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When to Acquire Silver, the Metal of Emperors?

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"To meet demand, silver suppliers have had to run down their stockpiles. However, this solution has only a limited time scale before it becomes depleted, thus limiting the supply and forcing prices up."


This is a question that pops up in our mailbox on a regular basis. The standard answer for the average retail buyer, who has neither the time nor the inclination to do the hard yards in terms of due diligence, is to layer in your acquisitions via a rolling program of purchases. This can be implemented regardless of the day-to-day 'white noise' that has many behaving as though they had spent the morning in a double-shot espresso drinking contest. Sell, buy, buy, sell. . .we all know that emotional white-knuckle ride and it needs to be sidelined. Try chill, relax, relax and chill for a day or two, and switch to a herbal tea.

Now, when you are sitting comfortably, we will continue with today's "take" on silver. Keep in mind, though, that we are big fans of silver and that our views and opinions can be biased toward silver, the metal of emperors. (Gold being the metal of kings, as you well know.)

Silver is often described as "poor man's gold, a second-class citizen in the world of precious metals. How preposterous. We will concede that it is indeed cheap at the moment, however, in a few short years the uninformed will be shrieking "How much?" as they try to come to terms with just how fast and how far silver has traveled.

Silver has many uses, not just decorative as in jewelry. It also has industrial and medical uses, as it is top of the class in terms of conductivity of light and electricity. It is easy to work with and can be shaped to almost any requirement. Silver is highly resistant to corrosion and requires little in the way of maintenance. As traditional sources of energy cost more, so the need for solar panels increases, hence we have China, the biggest producer of these panels, becoming an importer of silver as opposed to being an exporter. India also sees the value in silver and is a major importer of silver. These two countries alone help to backstop silver prices. To meet demand suppliers have had to run down their stockpiles. However this solution has only a limited time scale before it becomes depleted, thus limiting the supply and forcing prices up. Now if we throw in the constant devaluation of currencies worldwide then we start to get the picture of why silver prices have moved up from $4/ounce (oz) to $33/oz. Silver is a store of wealth and a hedge against inflation similar to its big brother, gold, however, we think that it has an edge over gold.

Silver is being consumed; gold for the most part is being stored. By comparison to gold the silver market is tiny, so when the demand heats up and the general public finally take an interest, the rush will look like a Wild West land grab. From the outset of this bull market we have maintained that silver will outperform gold and we see no reason to change our stance. Also note that the ratio of gold to silver is 51:1, during the last bull market when gold hit $800/oz, silver hit $50/oz, a ratio of 16:1. Should this event reoccur, then we could soon be looking at $500/oz. It wont be a poor man's anything then. With that scenario in mind we could argue it doesn't really matter what you pay for silver today.

Now, for those of you who watch gold and silver so closely that your eyeballs dry out and your eyelids are locked in the open position, we will give our short-term take on the situation.

Taking a quick look at the chart we can see that silver is struggling to gain any traction in terms of meaningful progress, as another rally fails to make a higher high. Look for the 50-day moving average (dma) rising and crossing over the 200dma, usually a very positive sign for higher prices; also watch for the Relative Strength Index (RSI) to go below the 30 level as a sign that silver is well and truly oversold. Finally, the dollar, the euro and the UK’s pound are toast, looking for their final resting place in a world where they are no longer trusted as a store of value.

This is how we see it, but it is your hard earned cash and it is your choice, so please read as widely as you possibly can in order to position yourself safely in this rapidly changing economic environment.

Bob Kirtley, SK Options Trading

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Winners of the GoldDrivers Stock Picking Competition 2007

Disclaimer: or makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.

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