A few sayings keep coming up in the minds of investors.
These sayings bolster and justify outlooks and strategies. They can also serve as reminders that temper our flaws.
“Don’t catch a falling knife,” and “Markets can remain irrational a lot longer than you and I can remain solvent” are two good examples…
I know both are obvious, but sometimes I’m really conflicted. Because while I know large investment firms can outmaneuver me every time in the market, I also don’t want to miss an attractive entry price for a sound investment.
I also know I have to live with what the market decides is a fair price for something. And I tend to think I’m right (go figure), that the market will become rational and I’ll be vindicated.
So with these two sayings always floating around in the back of my mind, I always have an internal debate before pulling the trigger.
However, I’ve been completely ignoring them when it comes to silver — even since it breached $25 per ounce back in April.
It seems like right when both of these old sayings are being proven, I’ve completely stopped caring for them. And of course I think I’m right to ignore them and wait for the market to wise up.
I Like Useful Things
Maybe I’m a bit old school in this regard, but I prefer to put my money behind things that are useful. That is, I want to own something that has a practical application.
This is why I never jumped on the Apple, Zynga, Groupon, or Facebook bandwagons. What’s more, their products and services simply don’t do anything that cannot be easily replaced.
Sure, keeping in touch with people you don’t particularly care about might be more difficult. And maybe you’d have to break out a digital camera on vacation, or go offline while commuting between your home and work computers. You might even be subject to clipping coupons from the Sunday paper to use at the grocery store.
My point is you can easily do these things without ever going near an over-hyped tech company.
I don’t want to put my money behind convenience. I want someone to desperately need what I have for sale. And I want them to have no substitutes or Plan Bs…
That is what I see with silver.
It is relatively cheap, but irreplaceable due to its electrical and thermal conductivity. And with a high-end polish, silver is virtually 100% reflective.
Now, copper is also highly conductive, but has been consistently far cheaper than silver. There isn’t going to be any substitution from silver to copper (if that were possible, copper would have been used from the start). And no other readily available metal even comes close to the conductivity of silver and copper. Gold is a good choice to avoid corrosion, but is obscenely expensive by weight.
Due to its irreplacable properties, silver use is dominated by electronics and electrical applications. Demand is poised to soar over the next several years for new uses as well:
According to the Silver Institute, industrial demand will comfortably exceed 650 million ounces by 2015, with a 6% jump in demand in 2014. That would make industrial usage account for over 65% of silver demand within two years.
Gold certainly can’t boast the same…
The main use of gold is for jewelry, followed by investment-grade bars and coins. Industrial applications only account for about 10% of gold use.
The Squeeze
With the large drops in gold and silver prices, we’re looking at one of the toughest times imaginable for gold and silver miners.
While precious metal prices were on the upswing, more and more companies were investing and borrowing for development that was only feasible at high prices. With gold down close to 30% and silver down around 35% for the year, a lot of those new projects need to be shuttered or slowed to a crawl.
A number of mining companies are going to be shuttered along with them. The ones that survive will be cutting production targets and reducing overall silver supply.
Prices will recover and these projects will be renewed; however, development and production increases will take years…
A prolonged dip in silver prices during a period of economic and silver demand growth will create a multi-year window where prices are forced higher while supply ramps up.
Major financial firms see this trend as well: a short-term shakedown will continue, followed by recovery.
UBS just cut its outlook on silver prices for this year and next while warning that the metal is liable to be dragged down with gold as the Fed tapers down QE. Its one-month forecast puts silver at $17.50 per ounce; its three-month forecast then jumps to $20.50 per ounce.
The megabank expects the cost of silver to average $24 per ounce in 2013. That works out to about a 10% drop in the short term, 5% gain over three months, and a 23% run up to the average yearly price.
If you jumped in at $17.50 per ounce, the three-month gain would be 17%, and the average silver price this year would be 37% higher than the low that is about to happen.
Credit Suisse, Deutsche Bank, and Morgan Stanley have all cut their forecasts…
All of them predict a strong recovery.
I’m confident the market will become rational within this year — and I’ll be even with my entry point around $25/ounce.
Everything I’m picking up right now is just going to boost overall real returns when that happens.
It may sound risky, but I’m definitely willing to bleed a bit now by catching this falling knife while I wait for the broader market to realize the mistake it is making by selling its silver.
And I know I’m not alone…
While silver has shed over a third of its value this year, silver ETFs have only seen a 1% drop in holdings.
