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What I'm Doing with My Silver NowBy
Monday, June 20, 2011
Since last September, silver has been the winner, up about 100%. But lately, it has been correcting.
We don't know how long and how far this correction will last. But based on past performance, we have to safely assume it will be longer, with more damage to come.
My approach has been simple. I have kept all my silver, and at current prices it is the single most valuable asset that I have. Gold comes second. However, I am prepared mentally to have silver continue to languish; it may well drop below gold, in terms of my holdings.
Gold itself has been a slow and steady gainer. This is not only the case for the past year, but since the entire bull market began a decade ago. Even when everything else fell apart during 2008, gold rose 5% in U.S. dollar terms over that year. Silver is the highflier, but gold is the steady winner, year in and year out.
For nearly everyone, if I was given a choice of recommending holding gold and not silver, or holding silver and not gold, I would without hesitation advise holding gold without silver.
In a period of uncertainty like ours, when there is danger both from possible high inflation as well as economic stagnation and even possible deflation, gold is the single greatest winner. It really should be at the center of every investor's holdings.
For years, it was the center of my own. I owned silver as well, and it was only in the last few months since September where the monetary amount of the silver advanced to more than the monetary amount of the gold. I have been expecting this to happen, since I long ago forecast that the ratio of silver to gold would rise in silver's favor: that silver would rise over time relative to gold. Both would rise, I thought, but silver would skyrocket compared to gold.
This was when 70 ounces of silver equaled one ounce of gold. My ultimate forecast is that the ratio will go to 16 silver ounces to one gold ounce. Back 10 years ago, this forecast may have been seen as a bit crazy. But silver has soared faster than gold. Earlier this year, it rocketed to 31-to-one. That's a long way from 70-to-one, and not that far any longer to 16-to-one, the ultimate target.
However, silver went up too far, too fast. It does this, during bull markets. The flip side is that silver can fall much farther than gold during corrections. So far, gold has hardly had any correction, but silver fell 33% in one week.
My expectation is for silver to continue to be soft compared to gold. In price terms, I would not be surprised to see silver go below $30. If it followed the path it took during the 2008 correction, it would fall 60% from its $49.85 peak, to $19.78.
I keep telling readers to visualize this price level. It would not be a catastrophe. It would be exactly what happened from March 2008 to October 2008. But those who kept their heads and their cash and bought silver in late October 2008 made a fortune. Silver itself soared from $8.80 to nearly $50 in just over two years. Those who bought some on conservative leverage (AGQ) made nearly 1,000%.
The trick is keeping your head and your cash during corrections. And the first step is to visualize the worst that can happen. The second step is to have some silver even so, just in case no huge correction happens. No two bull and bear markets are the same. This goes for temporary corrections as well.
I've been surprised at the relative strength that silver has shown since its first collapse from $49 to $32 a few weeks ago. I think Indians and Chinese buying physicals during any price weakness has been the cause of this. But I am expecting further weakness in spite of this.
My views are always based on having me experience no bad surprise and no stress whatever happens. That's why I can sit here and tell you that even though I have the largest single amount of my own money in silver, I am expecting to see it fall under $30 and maybe even under $20.
As I see it, with this perspective, either way I win, or at least I don't lose. Yes, having silver as I do, the higher it goes, the more net worth I have. But expecting a long and severe correction is good for my "mental" balance.
If it does happen, I can tell myself that my forecast was right, and I can even buy more at a lower price. But if it doesn't happen, then I can say, "Well, I was wrong about expecting a correction, but my net worth is higher."
Good investing,
Chris Weber
Further Reading:
Chris Weber has an extraordinary knowledge of history and human behavior. And his work is a "must read" in the DailyWealth office. We urge you to revisit some of his recent advice below...
"Everywhere I go in the financial world in Europe, I hear the same thing: The U.S. is shooting itself in the face."
"It would be a happier and wealthier world if people stopped thinking in terms of national currencies and thought in terms of weights of metals."
"These new funds strike me as excellent vehicles for the global investor..."
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