What You Need to Know About Buying Silver
This interview covers one of the biggest topics in our industry...
Longtime Stansberry Research readers are familiar with the bull case for precious metals. With the Federal Reserve's ridiculous "easy money" policies and governments around the world slipping toward a debt crisis, gold has become a popular holding.
Many folks are asking if they should own silver, too.
To answer that question, we sat down with precious metals expert Jeff Clark, formerly of Casey Research. Our friends at Casey Research do some of the best investment research you'll find anywhere. With a focus on natural resources like gold, oil, and uranium, their products are "must reads" for anyone who wants to keep up on the sector.
Whether you're a longtime holder of precious metals or considering buying silver for the first time, you won't want to miss what Jeff has to say.
Stansberry Research: Jeff, why do you like the idea of owning silver?
Jeff Clark: I think the bullish case for silver 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 will be 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 2013 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 in 2012 was about 880 million ounces a year. Worldwide mine production was about 760 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 we get a true mania in gold and silver?
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.
Stansberry Research: 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.
Those are just numbers, but it shows that we have an established precedent for the price to go much higher.
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 that the sovereign debt issues in Europe are resolved... Show me positive real interest rates...
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.
Stansberry Research: 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.
Stansberry Research: So... how do you know when 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.
My general recommendation 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 I 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.
Stansberry Research: Do you a recommend a certain percentage of ounces in silver versus gold?
Clark: I generally recommend you hold more gold than silver. I 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.
Stansberry Research: For individuals who are new to buying precious metals, what are your preferred ways to purchase and hold 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 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.
You can also think about buying silver stocks like Silver Wheaton. This particular company, in my opinion, is the go-to stock in the silver industry. It has great management and a great business model. It has no exposure to mining costs, for example.
Going forward, 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 stocks like Silver Wheaton are going to go much, much higher.
So find a couple ways to purchase silver that 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.
Stansberry Research: 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.
Bottom line, the long-term 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.
Stansberry Research: Thanks for talking with us, Jeff.
Clark: You're welcome. Thanks for having me.
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