For the average person reading or listening to the news it may seem as if silver is going through a classic asset bubble period. However, even a superficial look at what is happening will show this to be anything but a bubble. The primary dynamic to any asset bubble is a rapid herd-like movement into a particular market with the hopes and plan of making substantial profits from others moving into the market. We can all remember the tech and real estate fiascoes of a few years ago. At the time practically everyone you knew was talking about stocks or property and buying into the these markets. But who do you know now who has any silver? Or talking about it? And most importantly, even owns it?
Let's take a look at a number of critical and hugely important factors driving silver right now.
1. Dollar Inflation / Weakening / Failure
Year over year, the dollar is losing 10% - 20% of its purchasing power. This is corrosive and incredibly damaging to wealth. The safety of hard assets is the traditional safe haven for wealth and the preservation of purchasing power.
2. Silver Deficit
Since 1990 the annual production output of silver has been exceeded by demand, which is primarily industrial. As a result overall above-ground reserves has depleted from 1.8 billion ounces in 1990 to around 500 million ounces today. In many cases there are no acceptable alternatives to silver and the demand for this precious metal is increasing. And for some real historical perspective, in 1900 the silver supply was around 12 billion ounces.
3. Gold / Silver Ratio
This is related to point 2, but is fascinating in its own right. In 1990 there was about 2 billion ounces of gold above ground and today there is still approximately 2 billion ounces. So while in nature silver is the far more abundant element (and pricing has reflected that relationship, in part) we now have the reverse of that natural ratio. In short, gold is desired and silver is desire AND absolutely needed.
4. Asset Allocation
Studies have shown that a 7% portfolio allocation into a precious metals hedging position is the most effective strategy to protect the downside to dollar-denominated assets. Over the last few years that prudent approach has been abandoned in favor of an all-in gambling/leverage mentality for the average investor. Because that period of massive and widespread leverage investing is largely over, any general positioning into precious metals now and the future will have a huge effect on silver pricing.
5. Silver is Undervalued
Based on historical ratios and valuations silver should be trading at around $80 and ounce. Factor in its true scarcity and relentless demand even at the present moment and the price should be much higher. Than factor in our current economic uncertainty and the near-total exposure of assets to the dollar and you have a scenario of high triple digit silver pricing.
Any rational examination of silver shows the only dynamic really worth considering: Everyone needs silver, either directly or indirectly, and currently there are low and dwindling supplies.
What else is there to know?
