world has come to an end, miners are you best bet because they are leveraged to the silver price. If you don't know which miner(s) to pick, get an ETF tracking them (such as SIL).

Disclosure: long SIL at the time of writing.

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