Article from June 2004 where I recommended silver (then $7.50, now $17.50)

[JurisDoctorOfDoom]

Found this on archive.org, I remember writing it at the time and thinking "wow, I wish I had some money to put in". Silver was bumping in the $7.50 range, now it's in the $16-$20 range. Just imagine if somebody had taken say 10-25% of their 401k out and put it in at the time? Oh well .  . .

The graphs and links are no longer available, even on archive.org, but the text gives you the gist of my logic at the time:

Let me start this article by telling you I am not a financial expert.  I have no investments of any kind other than a very small amount of silver.

Hopefully, the publication of my book will improve my financial situation considerably. Assuming that it does, I will likely be investing more money into precious metals, particularly silver.

I've organized my thoughts regarding silver into the following question and answer format.

(Note: What you are about to read is nothing more than the musings of a layman who has been researching financial "life-boats." Nothing in this article is to be taken as financial or legal advice of any kind. Please consult with a financial professional before making any decisions.)

1. Why have you invested in silver?

A. Reason One: Silver Skyrocketed During the Oil Shocks of the 1970's

If you've read through this site, I don't need to convince you the price of oil will be skyrocketing in the next few years. In some ways, knowing a permanent oil shortage is on the way takes a certain degree of mystery out of investing. If we want to know what investments have a good chance of doing well during the coming oil shocks, we can simply look at what investments did well during the past oil shocks. As the following charts indicate, anybody who was heavily invested in silver at the start of the 1970's did very well during the oil shocks:

As the charts indicate, the price of silver remained below $2.00 an ounce until the oil crisis of 1973, at which time it jumped to almost $5.00 an ounce. The price remained in the  $4.00-$5.00 an ounce range from 1974-1978. When the oil crisis of 1979 hit, the price jumped from about $5.00 an ounce to over $20.00 an ounce.

As the price of oil came down during the 1980's, the price of silver returned to a more pedestrian neighborhood.

The reason for silver's performance during the oil shocks of the 1970's is relatively straightforward: as oil prices rise, inflation begins to rear its head. As inflation rears its head, fiat currencies begin to lose value. As fiat currencies lose value, precious metals such as silver tend to gain value.

There is one significant difference between the silver market of the 1970's and the silver market of the future: the silver market of the future will be even more bullish, because as explained below, the supply of silver has been greatly diminished in the last few decades.

B. Reason Two: Silver is a Crucial Resource for Which Demand is Already Outstripping Supply

1. Silver's Importance to Industrial Processes

While silver is certainly not as fundamental to industrial civilization as oil is, its importance should not be underestimated. It is used for a lot more than just photography and jewelry. In fact, industrial applications consume almost as much silver per year as photography and jewelry applications combined.

For instance, one of the great discoveries of chemistry was that the efficiency of chemical reactions can be significantly increased in the presence of other elements or compounds that do not enter into the reaction. A hundred years ago it was discovered that silver was one of those elements. Ever since, silver has been essential to the production of chemicals for the US $300 billion plastics industry.
As of the year 2000, some 700 tons of silver are in continuous use in the world's chemical industry for the production of compounds essential to the plastics industry.

Silver is also crucial for many hi-tech and heavy-duty applications.  It is the best electrical conductor of all metals and is hence used in many electrical applications, particularly in conductors, switches, contacts and fuses.  Every time a home owner turns on a microwave oven, dishwasher, clothes washer, or television set, the action activates a switch with silver contacts that completes the required electrical circuit. Nearly half of the 20 million troy ounces of silver consumed in the USA yearly for contacts and conductors is used for motor controls.

The majority of the keyboards of desk-top and lap-top computers use silver membrane switches. These are found behind the buttons of control panels for cable television, telephones, microwave ovens, learning toys like touch and tell or speak and spell, and the keyboards of typewriters and computers

If you want to read more about the myriad ways in which industrial civilization uses silver, click here.

The bottom line is this: silver's indispensability to such a wide variety of industrial processes ensures that demand for it will stay strong.

2. Demand for Silver Already Outstripping Supply

The demand for silver has been outstripping the production of silver for many decades now. In order to satisfy demand, central banks have had to sell off their silver reserves. The banks will not be able to keep this up for much longer as silver inventories are now running extremely low. As of 2003, they had dropped to 50% of their 1994 levels.(3) As Ted Butler (the Hubbert of Silver) explains:

"Half a century ago, at the end of World War II, total known stocks of silver amounted to ten billion ounces (with the US government holding 4 billion ounces of that total amount). At that time, we were just entering an era of unprecedented global economic expansion that has lasted to the present. In this era, silver was consumed in a variety of vital modern applications at a phenomenal rate."

"Today, known stocks of silver have shrunk over 95%, to maybe a half a billion ounces. The nine and a half billion ounce draw down in total silver inventory, was the result of the persistent shortfall between supply and demand, which continues to this day."

C. Reason Three: Demand for Silver Will Continue to Grow as it is Necessary for Large-Scale Renewable Energy Programs

As the oil shocks start to hit hard, you will see increasingly frenzied attempts to upscale the use of alternative energies such as solar and wind power. This is good news for the silver investor for two reasons:

1. Silver Paste is Necessary to Construct Solar Panels

According to the Photovoltaic Technology Division of the U.S. Department of Energy, silver paste is used to construct 90 percent of all crystalline silicon photovoltaic cells, which are the most common solar cell.

2. Silver Coating is Necessary to Improve Storage and Transmission of Solar/Wind Energy

Alternatives such as solar and wind suffer from the problem of  intermittency: A good deal of the energy solar or wind energy that is collected gets lost in the storage and transmission process. This raises costs dramatically.

For example, a wind farm's average production, or "capacity" may be just 45 percent in high-wind regions but generally close to 33 percent. Thus, if a utility wants to add 100 megawatts of wind capacity, it actually needs to install closer to 250 megawatts in new turbines.

Solar power has an ever lower capacity - about 20 percent. This means that if a utility wants to add 100 megawatts of wind capacity, it actually needs to install closer to 500 megawatts in new solar cells!

If solar and wind power are going to ameliorate the coming crisis to even a minor degree, the problem of intermittency is going to have to be addressed.

Right now, the most promising solution for this problem is the use of high temperature superconducting (HTS) wires. As Stephen Leeb explains on page 154 of The Oil Factor: How to Protect Yourself and Profit From the Coming Energy Crisis:

"These are wires that eliminate friction, which means that none of the electricity that travels along them is wasted as heat. Because electricity actually can be stored in HTS wire for later use, it may prove valuable in enhancing the use of alternative energies where intermittency can be a problem."

"Silver comes into play because for HTS wire to be supple enough to function properly, it must be coated with silver, quite a lot of it.  One expert in this field, Paul Bateman of the Silver Institute, has estimated that HTS wire has the potential to consume more than 50 million ounces of silver a year, equal to about 20 percent of current industrial demand."

D. Reason Four: The Price of Silver is Artificially Low Right Now.

Many reputable silver experts (see below) believe that a handful of elite investment institutions are attempting to scare people away from monetary lifeboats such as silver.

According to Ted Butler:

"As I was preparing this article (April 13), the gold and silver markets moved dramatically to the downside. No one should be terribly surprised. The important point is that the dealers succeeded in tricking the brain-dead tech funds again."

"Further, today's dramatic decline proves, without a doubt, that the commercial dealers are operating as a wolf pack. I know that the commercial dealers engineering this sell off do not have real silver, and they are desperate to cover their massive short positions. Once they cover as many shorts as they can, we go up, probably straight up, as the only reason we have dropped so dramatically is to allow them to cover. This is clearly illegal behavior, sanctioned by a questionable organization, the NYMEX, and a malfunctioning government agency, the CFTC."

These elite institutions know full well that fiat currency is going to collapse as the USS America is torn apart by the debt bubble iceberg and the oil depletion iceberg.

When the dollar does collapse, real money such as gold and silver will skyrocket in value. The elite are simply trying to scare people away from these lifeboats, drive the price down, and then invest in them as quickly as possible to reap the benefits as our fiat-based economy dissolves. From their perspective, this is the prudent thing to do.

The good news for you and me is these artificial manipulations have driven the price of silver down enough that even an average person can afford to buy a good deal.

The severe structural gap between the demand for silver and the supply of silver ensures that its price can not be kept down indefinitely. Eventually, no amount of manipulation will be able to keep the price this low.

When that time comes, those who have invested in silver may find they have come into a small windfall.

Note: If you're looking to make a quick profit from buying and selling silver, I don't know what to tell you about these short-term manipulations. My interest in silver is more for crisis protection. The amount of debt the US owes guarantees we have an economic collapse on the way, even without accounting for the disastrous effects of Peak Oil. The only question is, "How soon?" When the crisis does occur, the value of precious metals like silver will likely skyrocket.

[JurisDoctorOfDoom]

Part II:

2. Won't the advent of digital photography lower the demand for silver?

Perhaps a bit, but keep in mind that as explained above, photography accounts for only about 1/3 of industrial demand. Demand for X-Rays and other photographic film will still exist.  Furthermore, any decline in film use of silver reduces the overall supply as a good deal of the silver we use comes from recycled film.

3. A Note to Techno-Optimists:

This article is about investing - not about the inability of renewable energy to replace oil. Nonetheless, I think it is worth pointing out that the reason silver is a good investment is the same reason solar and wind power cannot replace oil.

Silver is a wise investment, because it is in short supply at a time when the demand for it is about to boom.

However, solar and wind cannot replace oil because (among other reasons) they require large quantities of silver, which is in short supply.

Okay, back to investing:

4. I heard the Federal Reserve is drastically increasing the money supply. Is there any truth to this and how will it effect silver?

It appears that is exactly what the Fed is doing.  According to Robert McHugh Ph.D., President and CEO of Main Line Investors:

"Let me just say from the outset that the Federal Reserve has confirmed our Stock Market Crash forecast by raising the Money Supply (M-3) by crisis proportions, up another 46.8 billion this past week. What awful calamity do they see? Something is up. This is unprecedented, unheard-of pre-catastrophe M-3 expansion. M-3 is up an amount that we've never seen before without a crisis - $155 billion over the past 4 weeks, a $2.0 trillion annualized pace, a 22.2 percent annualized rate of growth!!! There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system."

"The amount of growth is too much, too soon, indicative of an unseen (to all but the master planners) imbalance about to blow. The Fed knows something, and their massive infusion of liquidity is a signal that a crash event is not only imminent, but likely unavoidable. The extraordinary M-3 growth we are seeing is the level of liquidity infused to halt crashes, and to fuel post-crash recoveries."

"There has never been a six-week infusion of M-3 of this size preemptively (before a crash has occurred) in the history of the United States."

"There was only one other time we saw this level of M-3 growth over a six week period in the history of the United States, and that was AFTER 9/11/01."

What exactly is the Fed expecting? Nobody can know for sure, but recent large-scale naval deployments would indicate some type of an international crisis is brewing.

According to the Department of Defense, seven aircraft carrier strike groups are scheduled to be simultaneously deployed this summer in a training mission dubbed, "Summer Pulse O4." The British are also putting an unusual number of ships to sea during June.

As George Ure of Urban Survival points out, "Remember that this might all be normal, but in times of tight budgets and high fuel prices, it seems a bit odd that so many countries are putting to sea for the next month."

Regardless of what crisis the Fed is expecting, the fact it is pumping up the money supply to such an unprecedented degree means silver may soon experience a resurgence.

Even in the absence of an immeadite, massive crisis, the Fed is still going to have to increase the money supply to deal with the debt situation in this country. (See Next Question)

5. What does the debt situation in the US mean for silver?

The amount of debt owed by America is at absolutely astonishing levels. It seems everybody in the US is in debt: the federal government, state governments, local governments, big corporations, small business owners, students, senior citizens, etc. . .

The current debt on America’s balance sheet is over $34 trillion. There is another $44 trillion that is unfunded primarily Social Security, and Medicare which is growing at $1.6 trillion a year. Consumer debt is at 2 trillion!

There is no way these debts will be repaid without an inflationary monetary policy, especially with Greenspan at the helm. At some point, probably sooner than later, the Fed will increase the money supply. When it does, precious metal investors will benefit.

6. What do some reputable experts have to say about Silver?

A.  Jim Puplava of Puplava Securities/FinancialSense.com

Puplava has been writing about investing in the context of the impending oil crisis for several years now.  In this regard, he has been several steps ahead of most of the investing community.

In a recent editorial entitled "Man the Lifeboats," Jim addressed the recent silver sell off:

"The lifeboats are gold and silver. The number of boats available are few and certainly there are not enough to go around for all of the passengers. The captain and the ship’s crew must keep the passengers in steerage mollified until they are safely aboard. So they tell everyone that things are okay. The last thing they want is for the vast majority of passengers to head for the lifeboats. This is what is going on in the gold and silver markets today. The sell off and panic in the markets are the financial elites' attempt to get those in steerage off the boats, so that the elites may safely get on board. A major currency storm is headed for the financial markets and the only safe haven will be real money."

"Imagine a similar situation that developed in Argentina over the last few years. Those investors, who owned gold, silver, or had their money in stronger currencies, survived the storm. Those who had their money in cash with the banks or in government bonds or stocks lost almost everything."

Other articles Jim has written about silver include:

Silver: An Undervalued Asset Looking for a Catalyst

Short Story on Silver Part I

Short Story on Silver Part II

To the Moon, Alice

B. Stephen Leeb, the author of The Oil Factor: How to Protect Yourself and Profit from the Coming Energy Crisis:

Like Puplava, Leeb has a track record for making accurate market predictions. For example, in 1998, Leeb wrote Defying the Market: Profiting in the Turbulent Post-Technology Market Boom. At the time the tech boom was gathering steam. The key trend he identified was that - contrary to what almost everyone else thought - technological progress was slowing down. As a resulted, he warned the tech boom wasn't sustainable. By mid-1999, Leeb's predictions had come true: the tech boom went bust.

Leeb's most recent book, The Oil Factor, focuses on investing in preparation for the coming oil shocks. Like Puplava, he is bullish on silver for many of the reasons I explained above. Leeb also recommends investing in gold, predicting it could reach as high as $2,000 an ounce in the years to come.

If you'd like to read  a review of Leeb's book, check Joseph Dancy's Review for FinancialSense.com

C. Ted Butler

Butler has written extensively on the benefits of owning silver. He has been called the "Hubbert of Silver." As you imagine, he is extremely bullish when it comes to the metal.

You can read his writings at ButlerResearch.com

D. Warren Buffet

In 1997, uber-investor Warren Buffet accumulated a major portion of the world's silver inventories.  When somebody like Buffet makes a move like that, you know something big is going to happen eventually.

7. What happens if the collapse never comes? Will I be wasting my money investing in silver?

The fact is, all fiat currencies collapse at some point as they require constant growth. Constant growth, however, is not in God/Nature/Whoever's plan. There is nothing on planet earth that constantly grows except cancer!

In the case of cancer, once enough growth is achieved, the system dies. The same is true for any economy based on fiat currency. Once enough currency inflation is acheived, the economy collapses.

So even if the collapse doesn't happen in the short-term, you can hold on to your silver, knowing you have some type of a life-boat for when the collapse does occur.

8. I don't have much money right now. I'm not really an "investor." How would I go about purchasing some silver?

I understand how you feel. As I said to a friend recently, "Right now, I can't afford a seat in a lifeboat, or even a life preserver. But I can probably get myself a piece of driftwood to hang onto."

Luckily, silver is about as cheap as driftwood right now. You don't need to be a big-time investor to get yourself a decent stash. You can can easily purchase relatively small amounts from places like Kitco.com, which Stephen Leeb recommends in his book.

Even owning as little as $250 is better than nothing. If a monetary crisis occurs, the $250 in silver you purchased may jump to $1,000 or $2,000. This could be what tides you and your family over while things settle down.

There are numerous ways to invest in silver, but the safest bet, according to Ted Butler, is to hold your silver offshore to prevent emergency confiscation of physical stocks:

"Now that I think of it, holding physical silver offshore would be the most prudent step a prudent investor could take to further prevent emergency confiscation of physical stocks. Have you ever wondered why Warren Buffett went to the trouble of buying physicals held in London? In the long run, your only defense against the shrinking watering hole, the permanent shortage, is real silver in a real safe place."

If you're not able to invest off shore like Warren Buffet, you may just want to take physical possession of your silver. In many ways, I am in agreement with analyst John Kamin, who recently wrote:

"As President Bush points out, we are at war. No one knows where terrorists would strike next. Which would you rather have, a paper receipt for some gold or silver or coins that are highly leveraged upon which you have borrowed most of the equity? Subject to calls for more collateral or margin calls? Or physical coins?"

"In the event of crisis, I think only physical possession will do. Only physical possession of gold coins, hard money, will protect you against dealers going bankrupt in a sudden crisis."

A couple well placed bombs at a Saudi oil facility will be all it takes to send the market into crisis mode. If that happens, you will breath a sigh of relief that you have some "real money," at hand.

Of course, if you take physical possession of your silver, you are going to need to store it securely, and possibly defend it. 

____________________________________________________

Legal Disclaimer

Let me reiterate what I said at the beginning of this article: I am not a financial advisor and nothing in this article is to be taken as financial advice in any way, shape, or form. I have no expertise in these matters whatsoever. Please consult with your financial or legal professional before doing anything.

[Megadoom]

Long term....both precious metals are winners IMO. I'm buying gold and silver whenever I can. The trick though, is detecting the black swan event that will destroy the economy over-night and quickly cashing it in for assets: food, equipment, etc rather than worthless dollars. But hey, maybe we'll get lucky and avoid such an event (nuclear attack, solar storm, mega-disaster, etc) - everybody should know where I stand: IT WILL HAPPEN.

Besides, gold and silver look awesome, "yes my precious, it musen taketh my precious." 

[cygnus]

Great post, Matt!  I wish I'd bought more when the prices were in that range, too!

Only thing I disagree with is the part about holding your silver off-shore.  In case of serious political, financial or transportation disruptions, I sure wouldn't want to be caught by holding my food and tools "off-shore."   I don't want to hold my PMs offshore, either, for the same reasons. 

[Patchze]

So is silver where it is now still a good buy, that is, for long-term asset protection?  And if the stock market tanks soon, will the silver price tank with it? 

[ralfy]

I'm suddenly reminded of that scene in the novel The Road where the man and the boy who were looking for canned food and ammo find some silver (or gold) coins and then just toss them aside.

I also wonder if Orlov also talked about PMs when he talked about physical assets like land and water sources.

Of course, it's probably a good idea to have a mix of various assets, including some PMs.

[cz]

Only thing I disagree with is the part about holding your silver off-shore.  In case of serious political, financial or transportation disruptions, I sure wouldn't want to be caught by holding my food and tools "off-shore."   I don't want to hold my PMs offshore, either, for the same reasons. 

Yeah, that's like hearing the alarms going off, nuclear missiles incoming...  "Don't worry, I have a bomb shelter with a 20 year supply of food and water for this situation"... "what, lets get in it right now?  Well, its in Switzerland..."

[Megadoom]

I'm suddenly reminded of that scene in the novel The Road where the man and the boy who were looking for canned food and ammo find some silver (or gold) coins and then just toss them aside.

I also wonder if Orlov also talked about PMs when he talked about physical assets like land and water sources.

Of course, it's probably a good idea to have a mix of various assets, including some PMs.

That's why I said the trick is knowing when to sell these metals before the whole thing comes down, and exchanging them for items of real value: food, equipment, etc.

[justanouveaufarmer]

Yep, that's the trick.  Only thing is, what if we get no advance warning?  What if we just wake up one day and ts HAS htf?

[Megadoom]

Yep, that's the trick.  Only thing is, what if we get no advance warning?  What if we just wake up one day and ts HAS htf?

[Terminator Salvation]"Stay alive."

That's are only job, and stop worrying about gold and silver, or if you will make out with tons of money before the TSHTF, it's all a gamble. Once the TSHTF, the whole world and its loot will be open for the taking, as survivors will be picking through the ruins and pillaging mansions, stores, and anything they can to stay alive. To survive means you must become a opportunist and find resources where-ever. Does the "colony" come to mind?

[JurisDoctorOfDoom]

Great post, Matt!  I wish I'd bought more when the prices were in that range, too!

Only thing I disagree with is the part about holding your silver off-shore.  In case of serious political, financial or transportation disruptions, I sure wouldn't want to be caught by holding my food and tools "off-shore."   I don't want to hold my PMs offshore, either, for the same reasons. 

I agree, don't know what I was thinking writing that.

For most LATOCers, my guess is we're talking small amounts in the $500-to-$5,000 range. Put it in a mason jar or two, bury the stuff in the yard and don't think about it till things get to the point where food and fuel deliveries start getting spotty.

[ninakat]

In listening to a lot of financial advice from "the experts," I'm always amazed when they go on and on about how your portfolio should contain precious metals, and then they suggest 10%. I mean, you'd have to have some serious investments for that 10% to really help out when the majority of your portfolio tanks. Gerald Celente, on the other hand, doesn't give investment advice, but has stated repeatedly that he keeps all his savings in PMs. Mike Ruppert has always suggested that as well.

[Maya]

So is silver where it is now still a good buy, that is, for long-term asset protection?  And if the stock market tanks soon, will the silver price tank with it? 

December 2008 was a good time to buy in recent times. I think hedge funds are using margin accounts to increase the prices of both gold and silver. All that money printed from Fed has to go somewhere. I won't say if the stock markets tank , I would say when the stocks markets tanks, the hedge funds will liquidate their paper assets to cover their margin accounts. That would definitely be a great time to buy as price of both silver and gold will come down. Then there is also intrinsic demand for both real gold and silver. I like to differentiate between paper gold/silver and real metal.

[quick]

In listening to a lot of financial advice from "the experts," I'm always amazed when they go on and on about how your portfolio should contain precious metals, and then they suggest 10%. I mean, you'd have to have some serious investments for that 10% to really help out when the majority of your portfolio tanks. Gerald Celente, on the other hand, doesn't give investment advice, but has stated repeatedly that he keeps all his savings in PMs. Mike Ruppert has always suggested that as well.

My portfolio is fully diversified in gold and silver coins of different denominations. I wonder what Kramer would think of that !

[dermot]

For most LATOCers, my guess is we're talking small amounts in the $500-to-$5,000 range. Put it in a mason jar or two, bury the stuff in the yard and don't think about it till things get to the point where food and fuel deliveries start getting spotty.

Just be sure it's airtight. You don't want nasty tarnishes on your precious.