ECONOMY by Brett Arends (Author Archive)
Why the Silver Market Has Gone Nuts
The madness overwhelming the silver market has to be seen to be believed. Prices have skyrocketed in the past few days. The U.S. Mint has sold out of Silver Eagles, and is quoting several weeks' delivery.
Everyone is getting in on this. While I was in a local coin and precious metal dealership this week, two well-dressed men came in, eager to snap up some silver bullion bars.
It's getting ridiculous. Here are six good reasons this is a mania.
1. The price spike
Look at the chart. Does that look like a spike to you? It looks like a spike to me. Can you find anyone who doesn't think it looks like a spike?
At $44, silver is now at the highest levels since the tycoon Hunt brothers tried to corner the market, illegally, back in 1981. That's when it skyrocketed – very briefly. Then it collapsed.
Nothing is certain, but spikes are there to be sold. When a price moves that high, that fast, it creates high-danger situation. The few occasions in your life when a spike goes even higher will be more than offset by all those spikes which collapse.
If you buy into this at these levels, be aware of the risks you're taking. You can't buy low and sell high if you buy high.
Silver, price per ounce, 1984-2011
Source: Factset
Source: Factset
2. Madness in silver funds
Take a look at the Sprott Physical Silver Trust ( PSLV: 22.11, +0.44, +2.03% ) , a silver fund run out of Canada. It's very popular with the silver bugs, because it lets you claim your actual bullion and carry it off. That's great if you think all paper assets, including stocks and exchange-traded funds, are a giant hoax.
Sprott's stock is booming. It has doubled since January and jumped again Friday to $22.11, a new high.
Sprott's assets consist of silver bullion. Value: $18.11 per share. In other words, anyone buying the stock is paying 22% above net asset value. So even while silver has zoomed to $44 an ounce, someone buying shares in Sprott is effectively paying $54 an ounce.
On the other hand, look at the boring old Central Fund of Canada ( CEF: 24.80, +0.27, +1.10% ) . It's the grand-daddy of bullion funds. It's been around for 50 years.
The Central Fund holds silver and gold (and a little cash) worth $24.32 per share. Just over half of that is in silver. The Central Fund's stock is selling for $24.80.
That's a more modest 2% premium to net assets. But the silver bugs don't want it, because it isn't just silver, and because you can't redeem your shares for bullion.
Who pays a 22% premium when they could pay 2%?
3. Silver vs. gold
This chart compares silver to gold over the past 25 years. And silver, right now, is out of control.
On average, since 1984 an ounce of silver has been worth about 1.56% of an ounce of gold – or, to put it another way, an ounce of gold has been the monetary equal of 64 ounces of silver.
But in today's mania, an ounce of silver is being valued at around 3% of an ounce of gold, or twice the average. The ratio is 33-to-one.
Silver bugs will tell you than once upon a time the ratio was even more favorable to silver than that. In the 1800s silver was valued at 16 ounces per ounce of gold. Will those days return? Silver bugs clearly believe they will. But to bet on that happening is to bet that the market has had the relationship between these two completely wrong for most of the modern era. That's quite a bet.
I am not taking a view here about precious metals generally. The hard money school argues that as paper currencies get debased, scarce and valuable assets simply gain value. I've argued before that there is a reasonable, serious case for gold, even if some of the more popular arguments are total claptrap.
But if silver is a good thing, then gold is also a good thing. What on earth is a case for silver that excludes gold? It doesn't make sense. By modern standards, at least, it now looks very expensive compared to gold. Heaven knows what madness will happen this week, but from a strategic point of view -- that is, over the medium term – this is typically a sell. If you want a precious metal, it would seem to be an obvious conclusion to sell silver, buy gold.
Ounces of silver per ounce of gold, 1984-2011
Source: Factset
Source: Factset
Read more: 6 Signs the Silver Market Has Gone Nuts - SmartMoney.com http://www.smartmoney.com/investing/economy/6-signs-the-silver-market-has-gone-nuts-1303502720960/#ixzz1KWAKlOuC
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