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« Questions About Silver: Answered | Main | Hedge Funds Take Another Look at Greek Debt »

Should You Invest in Physical Silver?

We spotted this article earlier today on Silver Investing News which we thought you may find interesting. This is another great website containing all sorts of data about silver and silver stocks, well worth the book mark. I know that we send you hither and dither to read posts but it is important to read as widely as you possibly can. 

Investors seek protection in silver

Each category of investment products has its pros and cons. For those whose goals involve safety and protection, a recent roundtable hosted by Kerry Lutz, founder of the Financial Survival Network, presents a strong case for holding physical silver.

Silver can be a volatile market. One reason is that many investors make decisions in response to news that drive concerns over currency and banking risks. When those worries heighten, some investors put their cash into the metal and then extract it again when their concerns diminish.

ETF Securities’ Global Commodity ETP Quarterly for Q3 2011 stated that despite its proportionately large industrial usage, silver is still viewed as a store of value asset by many investors.

That quarter saw $1.6 billion in net inflows to silver ETPs, with holdings totaling about $18 billion. These inflows were seen at a time when nearly every commodity except gold saw flat or negative outflows. The main driver behind demand was concern about financial turbulence. During that three month period there was the US budget ceiling stand off, anticipation of a US credit rating downgrade, and growing focus on economic turmoil in Europe.

These sorts of conditions, and uncertainty of their effects, are triggering an increasing interest in silver. Late last year, we reported that a growing number of our readers are among those who admire silver as a safe haven.

Making a case for physical silver

The Lutz roundtable raised an interesting question for safe haven investors: if a position in silver is motivated by a lack of faith in currency or the financial systems that distribute it, can non-physical investments be viewed as the best form of protection?

Lutz described guest Chris Duane as a major silver aficionado who put his metal where his mouth is by liquidating his assets pre-crash, putting the money into silver when prices were ridiculously low.

According to Duane, people need to view silver investments as a flight from currency instead of as the purchasing of metal.

Duane believes that our money system, and indeed our entire way of life, is built on unsustainable debt. He says the purpose of investing in silver is to take yourself out of the mathematically inevitable collapse that is going to happen.

Whether or not a collapse is indeed inevitable is an arena for debate we will not enter. However, unsustainable debt concerns are a driver for safe haven investment demand, and that demand has been accompanied by increasing interest in a variety of silver-related assets, such as equities and ETFs.

These products are often strongly marketed on the benefit of convenience. Investors can build positions, and when they no longer wish to maintain them, those positions can be liquidated, a process that can be completed with little effort.

Building a portfolio of physical silver is generally more demanding. Doing so can present challenges such as the need to transport the metal between buyer and seller, and the need for the owner to store it. However, for safe haven investors, the case for owning physical silver appears to outweigh the other options despite inconvenience.

Liquidation of shares entitles investors to cash of the sort in which their investments are denominated, meaning that those individuals are bound to the risks associated with that currency.

When owning metal, investors are not obligated to deal with any particular currency, nor are they forced to rely on any particular financial system to access the value of their assets. In the event that one type of currency, say the US dollar or euro, becomes unattractive, silver can be redeemed for another currency or even used as an alternative.

Time is of the essence

Another point highlighted during the roundtable was that investors with interests in building a physical silver portfolio should consider their timing. Currently, there is not a shortage of the white metal, but in the event that something triggers a significant flight to silver, the current supply could come under serious pressure.

David Morgan of Silver Investor, another guest at the roundtable, and described by Lutz as one of the foremost silver authorities in the world, said that at best there is about six months worth of above ground supply of investable silver.

“That amount of silver is so small relative to the amount of people who have cash that they want to protect, deploy, and use or get into this market, that it could be literally over night or a week or two when you would absolutely be unable to find silver.”

Several days of significant buying could move prices much higher, he warns.

According to Morgan, he is not issuing that warning to peddle fear or pressure investors into the market. He says a shortage of physical silver products occurred during the financial crisis of 2008, and demand could not be met by supply.

Before the financial crisis, mining had increased, which led to an increase of silver in the investable form. However, the crisis created an environment where it became extremely difficult to purchase any retail product, Morgan said.

That demand drove silver prices up.

Morgan says the futures exchange was showing approximately $9 silver, but the true price to get metal was about $13.50.

A similar environment exists today. There is an adequate supply of physical silver given the current level of investment, but there are also concerns about financial deterioration in a number of regions. If investors have not built their physical portfolios ahead of a trigger event – whether that be another economic crisis or headlines that promote fear of one – this roundtable suggests that there is a risk that they could find themselves arriving late to the party, a situation which could be costly.

Regarding We are off to a good start this year closing two trades in January, the first gave us a profit of 71.58% and the second gave us a profit of 33.97%.

It was nice to bag a couple of winners before January ended and hopefully 2012 will continue in a successful manner. We do have a number of ideas on the drawing board which we are looking to execute shortly, but only when the risk/reward environment is firmly in our favour.

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