SILVER: BUY, HOLD OR SELL? Up-date N° 15

Silverinstitute

1980 to 2013:  From bear to bull
 

 In 1980, the price of one ounce of silver reached $ 50. Today, the purchasing power of the US dollar is substantially less than in 1980. 

The price of one ounce of silver would have to rise to $ 150 to reflect the value of the US dollar thirty years ago, assuming an average annual inflation of 3.5%.



During the financial crisis of 2008, the silver price corrected 57% from the high of $ 20.79 down to $ 8.95. This correction was followed by a spectacular rise of more than 400% to $ 48.42. A correction was inevitable and a drop of 42% followed that phenomenal rise. So far, the silver price has recovered 14%. The present up-leg started in May of last year and should lead the silver price to a new all-time high.

The long-term picture of the silver price

 The bull market of the silver price started towards the end of 2002. On the way from $ 4.02 to the recent high of $ 48.42 (an increase of 1,100%), several significant corrections took place, the most severe one in 2008 when the silver price sank by 56% only to jump 440% to a new  high since the bull market started. “The bull market is not over. However, at present, a correction seems to be overdue.” we wrote in March 2011. 



During the past ten years, whenever the PMO Indicator shown above exceeded 10 points, we would have been well advised in taking profit. On the other hand, whenever it fell to or below the 0 point line, it would have been opportune to buy. 2008 was of course an aberration or a one-time opportunity – or the opportunity of a life-time as we wrote at that time.



The present correction differs from the previous ones as those were relatively short-lived while this one has lasted for almost two years. When it will end, no chart can tell and some famous investors do not believe that charts offer a reliable guidance. For example, Peter Lynch once commented, "Charts are great for predicting the past." Warren Buffett has said, "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer" and "If past history was all there was to the game, the richest people would be librarians."

 Fundamental Considerations: THE RISING SILVER DEMAND

Silver is unique. Its natural beauty is legendary. Its range of applications is exceptionally broad. As a precious metal, it has been a source of human adornment since the beginning of time, such as a component of fine tableware, appropriately called silverware. As a light-sensitive element, it has revolutionized preservation of memories in the form of photographic images. More recently, its unique properties comprising of anti-bacterial qualities, corrosion resistance, malleability, ductility, reflectivity and conductivity have opened new possibilities for a myriad of other industrial applications.

The demand that pushes the silver price higher

 

World Silver Demand in millions of ounces (Source: World Silver Survey 2011)

 

Implied Net Investment demand, industrial demand and demand for coins cause the silver price to increase. Without it, the silver price would never have performed as it did. Industrial demand and demand for coins and medals are expected to grow further.

The Gold / Silver-Ratio

 In times of a crisis, as in 2008, gold tends to perform better than silver. In times of confidence or hope, as at the end of 2010, silver fares better. At present, the gold/silver ratio is in neutral territory as investors feel uncertain as to which way the major economies will evolve.



As the major European countries struggle to control the debt bubble, some confidence may creep back into investors’ sentiments which could then cause the gold/silver ration to fall back towards the 40 point level. This would cause the silver price to rise toward the $ 40/ounce level with the gold price remaining at the present level of $ 1,650. Should gold rise to $ 2,000 (not an unrealistic scenario), the silver price could move back to the $ 50 level.

Silver in Industry

From non-corroding electrical switches to chemical-producing catalysts, silver is an essential component in nearly every industry. Its unique elemental properties make it impossible to substitute and its uses span almost every sector of industrial application.

 

The distribution of electric power depends upon silver contacts in switches and circuit breakers. Silver contacts in membrane switch panels are now standard in control panels for machinery, chemical industry processes, railway traffic controls and elevator buttons.

 

Silver oxide and zinc batteries have twice the capacity of lead-acid batteries, making them the power source of choice for television and film crews, aircraft and submersibles. Unlike other substances, silver performs well at high temperatures. For example, silver batteries are the only kind that can function at the high temperatures found deep in oil wells.



Another important use is in radiography, the use of photo film to evaluate the internal condition of materials. This technique is key for the discovery of structural flaws.



Silver can be bought with little margin ($ 1,000 per units of 5,000 ounces): 



If somebody buys silver for USD 150,000 (5,000 ounces) and risks USD 15,000, he could make a profit of USD 100,000 if the price rises to $ 50 and lose his investment of USD 15,000 if the silver price drops to $ 27.



After the silver price rose to $ 49 in April of last year, it corrected down $ 27.07 by December of the same year. It has since recovered to $ 32.



Earlier this month it was published, that the demand for both gold and silver coins has been record-breaking as 2013 began. So much so, that now after selling over 6 million silver coins in 2013 so far, the US Mint has run out of silver eagles and has suspended sales. Furthermore, the Mint is saying that it will not restart sales until January 28th!

Silver is again our preferred precious metal!

Peter Zihlmann / Andrew Portmann

www.pzim.ch 

www.timeless-funds.com

invest@pzim.ch

phone +41 44 268 51 10

Disclosure:

The author has not been paid to write this article, nor has he received any other inducement to do so.

Disclaimer:

The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell this stock.

Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock - or to use their own brains.

In our opinion, the best approach is to buy a diversified portfolio of stocks as represented in THE TIMELESS PRECIOUS METAL FUND or THE SIERRA MADRE GOLD & SILVER VENTURE CAPITAL FUNDinstead of shares of only a small number of companies.