You could say that buying gold is like drinking vintage Grange wine.
In which case buying silver is like doing double shots of Bundaberg rum.
They both have the desired effect – the latter does it more effectively, but at the risk of a bigger hangover. Silver’s volatility means it swings wildly between the buy and the sell zone.
The good news is that Aussie dollar denominated silver is in the buy zone right now. And if history is any guide, it could take off like a rocket from here.
Last year it bounced 35% in two months from the buy zone. The time before that was as far back as 2010, when it soared 182% in a year.
So what could be in store from here?
In yesterday’s Money Morning, I gave a sneak preview of my recent interview with Eric Sprott, CEO of Sprott Asset Management, who manages $11 billion in the precious metals market.
His views on gold were very bullish. But today I’d like to show you just how bullish he is on silver…
But first let’s back up a second.
I’d like to show you where we are in the decade plus bull run in silver, and why this should be an ideal time to buy it.
Below is a weekly chart for Aussie dollar denominated silver since 2003. It’s an incredibly strong chart. The first thing to notice is that the 200-week moving average (red line) shows a strong and completely intact uptrend.
After the wild move in 2011 that saw silver almost triple, it has now almost finished a painful, two-year long hangover. Most importantly the price has now come back to rest on the ‘buy zone’ – the 200-week simple moving average.
Silver has tested this level just seven times in the last ten years, and bounced off it each time. In some cases, like last year, it was a move of 35% lasting just a few months. In other cases the price can increase in multiples. It almost tripled after it hit this 200 week moving average in 2010; and more than doubled after its 2005 skirmish.
So what will we see from silver this time? I’m confident at the very least of a move as big as last year’s. After all, that would only require hitting $37, where it has been several times in the recent past.
But really we’re looking for the Big Kahuna: when silver increases in multiples to reach a new high.
Will we have to endure any more false starts before this happens? It’s possible. The big moves of 2005 and 2010 both had two practice runs before taking off.
You can see in the chart that in both cases, it was eighteen months between the first bounce off the 200-week moving average, and the bounce that turned into the big one. If this historical pattern repeats, we’d need one more short-term move on this bounce, before we get the big one from late 2013.
At the very least buying now should be a profit opportunity for the short-term trader, but more importantly, it should be a cheaper buy-in for the long-term silver investor.
Very few investors have taken a bigger stake in the silver market than Eric Sprott. So when I had his ear for 25 minutes in Hong Kong last week, I was sure to ask his view on silver – as well as silver stocks too.
I’ll save the whole transcript for Easter Monday, but here are a few sneak preview quotes from the world famous portfolio manager, running $11 billion in the precious metals markets, and one who calls silver the ‘investment of the decade’.
Alex: …Now silver as I know is something that is very close to your heart as well. I’ve been recommending silver for some time, and I own some. It’s been very frustrating for silver investors for more than eighteen months. But that is the nature of the beast with silver. You have a very disappointing period, and then it will suddenly double in a period of months.
Eric: Well I think the same thing goes on in the silver market that goes on in the gold market, except it is more obvious. When silver got to $49.50 not that long ago, it traded over a billion ounces of paper silver in a day, and we only produce 800 million ounces of silver in the mines a year. I always ask people to think about the guy who sold a billion ounces of silver that day – what’s he thinking? There’s no way he can supply it. And therefore it must be somebody who thinks that by selling the billion ounces he can dampen the enthusiasm, which they did, of course they had the changes in the Comex rules all at the same time which helped them.
But I think that silver will triple the performance of gold, because ultimately we will go from a 55 to 1 ratio which we’re at today, down to 16 to 1 which was the typical ratio. And we see lots of signs in the silver market for incredible demand. I’m just awestruck that in the US, the US mint sells as many dollars of silver as they sell of gold, which means they are selling 55 times as many ounces of silver as gold. And yet the mines only produce 11 times more. I mean something’s got to give here. We can’t have the world buying 55 times more silver than gold, when quite frankly for investment its only available three ounces of silver for every ounce of gold, as most silver is used for industrial purposes.
So I’m pretty upbeat about silver!
Alex: So you think $100 silver is realistic in the next year or two?
Eric: Well I think obviously with gold at $1600, I would believe that silver should be at a hundred. Does it happen in one to two years? Maybe not, but I would certainly say in two to five years it happens. And that’s just with gold staying still!
Fortifying stuff indeed! And based on silver’s history, is quite realistic too.
But if you’re buying silver, a few key things to recall are:
- To buy as low as possible (like now), and with as low a margin as possible
- Hold with a long-term view, and
- Expect any number of swings and roundabouts in the interim!
In yesterday’s Money Morning I quoted Eric saying that, in the case of gold stocks, they outperform the metal price at least two to three times when the metal rallies. So, given that he thinks silver could triple from here, what does this mean for silver stocks?
This chart shows the global silver stocks index since 2010. You can see that that silver stocks have underperformed the metal by 28%! It’s not quite as poor a performance as in the gold space, but there’s clearly room for improvement too!
So from these depressed levels, I was curious to know what Eric thought about silver stocks, particularly if he could see silver price tripling:
Alex: …So how do you feel about silver equities? Could we transplant the same argument from gold and gold equities, to silver and silver equities?
Eric: Well I have a very disproportionate amount in silver equities. Just on the bet that silver far outperforms gold, and I want to be where the action will be, so I obviously favour silver equities over gold equities.
Alex: Producers, developers?
Eric: Producers, developers, even guys who just have deposits. We’ve all lost interest in the deposits these days. But if we start to see the price of silver go up, believe me, the interest will come back for the guys with deposits.
Alex: And from extremely oversold levels too.
Eric: Extremely oversold levels yes!
So there you have it. Silver stocks could even outdo silver, which Eric calls the investment of the decade.
So if you’re the type of investor that can hold your nose and buy, then it sounds as though over the next few years silver equities could deliver more fun than a whole case of Bundaberg rum!
There was far more to this exceptional interview, so don’t forget to tune in on Monday for the full transcript…
Dr Alex Cowie
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