Monday, 13 December 2010

To silver, or not to silver? That is the question...

I have been pondering a lot in recent months on the silver/gold question. I myself liked silver for some time, but more recently I have come to a personal decision that I should dishoard most of my silver holding, replacing it by increasing the gold holding; a process that is by now substantially completed.

I thought it might be interesting and educational, for myself and also I hope for others, to solicit some discussion on this topic, since many people are very passionate about silver, and if they have compelling and indisputable reasons then I am always open to changing my mind (again :-) ).

So, at the risk of possibly inciting a riot now, here is a quick and very short starting list of "some reasons for believing gold is the ultimate wealth preserver, while silver is not"...

  1. Silver demand today comes predominantly from manufacturers. It is positively correlated to economic demand; it does well when there is strong consumer demand for the products it is used in. This is one of the reasons cited by silverbugs to justify future massive price rises they anticipate - its scarcity value. However, if (when?) the economic demand for those products dries up, perhaps brought on by the very same high inflation that the silverbugs foresee coming down the pike, industrial demand for silver will dwindle along with that. Silver is used in desirable consumer products, but I don't think it's in anything quite as necessary as, say, food or energy? That is the largest part of the current buyers -- who steps into their shoes to buoy demand for silver, when the manufacturers leave the market as a result of sluggish global demand? There is no significant industrial demand for gold; it is uncorrelated to global economic performance. If/when the global consumer economy contracts significantly, there will be no disappearance of industrial demand for gold -- there is only really investment demand, even in the form of jewelry the purchase is fundamentally an investment by the buyer. If (when) the global economy takes a bath, the desire for gold is likely to only increase, in my opinion.

  2. Silver is the poor man's gold. The massive investors of this world, the Central Banks (CBs) and Sovereign Wealth Funds (SWFs) of current account surplus countries, do not add silver to their reserves in any meaningful degree. They keep gold in their reserves, but not much, if any, silver. If industrial demand for silver should fall, these giant potential buyers are not going to suddenly step into the shoes left empty by the manufacturers of this world, I strongly suspect. There are reasons that they do not keep silver...

  3. Silver is a "necessary" commodity. Many products that people need and/or desire contain silver, and in many of those applications there is no substitute for using silver. This means that it would be deemed totally unacceptable to hoard silver, because it treads on the toes of consumers the world over. Imagine CBs or SWFs decided to hoard, say, wheat or corn? These are similarly necessary commodities, and hoarding of them would distort the supply/demand balance, speculatively increasing the price and impinging on consumers. There would be uproar. These foodstuff examples are intentionally selected to emphasise the principle -- clearly I am not attempting to say that silver is as necessary to human existance as wheat or corn! But the principle I am illustrating is the same, albeit to a significantly lesser degree. The reason gold has been selected over the millenia as "money", is specifically that it impinges on nobody if you choose to hoard it. The price can rise as high as is necessary to clear the supply/demand balance, and nobody would be hurt. In fact, unlike any other "commodity", the higher the price of gold goes the better people like it! This is simply not the case for silver.

  4. Silver is actually not that rare to find, relative to gold. There are very few silver mines in operation today, with most silver mined as a by-product of mining other industrial metals. This is not due to there being little silver to mine in the world, but because the economics of mining silver mean that it is in most instances not economically viable to dig it up. Getting it as a by-product of some other activity is a bonus to the miners pulling out copper etc, it is an afterthought as far as they are concerned and they are not especially bothered how much they get for it. If the price were to significantly rise, it would mean that many more silver mines become economically viable, and the supply will ramp up to meet demand (bringing the price back into balance). There is plenty of silver to mine, just not at today's prices. This is quite unlike the case for gold, there are plenty of mines digging up only gold in the world today. When the price rises, I daresay more gold mines might become viable and there could be an increase in supply as a result, but I think you will find that the ability to respond in this way to higher prices is much less than is the case for silver.

  5. Similarly, because silver is a part of many consumer products, as the prices rises it becomes increasingly viable to recover the silver from products at the end of their life, increasing the scrap supply. Since gold is not used to any significant degree in consumer products, that avenue for increased scrap recovery will not be available. Gold is held pretty much only for monetary purposes, and it will only be returned to the market at a price that people believe it is fully, or more likely over, valued. Given the on-going, by-design debasement of paper currencies, any thinking person should understand that there is no time that paper is better than gold, unless you want to spend your wealth immediately. So, if gold should some day become significantly overvalued then perhaps yes, it might be dishoarded until the price comes back to whatever is deemed to be fair value. But I don't think this significant perception of overvaluation is very likely to happen to be honest.

Do you have counter-comments to any of the above? Or perhaps further reasons that you would like to add to the list? This is just a short and hastily-compiled list that I have knocked up really for the sake of stimulating the debate! :->

23 comments:

Fauvi said...

It’s exactly how I feel about silver.
I still have some and wait for a better GSR to trade it. I believe it’s a matter of time until it happens. When we’ll have a GSR of 30/1 I’ll be out. Therefore I now like this silver hype and try to understand the JPM silver speculation with his gigantic derivatives connected to silver. Yes, silver is speculative, might be for the time being a good occasion to make some money but one can wait to long and get it wrong. Of course silver has no monetary future, there seems to be enough of it even if some people say it would be the first element to disappear.

Dimmed aurum said...

@ DP
You make a just point. Please return the discussion to the FOFOA`s blog you will have my reply there.

DP said...

Hi D.a.

Per my comment over there a few moments ago, and also Jenn's before it, I don't think that would be especially welcomed. ;-)

I've put this post here, in order to split this particular debate out of the Freegold arena. I've seen for a little while that a dedicated "silver?" discussion thread is perhaps missing, it keeps getting brought up within other comment threads as an ancilliary topic and I don't think is ever satisfactorily addressed as a result, and is also necessarily not easy to refer people back to when it does come up so it keeps coming back over and over. But at the same time perhaps it's not seen as especially pertinent to Freegold per-se(?) and hence no dedicated post on the topic. The name of the concept seems pretty clear: to Freegolders, it's all about gold. :-)

If FOFOA were to put up a post to a similar aim, I think it might pay dividends in the end as I outline above. But at the same time I can foresee it is perhaps unlikely that post might ever materialise.

DP said...

Fauvi: Therefore I now like this silver hype and try to understand the JPM silver speculation with his gigantic derivatives connected to silver.

I think the JPM naked shorting is blown out of proportion. I think what is happening here is for one thing industrial buyers [the bulk of buyers of physical silver] have placed long Forwards and Futures contracts, for taking delivery later. They book purchases in advance, because they don't want to have to shut down their production lines because they ran out of material for their products at economic prices. They have to open these with a certain price agreed to buy at of course, and in fact they want to know the price of the inputs way before they will sell or make the consumer products in the factories. To protect themselves from the possibility the item they've agreed to buy later might not have gone up in price but actually might have a much lower spot price by that time, silver being highly volatile this is a very distinct possibility, they simply buy a short Future so that they will get back the difference between their agreed purchase price, and the spot price on the day they take delivery. If they price goes up -- great, they got a bargain when they bought earlier. If the price goes down, no problem they'll get the difference paid by the short contract anyway. JPM is the holder of most of those short contracts, because they are the primary party people buy the contracts through. They are holding them on behalf of others. I'm sure they do trade speculatively on their own account too, but I don't think it's anything close to most of their apparent exposure.

I also think that there are a lot of OTC longs bought by speculators, which JPM hedge their exposure (as the counterparty) to by opening a corresponding short with someone else.

Am I being too simplistic? Have I missed something? Clearly, it is much more fun to believe that someone like JPM is The Bogey Man! Perhaps it's true after all. Someone tell us all, so we can once and for all get to the bottom of this! :-)

Blondie said...

JPM not the big silver short?

May be better location for your proposed discussion too?
Blogger comments function is not particularly functional, IMO.

DP said...

@Blondie: Interesting and highly relevant further information. Thanks!

(The NNW site linked by Blondie is definitely worth checking out in generaly, as well as specifically on that topic thread, BTW ;-) )

Dave said...

Here's my comment from FOFOA, since this conversation should likely continue here.

I am bullish on silver.

But realize if you own silver, you are a speculator, and could lose money if you don't trade out for gold in time IMO...

From Harvey Organ

http://harveyorgan.blogspot.com/search?updated-max=2010-12-13T15%3A52%3A00-08%3A00&max-results=7

(Emphasis *** is mine.)


"Thus by taking 81 billion dollars and dividing by 17.00 dollars we get 4.7 billion oz of silver shortfall. I had originally estimated that I thought the shortfall was 3.3 billion ounces.

We know that the USA had 2 billion oz in 1990 ***and that silver is gone.*** The supply of silver from the mines over the 20 yr period has averaged around 500 million oz and demand of oz. at around 750-800 oz. This year demand will exceed 900 million oz."

That's one of many reasons I'm bullish.

However:

"It has been our supposition that ***China has supplied the remaining ounces of silver with their left hand in order to receive gold in the right hand.***"

And that is why I will trade my silver for gold as the GSR continues downward.

I want to hold what the CB's hold.

dnarby

Fauvi said...

Everything is possible and of course I don't want to be too greedy and miss an opportunity. I've heard in Germany of people trading their gold for silver... so sad. I sometimes even wonder who are the factions behind this silver campaign. Do i see ghosts and corpses everywhere?
Costata has already traded his silver, I think I would wait a while yet. Would you give us a h/t when you make the switch? Would be great.

Dave said...

@ Fauvi

They may well have time enough to trade it back and do well on it, but don't cry for them. They will still do very well compared to holders of paper.

DP said...

A red flag going up? Too much confidence in this call?

http://www.zerohedge.com/article/jp-morgan-admits-defeat-cuts-silver-short-position-proves-millions-conspiracy-theorists-abso

Either way, we are confident that this first unprecedented confirmation that a) JPM is indeed massively short silver and b) that it is hurting bad, will merely redouble efforts to put the world's biggest financial company out of business. Lastly, this means that silver is about to really blast off as the push to really hurt JPM takes off in earnest.

Tom said...

I am also very bullish on silver. It is much better to hold silver than paper, however it is better still to hold gold than silver. Most of gold's value has come from it's monetary use, which has been suppressed in recent history while most of silver's use has come from industry, hence it will do well as an inflation hedge, just like most real assets, commodities, etc. However, as gold reclaims its monetary function, it will go into hiding. Is this where silver's minor function as money is reclaimed? Maybe as gold goes into hiding, wealth will flow to silver? I don't think you can go wrong with owning gold or silver, its a matter of which will allow you to gain more. I was a silverbug, but have been changing some silver to gold. As the gold/silver ratio decreases I will change more silver for gold, however, it already hard to find more than 1 or 2oz of gold at a time at my local coin shops. But I will still keep some of my silver, it is far better to hold both and diversify against uncertainty.

DP said...

Hi Tom, and welcome.

It sounds like your journey has been VERY similar to my own and, from my understanding in his comments and posts, also FOFOA and probably nearly all of his merry band of followers. So we are all in very good company together, I think. :-)

My view at the moment is that gold is still perceived, and bahaving, as "just another commodity", alongside silver and everything else. While this is still the case, given the supply/demand backdrop, I think silver will probably continue to outperform gold (on the up and also down side - similar moves, but of a larger percentage). So far, so the same.

The day we in the Freegold camp await, is the day the Dollar system snaps and gold ceases to be "just another commodity", but everyone understands that it is still Real Money, below the Dollar at the base of Exter's pyramid. And it takes off on infinite investment demand, leaving silver and every other commodity in its wake. It sounds like you already share a similar opinion.

We watch all this together, yes? (smile)

DP said...

By the way, if you're having trouble finding gold coins, have you already tried looking on eBay, and for online coin sellers?

I don't know where you are, but in the UK there are some good vendors that sell online and the goods show up the next working day at your door waiting for a signature via the post man. Very convenient and with reasonable margins. Probably lower margin than you pay at as coin shop anyway I think.

Good luck! :-)

Tom said...

Thanks for the response. And I have looked at ebay. I prefer to buy cash and the guy I buy from has fairly low premiums so I can't complain. That may be one reason why I have to be quick when he does get some gold in. The other fellow in my area has higher premiums and has a harder time moving his merchandise.

As for silver outperforming gold until freegold, I agree entirely. It just makes sense. And as for gold outperforming silver I agree also. However, I believe silver will settle somewhere in between gold and the other commodities, because silver does have a monetary history. Just like gold's value is mostly money and slightly industry demand, silver's value is mostly industry and slightly money. I think freegold forgets this slight function of silver as money. Silver might reclaim its minor role just like gold will reclaim it's major role, especially in a situation where people can't rely on their paper notes and digital numbers to buy necessities or where gold has gone into hiding already.

DP said...

It seems we are indeed of one mind. Let's all watch together; I think we will not have to wait another 40 years to find out.

Bonne chance mon ami!

Tom said...

I doubt it will take that long. I stumbled upon your blog from some old FOFOA posts in the the comments section. Just going over your 2010 posts now. Great stuff, you think much like FOFOA, with almost more clarity. Maybe I just feel like it is more clear since your posts are a bit shorter. I like KISS. Although FOFOAs commentary is priceless and has really changed my perspective.

Tom said...

I think I may have made the terrible mistake of thinking you were a contributor. Apologies to those who do write the articles here.

Tom said...

haha, I really am confused. Wrong blog. This is YOUR blog DP. I was reading another one at the same time, thought this post was on that one.

DP said...

Hi Tom -- I hope you had a good weekend? (In Toronto, right?)

I am very flattered indeed for you to even mention my name in the same sentence as FOFOA, let alone make a favourable comparison. That is some high praise for sure! I can say in all honesty that it is not warranted, but I will take it and thank you all the same. :->

As you noticed, my approach is often lately to take an aspect of discussion at FOFOA's place that I see people are perhaps having difficulty with, and breaking it out with a focused simplification. KISS is my favourite idea to live by, it just works! I very much appreciate it when other commenters clarify a position in the discussion for my benefit, and I figure it's good to try to give something back when I can. It also very much helps me with my own educational endeavours, to talk about things publicly. Talking in public very much has a sobering effect and really helps with the thought process! :-)

shibumi said...

Silver will probably do better... Just as a matter of ratio's, the last time gold spiked did silver, and silver closed the ratio.

FREEGOLD is never going to happen in the sense FOA/ANOTHER/WHOEVER predict - thought expirements aside.

Believing in gold and silver and the price moving up and holding physical is the way to go given the CB shenanigans.

DP said...

Welcome, shibumi -- and I wish you very good luck with your silver and non-Freegold

DP said...

Welcome, shibumi -- and I wish you very good luck with your silver and non-Freegold

Tom said...

haha, I really am confused. Wrong blog. This is YOUR blog DP. I was reading another one at the same time, thought this post was on that one.

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