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11.25.2010

Silver Eagle Coins Could Be The Buy Of The Year

It's mainly the fear of runaway inflation as investors worry about fiat -- roughly speaking, official currency losing value because of rocketing levels of government debt that could devalue the pound/dollar/euro/yuan in their pocket. The prospect of currency wars doesn't help either. And nor do ultra-low interest rates, which also threaten the value of fiat money. Should I even mention the possibility of war?
The result is a relative stampede towards hard assets. 

Move over gold

For three years it's been gold and now it's silver as investors take a stake in the stuff through tracker funds, wholesale trading, the purchase of bars that are held in storage against a fee and, very recently, coins such as American Eagles and Canada's Silver Maples among others. 
In just one week in November, reported the Financial Times, the US Mint sold 1.8m American Eagles, way above the usual quota.
Yet, as commodities specialists make very clear, as an investment silver is very different from gold. It's a much smaller market for a start, so even relatively modest surges in demand for silver will shift prices quickly. Hence it's more volatile, which is of course good for professional and wholesale investors who buy and sell on a daily basis. 
As commodities specialist GFMS points out, silver is "very highly geared to growth in investor inflows". Translated, if a lot of punters suddenly pile into the metal, the market will shift fast. Indeed that's exactly what's happening now.
Also, unlike gold, there's quite a lot of silver lying about in the earth's crust. Roughly 17 times more, in fact. Thus physical supply can quite quickly exceed demand even though silver is almost mined by accident as a by-product of gold and copper. 

Why silver's not gold

It's easy to forget that silver is an industrial metal as well as a decorative one that's used in all kinds of processes such as photography (albeit declining), electronics, health care and energy, particularly in the high-growth area of solar power. GFMS predicts a significant jump in industrial demand.
Although silver has historically risen and fallen more or less in tandem with gold, at least until the last century or so, it serves a very different purpose in a portfolio. 
Gold is an anti-deflation metal while silver is anti-inflation. Indeed, silver prices sometimes track those of copper, another industrial metal, more closely than gold. That's because, as Bullion Vault analyst Adrian Ash points out, only 35 per cent of annual silver-buying, whether wholesale or otherwise, is down to its role as a store of value, like gold. Most of the rest is industrial. Indeed the trade body, the Silver Council, is an industrial body.
Part of silver's attraction to investors will however always be its history. As a monetary tool, it's been around longer than gold. Magnificent silver coins dominated sovereign currencies until the latter half of the nineteenth century before gold steadily replaced them. Even then, many countries ran their monetary systems on both gold and silver in a standard known as bimetallism.

How high?

But how high can silver rise in this current historic rally? 
There's a rough consensus developing round the $30 a troy ounce, possibly by early 2011. Prices have already climbed rapidly, albeit from a low base, and are up nearly five-fold since 2002. 
We can forget the stratospheric prices of $140 a troy ounce (in today's money) of the late seventies because the market was manipulated. Even so, I know intelligent people who have sold all their shares, real estate and other investments and are buying metals against a coming Armageddon. 
For all our sakes, I hope they're wrong.