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Buy more silver on weakness.

Saturday, September 25, 2010

On 7 February 10, I mentioned that "Silver is a real asset, with real value, just like gold, as its supply is finite.  Fiat currencies, on the other hand, do not have any intrinsic value and more could be produced at will.  So, we expect silver to at least keep pace with inflation and in an inflationary environment, an investment in silver should protect our wealth from being eroded."

In that blog post, I mentioned that my research showed that silver was very undervalued and was trading at the higher end of the Gold:Silver ratio since 1980.

At that time, silver was US$15.15/oz while gold was US$ 1,052.20/oz.  It was just reported by Bloomberg today that "Gold for December delivery was 0.2 percent higher after reaching US$1,299.70 an ounce on the Comex in New York. Silver for immediate delivery in London climbed as much as 1.2 percent to US$21.3875 an ounce, the highest price since October 1980." Read article here.

Silver has gone from US$15.15 to US$21.38 an oz.  This is a gain of 41% in slightly more than 7 months.  Gold has gone from US$1,052.20 to US$1,299.70 an ounce.  This is a gain of 23.5% in the same period.  An investment in either one of these precious metals would have been very rewarding but silver has obviously outperformed gold by a large margin.

I am glad I bought some silver and I would like to buy more silver on weakness when the opportunity presents itself as I continue to believe that having some investment in precious metals is an essential part of anyone's portfolio. Silver is a laggard in the realm of precious metals and it is just catching up.

Do I have a target price for silver? Silver reached its peak in value on 15 January 1980 when 1 oz of gold could purchase only 14.9 oz of silver.  Based on today's price of gold at US$1,299.70 an ounce, it would mean US$87.22 an ounce for silver!  Mind boggling, isn't it? That would be 4 times higher than the current price!  Of course, I am not suggesting that silver would hit that price anytime soon, if it does go that high at all. I am merely putting things in perspective. Remember where the price was in February? Good luck.

A new record! Gold prices struck a record $1,300.07 an ounce in afternoon trade on the London Bullion Market as investors sought a safe haven for their money amid increased uncertainty over the global economic outlook. Silver, meanwhile, jumped to $21.44 an ounce . Published: 5:44PM BST 24 Sep 2010 - Read article here.

Related posts:
Gold or silver?
Gold nearing US$1,300 an ounce.


Anonymous said...

How do we trade commodities in gold and silver? goldsmith?

AK71 said...

Hi Paul,

I don't trade gold and silver. I buy and keep them as a hedge against inflation and other forms of investments. You could read about what I think of these precious metals in a section labeled "Precious Metals" in the right sidebars of my blog. :)

If you want to trade gold, SPDR Gold Shares is available locally. You could also start Gold and Silver Savings Accounts with UOB. It's easy.

I wouldn't bother with goldsmiths as much of what you pay would be for the design, workmanship and wastage. If you were to sell the gold back to a goldsmith at a later date, the discount to market value could be big. I guess that might be the way some "investors" do it but it seems silly to me. ;-p

Raelynn said...

dear AK,

meaning you buy physical gold and silver????

AK71 said...

Hi Raelynn,

I buy physical gold (the 1 oz Canadian Maple Leaf gold coins) from the Gold Counter in UOB Raffles Place.

However, UOB does not sell physical silver and companies which do, sell them at a huge premium over spot price. So, even though I would rather buy physical silver, I settled for a silver savings account with UOB.

la papillion said...

Hi Ak,

Do enlighten me on this hedging part because I don't understand this.

Are you buying metals to hedge against your cash/cash equivalents in your bank account? What other forms of investments are you hedging against?

Let's say we have a hypothetical scenario. I have 100k of cash sitting in the bank and 100k of equities. Assuming I have unlimited amt of money to do hedging to prevent the value of the cash/investment to drop due to inflation. How much should I hedge as a % of my portfolio and what is the expected returns of my metal hedging in order that the gains can offset my potential losses?

Do let me know what's your thinking process :)

AK71 said...

Hi LP,

I have a blog post on the real value of gold. There probably should be one on the real value of silver as well.

Being in gold and silver is similar to being in soft commodities. These are physical assets with intrinsic value. We cannot print more of these at will like we can with fiat currencies.

Unlike soft commodities which could be grown, theoretically, metals cannot be grown or manufactured. Their supply is finite and their supply is dwindling. So, a simple understanding is that prices of these metals would go up. This is especially true for silver as it is consumed in more applications than gold.

With the US still being the No. 1 economy in the world at least for the foreseeable future, it is unlikely that the US$ would lose its status as the world's reserve currency anytime soon. The US also remains an important export market for many countries, including Singapore.

People might say that the S$ is strong and should be stronger but whether the government would allow it to be much stronger is questionable. I think unlikely in the near future.

So, all these mean that gold will still appreciate in S$ terms albeit slower than in US$ terms. Silver will absolutely outperform gold in time and will also appreciate in S$ terms but slower than US$ terms. Inflation? You bet.

How much of our assets should be in precious metals? It depends on how much wealth we have. An unlimited amount of money, you say? No need to hedge in that case. Right? ;p

If I had a large amount of cash to do hedging with (say S$2m) and say I have S$1m in equities, I could buy silver and gold to match the value I have in equities. Keep 50% of the balance cash and the remainder into more gold and silver. This is assuming that I am not considering other physical assets.

For most of us, if we could have 5% to 10% of our investible cash in precious metals, it would be enough. Why? For most of us, our largest physical asset would be the home we stay in. That is also a hedge against inflation at least in countries like Singapore. :)

Chong Jun said...

Hi AK,

i would like to know if you have bought commodities such as gold and silver to hedge against inflation or to hedge against the drop of US dollars.

As far as we know, since the unpegged of US dollars and gold in 1971, gold has been on the rise and from here, we know that gold grows with the weakening of US dollars.

So, if you still were to foresee that the US dollars would maintain its strength as the world's reserve currency, i feel that it might be a contradictory to your purchase in gold and silver(thus the question in the first paragraph).

While it is true that US has maintained as an important export market for many countries and this has somehow helped in maintaining the strength of the US dollars, i still believe the debt that US has occur will overwhelm this aspect.

For now, my stand is US dollars is likely to continue to be weaken, and thus you would definitely huat with the gold and silver in your hand. (:


AK71 said...

Hi CJ,

1971 is a year close to my heart. ;)

There are three issues to be addressed here: strength of the US$, supply of the metals and demand for the metals.

As the metals are consumed, the supply will dwindle. As their supply dwindle, the demand is unlikely to weaken and would in all likelihood strengthen with a wealthier Asia. The price would go up. Inflation.

This is also the case as Asia look towards alternative stores of value as the US$ loses its lustre as the world's reserve currency over time. Gold and silver are natural choices. India and China have been buying more gold. We are talking about both the governments and the people. Price would go up again? More inflation? You bet.

When we look at the value of gold, it is not useful to look at how much gold is worth in nominal value, we are looking at its real value which takes into consideration inflationary pressure.

So, inflation should always be the primary consideration. Of course, as the value of the US$ falls, gold in US$ terms would go up but of greater consideration to me is the effects of inflation since it would also be reflected in S$ terms. I am, after all, making and spending S$, not US$. :)

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