Has the Silver Bubble Finally Burst? Is Silver Investing a Bad Idea?
Silver investing has gotten a lot of press lately with silver’s amazing run up over the past eight months and even more so since February, making it a good market for creating wealth for some (and preserving wealth for others). Pundits all over the main stream media had been calling for the silver (and especially gold, with it’s 10 year run) bubble to burst and for the market to come crashing back down…
From an incredible high of near 50, the market finally did correct sharply… but it has NOT crashed, nor have the fundamentals for silver investing changed.
To understand both the gold and silver investing markets, you have to understand the macro economic picture, the big picture.
Silver is an industrial commodity, meaning that it not only has monetary properties due to it’s intrinsic nature and rarity among other things, but it is also used industrially in everything from cell phones, street lights, computers, solar panels and all sorts of consumer electronics. Therefore it is a metal that is consumed (and in such small quantities per application it makes recycling the metal impractical in most instances), which reduces the supply over time which puts upward pressure on it’s value (if there’s less of something it becomes more valuable).
Gold is more a store of value and is mostly used as jewelery and as a backup for real money. It is one of the best (if not the best) conductor of electricity, but at $1500 an ounce today it again doesn’t make much sense to use in that application.
Today, our society operates on a fiat money system, which is essentially just paper money. The paper itself has no real value, in fact it’s only backed by the faith we have in the U.S. government to be able to govern it’s own affairs that gives it any value. And with the massive levels of debt we as a country are faced with – more debt than we could ever repay, even with a 100% tax rate for all Americans – many people are beginning to doubt that our government can manage it’s own affairs responsibly (as in paying it’s debts and assigning a fair value for the paper we trust them to create).
This is one of the fundamental factors driving up the prices of silver, gold and other precious metals. Yes, there is speculation in the market due to the nature of leverage that’s available in the markets, but speculation on it’s own is not driving up prices. In fact, this most recent decline was due to regulators imposing not one or two but three increases in margin requirements, again affecting the amount of leverage a “trader” could apply to the market which caused many traders to have to liquidate their positions or put more skin in the game.
At the same time, billionaire George Soros’ fund sold a large quantity of silver into the market which further exasperated the situation and drove the price down (simple supply and demand). Then, as the market began to decline, fear kicked in and computer programs and momentum really began to takeover bringing the price down now to around 34.
I’ve been a big proponent for silver investing for many years now, due to the market fundamentals, some of which I outlined above. Am I now bearish on silver because the price came down?
Absolutely not! I am still very bullish on silver investing as well as gold investing because the fundamentals remain unchanged. Has our government somehow discovered an extra $14.3 trillion to cover the growing deficit? Or another $80 trillion or so to cover the unfunded liabilities that may be off-balance-sheet but are still debts paid for and owed to tax payers (think of social security, medicare, medicaid, etc). There’s over $100 trillion of debt our government is defaulting on and the interest that’s accruing on it is only compounding making the situation exponentially worse…
…But our government does have a solution to this problem (though they won’t admit it through their words – you have to look close at their actions to tell). It’s called inflation. Their plan to pay off all this debt is to basically inflate or hyper-inflate the debt away. What does that mean? It means they plan to steal that money from everyone else by devaluing our money as they add trillions of dollars to the money supply.
Imagine you were playing monopoly with a friend and you got to be the bank. You both started out with the customary $1,500 each, right? Now let’s say you purchased several properties and ran out of money but you landed on Boardwalk and purchased it with an I.O.U. You simply tell your friend that you are going to simply give yourself an additional $400 so that you can buy Boardwalk but he doesn’t get that extra $400 (he’s not the government or Federal Reserve – which is neither Federal nor does it have any kind of reserve, nor is it a government entity, but I digress…).
So what’s happened? Essentially the money supply that had a value of $3,000 (both your $1500’s together) now in nominal terms is $3,400 – that is 13% inflation! If you kept that up each round, what would happen? Your friend would run out of money while you could simply buy anything you wanted. And as you go around the board buying properties with your money-out-of-thin-air, he goes broke and you end up with everything – (even though technically you should be in debt to your eyeballs). That’s what our government does!
However, in the real world, businesses are not stagnant. If they see prices increasing, they have to raise their prices in order to continue being able to make enough money so they too can survive. In the monopoly example, that would be like the price of Boardwalk going up to $500 to compensate for the extra money in the system.
So what about silver investing and creating wealth?
Anything that takes off and shoots up like silver did recently in such a short period of time – even when the fundamentals are sound – is bound to go through corrections. No bull market only goes straight up. As mentioned before, speculators jump in when they think they can make a profit and push high prices higher and lows lower. Silver is a volatile market due to it’s small size among other factors. The general trend going forward continues to be up, however, as the metals do every year, I expect the summer to be a perfect time to pick up the metals cheap, silver perhaps in the high 20’s or so maybe a little lower as the dollar appreciates some with everyone currently fleeing the Euro for safety (Portugal and Greece default concerns, etc). The dollar is likely to drop back down coincidentally at the end of the summer as well which should prompt another good rally for silver.
The important thing is to do your homework and become financially educated. Learn about the benefits of silver investing as well as gold investing for that matter as well. Don’t just jump into or out of them because of fear or emotion. Use common sense and educate yourself about the bigger picture in particular so that you’re prepared for whatever may come down the pike for creating weal regardless of the outcome – keep your emotions out of it by being prepared and getting financially educated.
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It is definitely easy to let fear take over and cause you to jump into/out of investments like this, but it’s important NOT to allow that to happen and keep a calm head before making too many irrational decisions. Thanks for the outline here, I feel a lot better about the money I pretty recently invested in silver and gold – just in case!
Good point Kayla, a lot of people love to jump on board a rising stock for example because of fear of loss, they don’t want to miss out. Their emotions will convince them to jump in or out even before they understand the fundamentals or reasoning behind WHY to do or not do something. Again, it all comes to financial education and controlling and not reacting emotionally to market events but to understand the longer term fundamentals, what’s driving the market and you’ll make much decisions and feel much better about them afterwards. Thanks for your comments.
Advocates of gold investing are usually in one of two camps. The hedge camp suggests that gold will hedge against inflation. The other camp is the apocalyptic camp that suggest owning gold will give you an advantage over potentially worthless paper money when economic and political chaos reins.
That is true. Then are investors and speculators or trend followers as well who simply look at the charts and see that gold has been up every year for 11 years in a row (silver has a similar history as well).
Hi Hans…I never regret that I visited your site and I know that I will learn a lot from this…Anyway, investing is never easy and we all know that it always requires confidence and being optimistic…Continue to inspire people!!
I think a good rule of thumb is to not put all of your eggs into one basket!
I was just closing your site page recently but when I really found it interesting and informative.I am new to your site I am also a content writer and I write articles on various topics of Finances . I really liked the way you have presented your site. Nice post keep it!!
Great posting my brother! In my honest option (I’m a recovering commodities broker), precious medals was never and never is a bad idea.
With the more uncertain times ahead of us over shadowing our financial futures, it’s no longer and option… it’s a requirement.
It’s out job to help those understand that this is the only way to hedge your bet for the future.
Couldn’t agree more Dereck! Thanks for the comments.
Completely agree with you Dereck. My friend’s grandparents retired off of their investment of gold. Natural resources are great investments.
I never thought before of investing into silver, I am kinda afraid to take any risks as I am not an expert in these stuff, especially not in economy investments, finances or stocks. I can only say I always prefer silver to gold, but investment is not about our own immpressions and subjective thoughts, but about realizing the macro economic situation in order to make the best decision possible.
Kristina, great point. I personally think gold and silver are pretty neat in their own right, but it’s the supply and demand forces behind them, the economic environment we see ourselves in today and the direction we are headed among other things that give them an important role today. It’s all about financial education and learning about the big picture, trends, macroeconomic and geopolitical forces, etc to understand what’s really going on and how to protect yourself as well as create wealth. Thanks for commenting!
Yes goodness Gold is high again isn’t it!
Had another chat with Jules, he said lately he has “seen silver up to $45 an in the last few months but has dropped to last $34 during the same period. Showing the unpredictable nature of the market place . Drop mainly due to a drop in the price of oil. Some say silver could go to $500/ oz by 2020. This could happen as silver is wasted in many industrial processes which means it does not accumulate.”
Have a great end to the week, Sadie 🙂
Hey Sadie, yes, the silver market is a much smaller market than gold as it is also has industrial function and is therefore consumed, making the silver market a much smaller market and prone to larger swings in the market. However, the fundamentals do remain. Many analysts predicted silver to drop much lower than $34, into the $20s, yet now it’s back to $40 already, even after 5 margin increase requirements (while the S&P margin requirements were lowered). Still a ways to go. Just goes to show the real effect of inflation and how serious it is becoming.
You are right, there has been a lot of noise lately about the silver markets.I have no experience, though I know the price of gold always goes up during a recession! Owing to all the chatter some months back I asked a friend who is both a silver and goldsmith in the UK Julian Stephens and he said he still though buying silver was definitely worth a long term punt! 🙂
Hey Sadie-Michaela, normally the summer time is a weak time for the precious metals yet as I type this gold is over $1600 hitting a new record and silver is back over $40. The fundamentals for holding gold and silver still exist even with the 5 margin increases they put into effect. There’s definitely something to this market. Thanks for your comments.
I’ve never thought over Silver Investing but just got a bit curious reading your post and I’m certainly checking for more details. The unpredictable nature of the market makes investing more challenging and it depends on personal choice about where and in what we invest but I never invested in precious metals, I usually go for properties but land properties takes time to liquidate though it is worth investing.
Hey Greg, yes, that is definitely an advantage of precious metals – they are very liquid and can easily be traded for something as well (not just dollars). I too invest in property which may also be a good hedge against inflation and the crashing dollar (as long as your costs are more or less fixed and the properties are cashflowing so you can hold through uncertain times and continue to make money). Silver is real money and can be fun learning all about it – even just holding it your hands – not to mention profitable. Thanks for your comment!
What a timely post. I have been thinking about silver/gold for some time. I read from others on the net that there is going to be a great wealth transfer sometime soon. Unfortunately it won’t matter to me since I have no wealth to transfer. Someday soon I will. Love your post and will be following you for more advice. Your writing style is easy to read on a subject that is at times confusing.
Joyce, what’s funny is that with all the social backstops in place today, they (our government/the Federal Reserve/etc) have been able to prolong or put off this great transfer of wealth. It is already beginning to happen but there is still time to create wealth before the window closes and the middle class potentially gets wiped out (according to people like Robert Kiyosaki and others). Thanks for your comment and check out some of my other posts for ideas on creating wealth so you don’t miss the window!
AH, the ups and downs of investing. While I don’t invest in metals myself, I’ve known a couple people who do so. Metals seem to be a lot more ‘stable’ than say, ‘oil’ or commodities for example. (Is this right?) In any case, I think folks have to be mentally prepared for the corrections in order to come out on top. Thanks for the education.
Hey Linnea,I would say the long-term fundamentals for precious metals are more sound that just commodities in general but inflation on the rise, commodities should also going to see a large rise (of course so will most things, even the stock market and real estate). With oil though you also have supply issues with global overall demand increasing so I think we’re bound to see higher oil prices there as well. But as far as hedging against inflation or a declining dollar, silver and/or gold are likely going to be your best bets.
That’s really what it’s all about though Liennea, is education. Being informed and aware of what’s going on gives you a much better odds of coming out on top. Otherwise, without the awareness and education, you’re only gambling, hoping or preying your right! Not the best investment strategy as many are or have learned recently with the stock market and housing crashes… Thanks for your comments!