Silver price volatility and the intense media coverage of the white metal is making it difficult to decide which side of the fence to stand on. Now more than ever, it’s important that investors remove emotions from the equation and take a fresh, rational look at their silver holdings.
Long-term, I’m still a silver bull, but the case against the metal in the near-term seems to be growing every day. Let me play devil’s advocate and give you five reasons to ditch your silver investments:
1) Over-reacting to inflation. There’s certainly an industrial component to the silver story, but inflation has been the primary driver for the metal since it bottomed in 2008. Still, as Pradeep Kandasamy at SeekingAlpha, points out, silver has over-reacted to the threat of inflation. The monetary base has increased by 100 percent since the launch of QE1 nearly three years ago.
Gold’s price rise perfectly mirrors the expansion of the money supply (up roughly 100 percent over the same time period). Silver, though, has rocketed up 300 percent, Kandasamy writes. That’s even after the recent crash! Late last month, silver was up 400 percent from it’s October 2008 lows. If silver is responding to inflation, it’s clear that response was too fast and too furious.
2) Uncharted waters. We constantly find ourselves referring back to the 1980 highs in the silver market as an indication that the metal has plenty of room to run. After all, if we adjust silver’s 1980 high for inflation, the metal actually hit prices above $130 an ounce.
We have to weigh those numbers against what the Hunt Brothers were doing, though. The two sons of a wealthy Texas oil baron almost single-handedly cornered the market in the white metal. At one point, they held nearly $4.5 billion of silver in bullion and futures contracts! (See my post Silver Thursday, the Hunt Brothers, and the collapse of a precious metal for more on silver’s last record run). If we take the Hunt Brothers out of the equation, it’s hard to argue that silver prices would have gone as high as they did.
3) New margin requirements. It’s not just the COMEX that’s making it harder on silver speculators. Now, we’ve learned that the Hong Kong Mercantile Exchange (HKMEx) has also raised margin requirements on silver futures contracts (per TheStreet). Periods of extreme price volatility in the silver market don’t just ratchet up the price of the metal, they also ratchets up the risk involved. That forces the COMEX and HKMEx to protect themselves by driving up margin requirements (see my post Why does the COMEX raise silver margin requirements? for more). Likewise, hedge fund managers and financial institutions likely ease off their positions and/or hedge their precious metals holdings during periods of extreme volatility as risk ratchets up.
4) ETFs losing steam. One of the more pervasive arguments against silver in the short-term is the relative under-performance of the silver ETFs, which could indicate that retail stock investors are losing interest in the metal. Yesterday, for example, the New York spot price for silver rose from $33.25 to more than $34.50 – a gain of 3.8 percent. Nonetheless, the iShares Silver Trust ETF (NYSE:SLV) shed nearly 1 percent of its value (including the after-hours bounce). If the trend away from SLV continues, silver spot prices will fall as the silver tail starts wagging the dog.
5) Opportunity cost. Even though I’m optimistic about silver prices six months from now, that’s a long time to leave your investments languishing. If you do foresee a lengthy period of consolidation in precious metals, it makes sense to park your cash somewhere else for the next few months. Every long position you hold, after all, means you can’t be invested somewhere else. That’s the definition of “opportunity cost.” While silver languishes, opportunities in other sectors will emerge. Park your money there until silver resumes its upward climb.
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Tags: Comex, HKMEx, Hunt Brothers, inflation, silver price, silver price forecast, Silver Thursday, SLV
