When to buy silver?

One of the more enjoyable rewards of writing for this blog, aside from the hedonistic pleasures of being GM Jenkins' official beard trimmer, is that I (and the others) often get nice emails from readers. Sometimes they're just to say, 'hi', or to say thanks for an article they liked. Sometimes they expand on points raised on the blog, or they ask for advice. I always do my best to reply to each one. But one common theme that comes up again and again is 'when should I buy gold/silver?' 'What's a good entry point?' Or, occasionally, 'Should I be selling?'

Of course the only truly honest answer to such a question is, 'Dear X. No idea, Guv. Yours, JdA.' That said, I also often think I could probably write 5,000 words on the subject without breaking sweat. It's such a big question, and one that all our readers and contributors probably ask themselves at least once a day.

I received one of these emails last week and so - rather than just giving my opinion - I thought it might be interesting for Screwtape to do its first ever joint post. So today five of us will be setting out our brief thoughts on this most pertinent and popular of topics. We all prepared our answers independently, with absolutely no collusion, to see what the results might be...

When should I buy silver?

Robert Leroy Parker: My non-expert opinion says not right now. In fact, imo, right now is the time to be exiting your silver positions in preparation for the next economic wave of catastrophe. The collapse of Bear Stearns was a 5-month leading indicator to the far more devastating collapse of Lehman Brothers. MF Global collapsed at the end of October, so if history rhymes, we’re getting closer and closer to the next Wall Street blow up. The MF Global debauchery continues to get worse as noted in the NY Times last week. How much worse will the next casino implosion be? On a scale of “not so bad” to “epic disaster,” my money is on “the Mayans were right.”

Anybody that has bought and held silver before mid 2010, whether it be ETFs or physical bullion, has done very well. At worst, you’re near a double with silver at $34/oz. You would have outperformed the S&P by 60% if not much more. However, anyone that bought silver pre-Bear Stearns had to sit through a greater than 50% fall in 2008. The volatility of silver is a sight to behold, and from my view, it’s best to watch from afar, especially when the criminals running Wall Street and Washington D.C. remain in power.

I’m sure many will disagree with this assessment, and will point to silver bullion’s lack of counterparty risk as an advantage against the system. And while I would agree with you in a different era, I don’t think it applies to our current situation. Unlike gold, silver is primarily an industrial commodity; a deflationary wave of sufficient force will drastically reduce both demand and price (e.g. 2008). I expect gold to suffer a similar massive price drop if such an event should occur, but there is a little thing called freegold that keeps my gold close to my chest. Perhaps some will point to a future of bimetallism, but that is unrealistic in my opinion. The return of silver specie would vastly encumber industry, and it is simply not necessary to have two metals performing the same function, whatever that function turns out to be.

Bimetallism is an interesting subject however, so here are a couple of Milton Freidman papers on the subject that you may enjoy on your spare time: The Crime of 1873 and Bimetallism Revisited.

To conclude: When to buy silver? Imo, it will be a good time to consider buying silver when the ashes of Wall Street have finally settled. When the IMFS is no longer in a state of vast uncertainty, silver fundamentals will be far easier to analyze, and issues such as peak supply will come into focus. Currently, demand for silver as a monetary commodity makes silver a hazy investment, but I expect the situation to clear up within a year or two.

Louis Cypher: This is going to be quick and dirty: TA method: magic 8 ball, chicken bones and human entrails.

Looks to me like Silver is rolling over, and I expect it to drop tomorrow [written Monday evening - Ed.] as will most co
mmodities. I expect a choppy Wednesday. Thursday and Friday are make or break.

If it drops I will use palladium as the windsock to judge the bottom. I expect palladium to bottom out at $675-650 and that will signal the end of the plunge across all commodities. $650 absolute, absolute bottom for palladium.

Warren James: In a nutshell, it depends what your goals are. If you want price exposure (because you believe you can increase your cash holdings by being in the silver game) then an ETF is your best bet - it's easy to use and liquidate, and the premiums are low. I have no trouble recommending SLV because all evidence shows me that they do indeed have silver in the vault! In fact, I recommend it because it's not PSLV (which has a premium jumping all around the place ... gave a listen to this guy, who basically echoes my sentiment - don't take his advice, but do observe his growing realisation about Sprott's fund; p.s. drugs are bad).

If you want to buy silver because you think it's a hedge against the global financial insanity taking place, then you're probably better off holding the metal yourself. But bear in mind that each time you transact in physical, you're paying a small premium to the dealer each time you buy, and each time you sell, which means that with short term trades on physical stuff, you're losing out a little with each trade (that's how the bullion dealers make their money), i.e. if you're chasing the price on short term gains then you may as well be trading an ETF.

So like any investment, it's purely an assessment of risk - what's acceptable to you and what's not. I personally am of the opinion that silver will continue to be volatile - mostly because I see that a pump is occurring ... from my research there appears to be no real shortage of silver, despite the many stories (and talking bears) ... and the big traders are using this to their advantage to skin the little people. The two silver corrections of 2011 personally made my nose bleed although I gained overall. I have realised that for my own purposes (of long-term wealth preservation) I am probably better off buying gold. If I was after quick cash then I would have done just as well (if not better than silver) with Jeanne's recommendation of buying Lloyds TSB (article link).

So, once you've done an honest assessment of (1) your personal investment goals, (2) your risk appetite and (3) your liquidity needs, then the rest of the answers are just a matter of putting in solid research and finding the guys who know their stuff (recommended link). For bullion purchasing, I recommend the Dollar Cost Averaging strategy - works nicely. For trading the spot price, I recommend reading GM Jenkins's weekly charts and paying attention to MACD and RSI. My recent strategy involved buying a big bunch of Silver ETF after the price plummeted dramatically. The strategy worked (for $ gain), which lent some confirmation bias to the idea of buying when there is blood in the streets.

Following from that, if you're actively trading the silver price then the recent $26/ounce was a gift. If you believe, like I do, that there are agents out there with an active interest of gunning the silver price up and ramming it down every four months, (and missed the recent one) then around about April or May you should have another opportunity shortly so keep your powder dry (or you could chase the pump). Some more hints to this timing including watching the premium action on PSLV, as well as the intensity of silver rumours - yes, I'm watching the strategic placement of silver memes in the social media, and using this as a leading indicator (go figure).

PS: I worked really hard to trump GM's cougar-on-coke analogy, but couldn't.

Jeanne d'Arc: I'm not a buyer at the moment - I'm a seller. I just sold a tranche from the silver stash I picked up recently at $26 - 28. If the price goes up, I'll sell another tranche, and so on. The final tranche will be sold hopefully just before silver inevitably crashes again or if (if) it hits $40 - whichever happens first. If the price goes down, I'll hold as I doubt it will crash far below my cost average, and my profits from selling the other tranches will cover any losses if it does. I will not buy silver priced above $30 for many years, as even this level is above the post-2009 trend line.

I'm something of a bĂȘte noire to the silverogosphere (perceptive regular readers may have picked up on this) - I trade silver to (hopefully) make a quid or two, and I don't have the slightest emotional attachment to it. It's not money, and it isn't going to be. I ditched it like a stone in April 2011 when the RSI went mental, and my only mistake was then getting back in too early, which cost me all my April profits (silly JdA).

As for all stocks, commodities, bonds, whatever, the decision about if/when to buy depends on (a) your planned holding time, (b) your risk appetite (and, linked to this, the scale of your proposed investment), and (c) the opportunity cost from not using your money to buy something else.

For (a), I don't think now's the time to be thinking too long term. If Greece exits the Euro, which it still may, then there will be a 2008-style crash, no question. The recovery may in fact be swift, but for a time money will pour into the dollar and you can say hello to $22 silver before you can mutter "I think I'd better log into my trading account". That's when you should buy.

Conversely, Mr Bernanke announcing QE III would give silver a lovely boost, certainly, but the same can be said for all stocks and commodities and frankly I think the upside is going to be greater for them than silver. But if you are thinking long term, and have the stomach to live through several silver crashes, then you could buy now. It's not at a crazy price, and there could be some nice upside left. But that brings us to (c) - what is the realistic upside for silver compared to other choices? My deliberately polemic article on silver vs. banking shares was essentially all about this opportunity cost. Where is the smart money going now?

But if you do really want to buy some silver, then the answer's pretty simple in my book. Do what the successful traders do. Be patient. Wait for the next crash. For silver, you can almost guarantee that you'll get one within 12 months (more likely six). Wait till the heart-ripping plunge is over, and for the dead-cat bounce to finish, and then buy. In the meantime, if you can't sit on your hands, then use your trading account to buy other things that have just been punished and then sell on their dead cat bounces, so that you can have more money with which you can buy your beloved silver when the time comes.

If you must.

Grundlemaster Jenkins: Though my contract explicitly states I'm obliged to write only one post per week, I have agreed to briefly contribute to this symposium in exchange for a small sack of adderalls that JdA keeps in her purse.

When should one buy silver? Right now! I arrived at this conclusion through a proprietary algorithm it took me several years to develop, which involves Markov chains, Bessel functions, Fourier-Stieltjes transforms of spherical harmonics, and the Quadratic Formula. But since I've heard that silver investors aren't the smartest lot, I'll explain my rationale using a somewhat simpler measure [don't lose your audience, GM... Ed.].

When was the last time silver traded flat for 15 straight trading days (I'll define flat as +/- 2% of an average value)? If you increase the range (percentage-wise) a bit, you'd have to go back to when silver traded between $17.50 and $19.25 throughout the summer of 2010, after which it did the straight shot to $30. The other two times in the recent past that silver traded flat for an extended period (though fewer than 15 days) was December 2010 and October 2009 (and check out the RSI during those periods: very similar to the action now). In December 2010 it popped up to close the year, and in October 2009, though it sold off ~8%, that only lasted 6 days, followed by a lightning fast 20% jump to its yearly high.

So, in short, if you wait, you might miss a strong move up, and even if you're lucky and it rolls over, you may not have a lot of time to get in at a lower price anyway. As I wrote in my post below, I don't see another waterfall correction in the works, so start building your position.

[Please consult your medical professional before taking my advice, as side effects could include dizziness, high blood pressure, glaucoma, and loose stools. This is silver after all].


To finish, let me point out that all of the above are just personal opinions, philosophies and rants. It is not investment advice (please read our disclaimer at the bottom of the page if unsure about this). In fact, it is the opposite of investment advice: this is a quick and simple exercise to show that there's no such thing as a guru who knows it all, who has privileged insight into the future, or who can painlessly guide you onto the path to fabulous wealth. Ask five blog contributors, and you'll get at least six opinions.

Sadly, the opposite is all-too-often true, and blindly following those who claim 'to know' will send you to the poor-house. So perhaps 'no idea, Guv.' is actually by far the best investment advice anyone could ever give...


Boefke said...

This leaves just one question: "Are we, the people, investors.....or mere savers"

IMO more than 90% are just savers, "forced" to take risks to keep their purchasing power of their savings stable.
When we save, there is available at unbelievable cheap price the ultimate store of value: gold.

When we seek speculative returns probably a silver-ETF would perform better NOW! As it still are both commodities....this won't last forever ;)


The Big Setup said...

Funny posts above. Nobody has been able to predict ANYTHING over the past 12 years... Except Jim Sinclair with GOLD and Peter Schiff with housing.

Ideas Man said...

Folks, excellent blog. But how do you subscribe if you don't use Twitter?
Why not add feedburner or similar to the side, then we can get an email when you post a new entry?
Thanks Dominic

Jeanne d'Arc said...

@Ideas Man

Ask and you shall receive. See top left.

Thanks for reading the blog!


KJ said...

"In fact, it is the opposite of investment advice: this is a quick and simple exercise to show that there's no such thing as a guru who knows it all, who has privileged insight into the future, or who can painlessly guide you onto the path to fabulous wealth. Ask five blog contributors, and you'll get at least six opinions."

transparent stuff, well done. important as well as there still might be many out there who believe person "x" knows what will happen moving forward.

rlp takes a longer term/new monetary system perspective which i'd relate to more as a physical gold advocate.

lc: trading approach, whether for paper/physical silver - very short term analysis.

WJ: i like the approach - broken it down depending on goals/philosophy/outlook/needs - resonates with me and likely a lot of readers - is the system ending or is it business as usual? If latter, paper instruments makes sense. As for price movement, short term but medium term when compared to lc & gmj.

jda: as with wj, like the approach, lay out your approach and taken a dispassionate, objective view of silver - it's just another trade, whether short/long term. And you do point out your opinion that you do not believe it to be a future monetary metal which supports your analysis.

gmj: implied is gmj is talking about both paper/physical metal buys and focuses solely on a possible move upwards in paper price and thus a short term analysis.

some themes:
a) very short term, short/medium/long term approaches
b) view of collapse of monetary system or business as usual
c) whether silver will revert back to being a monetary metal or will remain mostly an industrial metal; whether physical gold will be the future store of value/reference point
d) risk appetite
e) liquidity needs
f) deflationary out inflationary outlook
g) opportunity cost vs. other trading/investing opportunities
h) paper silver might just be a game

Be nice if the 'guru's' out there laid out their underlying philosophy and opinions on some of the themes above so we know where they're coming from and provide shed light on their consistency, or lack thereof.

should add: traders better know what they are doing as they are very likely to get trampled on.

KJ said...

btw, where is Sprott these days...haven't heard from him in a little while. The silver rumor mill needs some flow.

and again, a question posed earlier, who really is Eric King of KWN? Perhaps Turd can do an interview with the interviewer himself?

Dr Durden said...

No one playing the silver/gold ratio? Buy 1000 oz silver at 60, hold till it drops to 50. Trade/sell 500 for 10 oz gold, hold till it rises back to 60. Repeat.

Just an example with numbers off the top of my head. There was a good chart to go off posted a few days back. If the lower trendline is met again this year we'll probably take out he recent low of 30 set last May.

GM Jenkins said...

Great recapitulation of the key points, KJ - thanks for it. Btw, just checked out spam filter, and noticed you had several nice posts from a few weeks ago get sent there. I'll make a point of checking that damn filter more frequently and repost stuff that gets lost from now on.

Dr. Durden, are you saying you think the ratio is going up or down? i.e. why sell at 50 if you think it's going to 30?

Btw something I might have added to my contribution above was, if silver drops 10% from here, there will be a monster 5 month inverse head and shoulders pattern in the works ... so the bears would need to set a lower low, i.e. below 26, if knocking this thing down further isn't going to bite them in the ass.

Mr T said...

Thanks for your great charts always.

So - what's the panels decision on the HUI / GDX?

When would you buy this one? If ever again?

Frances said...

With this post as well as those I've read from BuySilverAssets.com, one thing's for certain: It's never too early to get a hold of a silver investment since as time passes by, its value only increases. You just need to be patient.