Why Gold and Silver are Acting Like the New "Flight to Safety" Vehicle

Sentiment on the dollar is in the tank - and we've got a pretty decent crisis on our hands in the Middle East.

So you'd think with all the bad news already priced into the buck that this turmoil would be enough to send the dollar sprinting higher.

Good guess...but thus far, an incorrect one!

Bad news for the buck? It's actually sold off since the (latest) Mideast crisis began. (Source: StockCharts.com)

Is King Dollar no longer a "flight to safety" destination?  Steve Sjuggerud explores in today's DailyWealth:

In this crisis, instead of fleeing to the safety of dollars, investors have pushed the price of gold up, and silver has soared.

Are gold and silver the new safe havens for the Big Money? It's been decades since that was the case. But it may be the case again now.

Another explanation here is that Tunisia, Egypt, and Libya don't matter in the world of high finance... They don't matter enough to move the Big Money's needle. They don't matter enough to send the Big Money rushing for safety.

That might sound harsh. But when it comes to global economic growth, those three countries are barely a rounding error...

Let's put it in perspective... When Europe's banking system is crashing, the Big Money rushes to the dollar. But when Libya is collapsing, it's basically irrelevant... The Big Money's assets in London and New York are unaffected, and that's what the Big Money is concerned about.

So which is it? Why has the dollar weakened in this crisis? Is it because the Big Money has chosen gold and silver? Or is it because the Big Money isn't rushing for safety – yet – because of this current crisis?

Personally, I think it's the latter… The Big Money isn't losing sleep over Libya... but is still buying precious metals instead, in a big way.

Source: DailyWealth

And check out the price action in gold and silver of late - each has rebounded earlier, faster, and quicker from their recent pullback than even the most ardent precious metal bull had predicted:

The "one way" trades of going long gold and silver continue!

Maybe it is different this time - er, maybe it's not 2008, at least.  Gold and silver continue to shine, while most other assets are beginning to show some cracks in the armor.

Though remember that gold last peaked in March 2008 - many months after stocks had begun their epic free fall.  The precious metals could again be the last holdouts of this rally - but the fact that these are "higher highs" from 2008 (and all-time highs in the case of gold) would make the secular bullish appear to be a strong one.

How Silver Vastly Outperforms Gold During Precious Metal Bull Markets

Precious metal fans, take note - silver may be gold's crazy cousin, but this inherent zaniness can't work in your favor in a big way when the metals are running...


Why I'm Buying Silver at $30

Jeff Clark, BIG GOLD

The silver price has bounced 27% since January 28, a huge advance for a measly 16 trading days. It's already soared past its 2010 high and was selling for less than $16 this time last year, a double in 12 months. So, is it pricy? Or should we ignore the run-up and keep buying?  

I've read a few articles that say we should expect silver to drop to the $25 level, and one pinpointed $22. Others, of course, see bullish tea leaves for the near term and believe it's headed higher. Of those that assert silver will decline, most believe it will be temporary, though one writer claims the bull market in precious metals is over (I think he's a holdout from the gold-is-a-bubble camp).  

These authors could be right about a near-term decline, but I'm less concerned with what the price does this month or even the next few months, and more focused on where it's likely headed over the next few years. Caution: the chart ahead may cause excitement. 

While there are lots of reasons to be bullish on silver, what everyone really wants to know is how high the price can go. Here's one hint, based strictly on historical price performance.

Silver rose an incredible 3,646% from the November 1971 low of $1.32 to its January 21, 1980 high of $49.45 (London PM fix prices). Our current advance, through February 4, is 596%. At $30, silver would have to climb over five times to match the last great bull market. If it did, the price would hit $160.89 per ounce (from its bottom of $4.295 on March 30, 2001). 

You'll also notice silver has a record of outperforming gold in these two bull markets. In spite of the price dropping 26.9% in 2008 (while gold gained 5%), the metal has outrun its yellow cousin by 38.6% since their respective lows in 2001. 

Gold advanced 2,333% in the 1970s; it's currently up 430%. If it matched the last run, the price would hit $6,227.26 per ounce, a return of four-and-a-half times the gold you buy today.

From solely a historical price perspective, the chart certainly suggests we've got a long way to go with both metals. The question is if the fundamentals support such price advances (show me a healthy dollar and no threat of inflation, and we'll talk), but my point for the moment is that there is an established precedence for the price of these metals to climb much higher. And just as important, to keep one's eye on the big picture.

So, yes, I'm buying silver at $30, in part because I think the potential for enormous gains is high.

However, I'll add that I'm not draining my cash account to do so. I think it's important for the precious metals investor to always be in the game, but given silver's volatility and the precarious nature of most markets right now, prudence suggests we keep some powder dry as well.

Let's say one of the soothsayers noted above is correct and silver temporarily falls to $25. If you snag it at that level, your endgame return would be 543%, vs. the 436% gain from $30 (excluding premiums and storage costs). That's more than another 100% gain on your original investment. 

But how does one buy silver not knowing if the price will plummet or soar? For example, silver could take off from these levels, never to see $30 again, leaving those of you waiting for a sell-off out of the market. Or it could sink to $25, making investors who went all in now regret they didn't wait for a better price. Or it could trade sideways until, say, next fall, leaving both parties uncertain and on the sidelines.

In my opinion, there's a one-word answer to the question. It solves all dilemmas – it keeps you in the market, while simultaneously letting you buy at lower prices if that occurs. It lets you build your position bigger and bigger without the worry of whether you're getting a good price.

That one-word verb is, accumulate. Or in the vernacular made popular in the '80s by the financial planning community, dollar cost average. In other words, buy a little now, buy a little next month, etc., until you have a position sufficient in size to fight off inflation and any other economic woe we're likely to encounter over the next few years.  

So my advice is, buy, hold, repeat. Because if our silver market ends up looking anything like that left bar in the chart, you may regret not having bought at $30, too. 

[By the way, we updated the numbers on the market cap for Pan American Silver from our article last week… check out how tiny one of the largest silver producers is compared to other popular stocks here.]

[Where do we buy silver and gold? Get our recommended list of dealers, who have some of the cheapest prices in the industry, along with the silver stocks we think will outperform the metal, with a risk-free trial to BIG GOLD for only $79 per year. To learn how Editor Jeff Clark has boosted his mom’s IRA and his subscribers’ portfolios – and how he can do the same for you –click here.]

Ed. note: I am a Big Gold subscriber and affiliate.

Why Increased Demand for Silver Will Have a Leveraged Effect on Its Price

How Much More Demand Can Silver Handle?

By Jeff Clark, BIG GOLD

The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply.

That is some very hungry demand. Which raises the question, how long can this pace continue?

This is important for various reasons, starting with how demand contributes to price. If demand falls off, our investments could, too.

While I’ve discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let’s focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?

There are a number of ways to measure this – the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. – but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.

So how do the world’s largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?

The largest silver ETF, iShares Silver Trust, has net assets of $9.6 billion (as of February 4). This pales in comparison to the more popular stocks trading in the U.S. In fact, SLV has roughly 3% the market cap of Apple. It would have to grow over 43 times to match Exxon Mobil.

Pan American Silver, the largest pure silver producer trading on a major U.S. exchange, has a market cap of $3.72 billion. This is 4.7% the size of McDonald’s. The market cap would have to increase more than 53 times to match Walmart. It is over 62 times smaller than Microsoft.

This isn’t to suggest SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver’s investment vehicles.

So how much more demand can silver handle? As much as it takes to make it the household name I’m convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street’s top pick for the year.

Imagine what those bars on the right will look like when most everyone you know is talking about poor man’s gold. The rise could be breathtaking.

Remember that silver rose over 3,646% from trough to peak in the last precious metals bull market; it’s up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak.

When you look at the potential growth in market cap of the world’s biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do.

[The current edition of BIG GOLD includes naming the cheapest one-ounce bullion coin on the market right now, plus a new gold stock pick that has incredible growth potential. Get all this and more for only $79 per year, including a 3-month trial with full money-back guarantee. Details here.]

Ed. note: I am a Big Gold subscriber and affiliate.

Silver Predictions 2011: Big Reasons for Big Price Increases

The Silver Sleuth

By Jeff Clark, Senior Editor, BIG GOLD

We once had an ongoing series in BIG GOLD called, "1001 Reasons to Own Gold." The idea was that there were so many valid reasons to own the metal that I wanted to track and report on them. If you've been invested in the precious metals arena, you know there have been a myriad of bullish indicators for silver this year as well.

Here's a couple new reasons to own silver that a lot of mainstream investors probably aren't aware of…

Due to increased demand from industry and investors, silver exports from China are expected to drop about 40% this year. And that's actually an improvement; customs data show exports plunged almost 60% through the first eight months. China exported about 3,500 metric tons of silver in 2009, but has exported only 970 tons through August of this year.

What a lot of Westerners don't know is that China ended export "rebates" two years ago to stem the shipment of natural resources leaving the country. As a result of the regulation, silver exports decreased in 2009 but are nothing like what they're experiencing this year. In other words, the large drop in exports is a direct result of a huge increase in demand within China itself. According to one Chinese banker, the spike in demand is coming from all areas – jewelry, investment, and industrial. In his words, it's led to a "physical market shortage in the Far East."

How important is this? China is the world's third largest producer of silver (after Peru and Mexico), so the amount of silver coming to the global marketplace this year will drop by more than 74 million ounces. This represents roughly 8.3% of total annual global supply from 2009. If worldwide demand continues at its current pace, where is the extra metal going to come from? This alone tells us the price of silver will move higher.

The next item I sleuthed out was that the U.S. Mint is expected to release a new five-ounce silver bullion coin this year, the first ever. The coin will be three inches in diameter and have a composition of .999 fine silver.

I've read the five-ounce bullion coins will be near-exact replicas of the America the Beautifulquarters. There will reportedly be five different designs, and the mint plans to produce 100,000 of each. I can't wait to see them.

The coins will be classified as bullion, meaning they should be available to the same dealers already authorized by the mint. This will likely create excitement in the silver market, especially when you consider its affordability. At $23 silver, the five-ounce bullion coin will cost $115, plus premium. One ounce of gold runs $1,340 as I write, while five ounces will cost you $6,700 plus commission.

Perhaps most bullish is the fact that silver is vastly underpriced when compared to gold. Look at it this way: gold is currently priced 57% above its 1980 nominal high of $850; silver would have tomore than double to reach its 1980 nominal high of $48.70. And that's excluding any inflation-adjusted calculation. Yes, silver's spike was partly a direct result of hoarding by the Hunt Brothers, but my question to the skeptics is this: what's keeping us from seeing similar stockpiling today? What if there are several Hunt Brothers out there?

It's true that central banks don't buy and store physical silver, so one source of demand that's common for gold isn't present for silver. But let's keep things in perspective: demand for all forms of silver is rising, and we see no reason the trend won't continue. And with indicators like decreasing supply from China and increased attention from a new bullion coin, I say the big picture on the silver price is extremely bullish.

This silver sleuth says, buy some silver on the next dip. There's lots of reasons you won't regret it.

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[Ed Steer, editor of the free Gold & Silver Daily newsletter and longtime GATA member, believesthat silver will go to the moon, and soon. Read his explanation why that’s the case and how you can profit from this enormous upswing. Details here.]