Things New Investors In Silver and Gold Should Know! 0 comments
Mar 22, 2011 10:19 PM | about stocks: SLV, GLD, IAU, SIVR, SIL, GDX, GDXJ

We at thesilvershortage.com feel so strongly about silver that we invested 100% of our investable retirement assets in the ETFs Physical Silver shares trust (SIVR) when it was $29.10 in December 2010. We went up on our portfolio 5% in just a few days to end the year 2010 and were ecstatic. Then in January we went from up 5% to like down 8% YTD. Our relative performance was looking weak versus stocks. However we at thesilvershortage.com had done our research and our investment convictions we’re so strong that we didn’t panic. We then sold some of our physical ETF at a 5% loss but then bought silver mining stocks 15-20% off their recent highs. Since then as silver prices have continued to shock the long time investors in it and it just won’t pullback. Even when the S+P 500 pulled back a good 8% it only fell about 5% and now has regained almost all of that loss. Bottom line is now we at thesilvershortage.com are up 37% YTD in our silver model portfolio. We have executed a total of fifty-three trades with forty–five have been winners and 8 being losers. That is an incredible win/loss ratio of 84.91% and 15.09%. We admit that is the best streak of our investment career which spans over twenty years. Obviously we’re not going to be able to replicate those returns in the next few months but by the end of the year we predict will continue to have a powerful bull market in silver. We admit that the old saying rings true: Everybody’s a Genius in a Bull Market!

New precious metals investors should know that even while gold has risen about 25% and silver about 100% in just the last twelve months, skepticism about them as an investable asset class still abounds. Yes there are millions of new gold and silver investors in the respective exchange traded funds and yes the media has begun to cover silver much more than in recent years, the amount of investable assets in precious metals is about 2% of the worlds institutional investors and the entire mining industry is only about 1.8% of world stock market capitalizations. It is nice to know this because we might see a short-term peak in silver soon with a pullback. That would be healthy and just gives it more future potential. The thing we at thesilvershortage.com fear right now the most is that it might become too hot of a sector like it became and ended about one week ago. We don’t want a rush into silver by the public and a higher parabolic move higher now. That would destabilize the nice uptrend and threaten the strength of silvers investment fundamentals longer-term. Remember at thesilvershortage.com we believe the key to rising silver prices is new marginal investment demand. That will continue to rise as silver performs well but a large fall in the price could harm its long-term uptrend we’re in now.

We want the public and institutional investors to flood in and buy so much a big parabolic move comes a couple of years from now when silver is like $60. Then it might soar to $100 or $120 in a final blow off crescendo of buying. So far things are setting up right with media and general investor skepticism. The small investor who has been and continues to accumulate silver under $40 will be rewarded long-term. That’s right at $40 we might change our tune and not acquire more silver. That is because if our forecasts and estimates are wrong the price might top out around $50. If you don’t buy any higher than $40, that would still be a nice 25% return. Even that beats any opportunities in stocks, bonds or real estate right now. The great thing about that is you’re also protected against currency debasement and higher inflation and at the same time outperforming almost any other investments that is a no brainer in our book.

The 3.7% correction in silver last week came and went pretty soon with silver strong again here on mid-day Monday, up 2.52% and then up again on Tuesday. This Thursday is the beginning of the expiration of silver futures so we wouldn’t be shocked to see silver strong again and come close to reaching its recent high of approximately $36.66. Remember this was supposed to be the month when multiple players were going to demand physical delivery and try to squeeze the shorts again. We are dubious of this simply because there was a squeeze at last month’s expiration and prices have been nothing but strong ever since so we think the market has anticipated and discounted this event. Also the conspiracy theories in the silver sector are overhyped and some of them border on the ridiculous.

We recently read an article that was in a major financial newspaper that covered asset classes that would protect you in retirement from inflation. Believe it or not gold and silver were not even mentioned as an asset class. Every time you hear about gold it is dismissed as a bubble and a fundamental bias against precious metals. However after multi-years of outperformance of precious metals vs. stocks and bonds you have to ask yourself the question: why is the media, especially the financial media and the financial services industry so reluctant to advise a significant percentage of holdings in gold or silver? The answer is fairly simple. They are ignorant about the subject and secondly they have no financial interest in advocating them. The media is from the age when financial assets were in a bull market and precious metals floundered and were for fringe conspiracy types. It also takes some effort to sort thru a lot of myths, hyperbole and incorrect facts in the precious metals world to research it. In fact until I was desperate for an alternative to stocks, I didn’t have much of an interest, had a built in bias against it and researching it was about 500% more work than I originally imagined. Secondly if you’re buying gold or silver long-term, those are investable assets a broker can’t trade and generate commissions or management fees from.

We understand why financial media and investors have been slow to come around to precious metals. It is very simple if you’re 45 years old or younger, you have been trained since you can remember that paper financial assets are real investments and precious metals aren’t. If you’re in that age group like we are, we we’re about 10 years old in 1979-1980 when gold and silver went parabolic and there was a public mania. After that gold and silver prices did nothing but fall for twenty years and the only investors in it we’re gold bugs who gold and silver seemed to be their investment ideology instead of a valid strategy. We here at thesilvershortage.com suffered from this same malady until last fall when the evidence was finally so overwhelming, we finally stepped out of our comfort zone in stocks and became heavily involved with silver. However you know what in 2000, stocks soured and commodities began their up cycle again by 2002. By 2005 Gold and Silver entered strong bull markets and in 2010 silver finally exploded. Since these cycles run 15-20 years before stocks and real estate are cheap again and precious metals are overvalued, there are years left in the precious metals bull market. That also means there are years left for stocks to underperform and disappoint investors

The various arguments against precious metals make little sense to us. The biggest argument against precious metals about storage, cost and convenience were eliminated with the advent of the Gold and Silver Exchange traded funds. In fact this is what changed the precious metals market fundamentally. Now for the first time I can take a position in gold or silver by purchasing in a regular brokerage account with very small flat rate commissions. This is similar to when stocks became more accepted by millions of new investors in the 20’s, when mutual funds flourished in the 60’s and the baby boomers became stock investors in the 1990’s. The main influence on an asset classes prices are number of investors increasing or decreasing and the net amount of dollars entering or leaving the asset class. That is the true bottom line and can only be temporarily out of whack. For instance after the crash of 2008, money in stocks continued to flow out even as prices recovered until just the last few months. However once again the long-term trend with stocks is negative from a demographic point of view. Because the baby boomers are beginning to retire and need income, are still shell shocked by two bear markets and a crash in just ten years in stocks and a crash in real estate prices, they are reluctant to go back to stocks and are net sellers.

Number one is that gold or silver doesn’t produce any earnings or dividends like stocks do. So to own it you only have one purpose, to sell it higher to the next greater fool. As if that wasn’t the reality of what you do when you own a stock or a bond. First of all there are thousands of stocks that don’t pay any dividends and have earnings that are never shared with stockholders with dividends or effective stock buybacks. It is true that when you own stock you have a theoretical claim on future earnings of a company but you’re also the first to lose your investment if business deteriorates significantly.

Precious metals can decline in value substantially, however they never go to zero like hundreds of thousands of stocks and bonds have over the last 500 hundred years. They also usually retain their purchasing power over the very long-term which is what most investments do but precious metals do it better. Precious metals have one feature that no other asset class on earth contains protection from wreck less excessive printing of a nation’s currency and deficit spending. There is no other and never will be another asset class that can do that. Some fools think that TIPs or treasury inflation protection securities will protect purchasing power but to believe that you have to believe the Consumer Price Index accurately reflects real inflation and the government’s solvency and credit will never be in question. I wouldn’t want to bet on those fallacies.

If you’re new to precious metals I suggest you do some research and find a place for them in your portfolio. We at thesilvershortage.com prefer silver over gold because we think it is so much more undervalued relative to gold and has that much more percentage upside. We like silver mining stocks more than gold mining stocks which have struggled this year while the average silver miner is up about 50%. We think you should dismiss the conventional wisdom that 5-10% of your portfolio should be in precious metals. We think 25-50% is more accurate for an average investor and ourselves have been at times 100% and it has paid off big time. We would caution however that right now is not a time where you want to go in big like we have been advising for months. Our first quarter wound up being better than we could have hoped for and while silver and silver miners offer money to be made over the longer-term, the next one to two months may be difficult and being more patient for good entry points will be required.

————

Mark Thomas is the Chief Investment Strategist and author of Silver-Short-Squeeze.com newsletter. Prior to founding the report he has worked in the securities field since 1996 to 2003. He has been a successful individual investor, trader, newsletter author and has been actively involved in the Financial and Securities markets since 1990. He graduated with a Bachelor of Science degree in Finance with emphasis in investments from California State University Long Beach. He currently is studying for a BS in Accounting.

Disclosure: I am long SIVR, AG.