Everyone loves a bull market. CNBC, Bloomberg, Wall Street, Washington, everyone. Normally when something, almost anything, rises 20% (a 20+% move is the definition of a bull market or bear market) the media throw a party. Wall Street loves it because they can jump up and down to create “excitement” which causes “movement” which…creates commissions. A “bull market” in almost anything financial is embraced by Wall Street simply because they can “sell it.” It gives them a “product” idea to push and to run with which is what “momentum trading” and investing is (has become) all about.
I know that it doesn’t feel like it but the latest bull market to emerge is that of silver. It has risen from $18.50 to $23.50, a $5 move or better than 25%. Have you heard any “hoopla?” Has CNBC told you anything at all? If anything you are hearing phrases like “dead cat bounce,” certainly not “bull market.” Wall Street generally does not recommend physical metals (though astonishingly JP Morgan has recommended gold to their clients), they recommend the ETF’s. Why do they do this? Because when physical metal is bought it is generally delivered out to the customer who usually sits on it for YEARS. When ETF’s are bought by customers, they generally stay in the account which makes it “easy” (er) to sell and the firm still has them as “captured” assets. Also, commissions are generally lower on physical metal than stock trades at a full service firm…and they hope to get you to sell at a later date for the round trip commission…and then presumably on to another “commissionable” venture.
So why am I spouting off about silver? For several reasons. First, the gold to silver ratio is now 60-1, up from under 45-1 two and a half years ago and light-years away from the historical average of 15-1 (which is closer to the ratio of how much is mined each year). I also know that silver has historically way over-performed in bull markets and under-performed in down trends. Put simply, silver is far more volatile than gold…in BOTH directions; up and down. My personal opinion is that gold is grossly undervalued and its price has been suppressed for years…which makes silver FAR more undervalued and has far more upside potential.
Lastly and maybe at some point the most important of all, “silver will spend.” Let me explain this one. If I am correct and we enter a situation where fiat currencies collapse along with bank failures, holidays and bail-ins, “cash” will only spend for a short period of time until it is no longer accepted due to a failure in confidence. New currencies will need to be issued. These currencies will initially be scarce and it may take some time for them to gain an accepted confidence. I believe that a period of time (two weeks? two months? 6 months?) will follow where “barter” will prevail.
That said, gold is just too “expensive” to trade for daily goods because unless you do a deal where you leave some “change” left over as “credit” then you will have over paid. For example, a pre-1965 dime for a dozen eggs might be a correct price whereas an equal amount of gold in terms of eggs would be microscopic. This is why “big” wealth should be put into gold and “spendable” wealth into silver.
If I am correct, the common man at some point will be priced completely out of the gold market. Silver on the other hand will be the common man’s money because one ounce will still be priced within reach. For instance, three silver ounces can buy a fairly nice bag of groceries today. Maybe it will only take two ounces or one ounce were silver to actually circulate in a barter market. I am not saying that the world is going back an outright metallic standard, what I am and have been saying is that new currencies (in order to obtain acceptance) will have some sort of ratio or backing by metal. Prior to the new currencies circulating I believe there will be a “vacuum”…silver can readily fill this vacuum to some extent.
In any case, silver has turned up (as has gold) and the decade plus long secular up move is reasserting itself. History has proven that during the bull market phase of precious metals that silver, as opposed to gold gives you a much bigger percentage bang for your buck. If I am wrong about the banking system coming down (I doubt it), the amount of inflation ALREADY pump primed into the system will make its way through the pipeline and blow the price of metals through the roof in the long term anyways. Having “spendable” insurance (silver) in the meantime is more than prudent in my opinion.