Silver Investing – Its Time To Be Very Careful

In late September of 2011, the price of silver dropped about 25% in two days. The price of gold dropped sharply too, but not as sharply as silver. The reason given by analysts is that investors sold profitable investments to pay for stock market losses. What triggered the losses was a darkening view of world economies. Economic growth is slowing all over the globe. What most analysts do not mention however, is that when the real inflation rate of a country’s currency is factored in, growth is not only slowing, but is already negative. For example, if a country’s GDP is growing at a healthy 4% annual rate, but inflation is 6%, the real growth of GDP is minus 2%. World economic conditions are much worse than even most avid readers of financial publications realize. And that means the high probability of a prolonged period of depressed silver prices.

Before I continue, I want to distinguish between silver investing and silver “insurance.” I consider the possession of silver bullion to be insurance against

  1. erosion of asset value due to high inflation and
  2. The possibility of economic meltdown.

Silver investing is more likely to utilize stocks, stock options, and electronic traded funds (ETF’s).

Websites that publish precious metal prices include four metals. In order of price per ounce in recent years, they are platinum, gold, palladium, and silver. In terms of price, silver is a very, very distant fourth. While considered precious because of price, platinum and palladium are industrial metals. By far the greatest use of both is catalytic converters for automobiles. The price per ounce reflects the scarcity relative to gold. The relative price of palladium to platinum reflects the efficiency of the two metals in their use in the production of catalytic converters. When world economies fall into a deep depression, demand for palladium and platinum will drop significantly, and so will price.

Although silver is listed a precious metal, the investment community looks upon silver as an industrial metal. In 2010, 51% of the silver mined was consumed by industrial applications. For over 20 years, the price of silver has not reflected its scarcity relative to gold. While the ratio of the price of gold to the price of silver dropped greatly in 2010 and the first half of, I expect a reversal in that ratio. That is; the price of gold will continue its upward trend as while the price of silver will likely fall and remain depressed for some time. I think the gold to silver price ratio will approach 100:1 again.

Why will the price of silver drop and stay down? When economic conditions worsen worldwide, industrial demand for silver will decrease. Short term speculators investing on margin will sell, sell, and sell.

How long will the price of silver stay down? That is impossible to say. What will eventually push silver higher will be investment demand; people and institutions pulling silver bullion out of circulation. I expect that to happen after the gold bubble starts inflating and investors turn to silver as a low-priced alternative.

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