9 December 2010
Over the past month, from a business standpoint, one individual stands head and shoulders above the rest as deserving of my gratitude - Federal Reserve chairman Ben Bernanke. When "Helicopter Ben" announced the Fed's plan for a second round of Quantitative Easing (QE2), he triggered a spike in precious metals' prices and a subsequent explosion in telephone calls and emails to us at Asset Strategies.
The reaction by investors to his plan was so sudden and resolute that we need to give serious thought to awarding him a plaque as our Salesman of the Month. And after what happened in November, he is definitely in contention for Salesman of the Year honors as well.
All precious metals have been soaring. But none prospered as handsomely as silver, the poor man's gold. Since Mr. Bernanke's announcement, silver has appreciated nearly 18% ... in less than a month!
Basically, investors saw the Fed's action for what it is -- a desperate measure in a crisis situation, using the only monetary tool left in Mr. Bernanke's arsenal. Simply put, he has guaranteed the further debasement of our currency. He has set in motion a plan that can have no other outcome than the accelerated loss of purchasing power.
The defensive action investors should take is simple: shift to things of real value. At the top of that list should be what the world has always recognized as real money - gold and silver.
I'm sure you already understand that. That's simply the backdrop for what I really want to talk about today. Namely, silver's 18% appreciation in 30 days. After all, gold only spiked 3% during the same period of time.
In our July 6th alert, which was entitled, Silver - Lagging Gold, But Ready to Soar, I talked about the relationship between gold and silver. Click here to revisit that message. In it we spoke of the gains both gold and silver have made in the nine and a half year bull market we have been enjoying. During that period, gold posted gains of 374%, while silver lagged a bit at a mere 317%.
Our recommendation at the time? Buy silver.
In just five short months, with a little help from our Salesman of the Year nominee, gold's 10-year appreciation now stands at 428%. That's certainly good news to everyone who owns some of the Midas metal.
But in the same period, silver has gained 548%. If gold has soared, silver has exploded.
Remember, gold is the undisputed leader of precious metals. Gold moves (up or down) first. Only when the trend is established do the rest of the precious metals follow their leader. However, once that trend is established, silver often outpaces gold upward (and downward, too, keep in mind).
The value of the total gold supply for 2010 (as estimated by Gold Fields Mineral Services, basis data received through the first week of November) is $170 billion. Compare that to the value the same group places on all above-ground silver: just $19 billion, or roughly 11.1% as much. This will help you appreciate the relatively tiny nature of the silver market.
The gold market is nine times the size of the silver market. If you throw a rock into a puddle, you'll make a bigger splash than if you threw one into a pond. Just so in the silver market. Each dollar invested there has a larger impact on price appreciation than a similar amount spent on gold.
But that's not all. As gold moves higher, some "sticker shock" is inevitable. Now more than ever, people know they should own precious metals. Yet at $1,400 an ounce, gold seems expensive. Is it too expensive? I'd like to suggest that, even at these levels, not owning gold will turn out to be far more costly to your purchasing power than buying some now.
Price is an important reason why silver, the poor man's gold, is somewhat more palatable to investors at these lofty levels. As a result, we see purchases of precious metals start to skew in favor of silver versus gold. Each dollar spent purchases many more ounces of metal.
Let me take off my cheerleader outfit for a moment. There is a flip side to this phenomenon. When we see corrections, silver tends to overshoot to the downside, just as it tends to overshoot to the upside.
When gold starts to correct (and at some point, a correction is inevitable), and it begins a short-term downtrend, silver will follow. And its downward correction will typically be more pronounced than gold's.
If you're going to own silver, it's important that you stay focused on the fundamentals. Price movements can be as unnerving on the descent as they are euphoric on the ascent.
When you see a dip in prices, consider loading up on silver. This is precisely the situation in which we found ourselves last July. It is what compelled us to write that particular alert.
Let's face it. We are in an economic mess that will take a long time to clean up. For the foreseeable future, gold and silver are the best antidotes available to the venom known as QE2. They are our solution to the results of Mr. Bernanke's plans to "fix" our economy.
We remain buyers of both gold and silver on dips large or small. When the dip occurs, consider putting more of those steadily worth-less dollars into silver than you do into gold. When silver explodes, it is a beautiful thing.