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The
silver price has bounced 27% since January 28, a huge advance for a measly 16
trading days. It's already soared past its 2010 high and was selling for less
than $16 this time last year, a double in 12 months. So, is it pricy? Or
should we ignore the run-up and keep buying?
I've
read a few articles that say we should expect silver to drop to the $25
level, and one pinpointed $22. Others, of course, see bullish tea leaves for
the near term and believe it's headed higher. Of those that assert silver
will decline, most believe it will be temporary, though one writer claims the
bull market in precious metals is over (I think he's a holdout from the
gold-is-a-bubble camp).
These
authors could be right about a near-term decline, but I'm less concerned with
what the price does this month or even the next few months, and more focused
on where it's likely headed over the next few years. Caution: the chart ahead
may cause excitement.
While
there are lots of reasons to be bullish on silver, what everyone really wants
to know is how high the price can go. Here's one hint, based strictly on
historical price performance.
 
Silver
rose an incredible 3,646% from the November 1971 low of $1.32 to its January
21, 1980 high of $49.45 (London PM fix prices). Our current advance, through
February 4, is 596%. At $30, silver would have to climb over five times to
match the last great bull market. If it did, the price would hit $160.89 per
ounce (from its bottom of $4.295 on March 30, 2001).
You'll
also notice silver has a record of outperforming gold in these two bull
markets. In spite of the price dropping 26.9% in 2008 (while gold gained 5%),
the metal has outrun its yellow cousin by 38.6% since their respective lows
in 2001.
Gold
advanced 2,333% in the 1970s; it's currently up 430%. If it matched the last
run, the price would hit $6,227.26 per ounce, a return of four-and-a-half
times the gold you buy today.
From
solely a historical price perspective, the chart certainly suggests we've got
a long way to go with both metals. The question is if the fundamentals
support such price advances (show me a healthy dollar and no threat of
inflation, and we'll talk), but my point for the moment is that there is an
established precedence for the price of these metals to climb much higher.
And just as important, to keep one's eye on the big picture.
So,
yes, I'm buying silver at $30, in part because I think the potential for enormous
gains is high.
However,
I'll add that I'm not draining my cash account to do so. I think it's
important for the precious metals investor to always be in the game, but
given silver's volatility and the precarious nature of most markets right
now, prudence suggests we keep some powder dry as well.
Let's
say one of the soothsayers noted above is correct and silver temporarily
falls to $25. If you snag it at that level, your endgame return would be
543%, vs. the 436% gain from $30 (excluding premiums and storage costs).
That's more than another 100% gain on your original investment.
But
how does one buy silver not knowing if the price will plummet or soar? For
example, silver could take off from these levels, never to see $30 again,
leaving those of you waiting for a sell-off out of the market. Or it could
sink to $25, making investors who went all in now regret they didn't wait for
a better price. Or it could trade sideways until, say, next fall, leaving
both parties uncertain and on the sidelines.
In my
opinion, there's a one-word answer to the question. It solves all dilemmas -
it keeps you in the market, while simultaneously letting you buy at lower
prices if that occurs. It lets you build your position bigger and bigger
without the worry of whether you're getting a good price.
That
one-word verb is, accumulate. Or in the vernacular made popular in the
'80s by the financial planning community, dollar cost average. In other
words, buy a little now, buy a little next month, etc., until you have a position
sufficient in size to fight off inflation and any other economic woe we're
likely to encounter over the next few years.
So my
advice is, buy, hold, repeat. Because if our silver market ends up looking
anything like that left bar in the chart, you may regret not having bought at
$30, too.
Jeff Clark
BIG GOLD
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