Thursday, April 7, 2011

Is it too late to invest in Silver?

Been busy this week, so I haven't had a chance to post a part 2 to last Sunday's post but I hope to get too it before too long.

Jeff Clark, of Casey Research, has come out with an article which it timely and addresses a subject I have been questioned about a lot lately: "As an investor, have I missed out on silver?"
I get this question almost every day. And with good reason... silver's performance since last August has been phenomenal, doubling in price since the dog days of summer.

So if you are just now looking to get into silver as an investment, are you making the mistake of getting in at the top?  Is the price being driven by all the same things we see in the Housing Bubble: ie. irrational exuberance and over investment?

The fact is, we haven't even begun to see silver rise in price... and you haven't missed anything yet.
One of the best ways of looking at silver is to compare the amount of money investors have invested in silver with those of other 'products'.

As Jeff Clark notes, the market cap of the silver industry is $73.1 billion.  Compare this with the market cap of other industries (see above chart). It barely registers when compared to a number of other industries.  The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger. The gold market is 19 times greater.

And here’s a stunning statistic: the market cap of the entire silver market, with all its record-setting prices, represents just one-third of one percent of the oil and gas industry.

The silver market is very tiny.

And it's so tiny, that I would suggest to you that the money is just starting to flow into it.

That's why the price has risen so dramatically.

As more investors start to seek the security of precious metals in this era of governmental fiscal mismanagement and runaway debt, average investors will be tripping over themselves to join in. And when they do, silver will rise parabolically.

Consider the following chart:

At $35 silver an ounce, all exchange-traded funds backed by silver amount to $20.7 billion.

This is less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the ’08 meltdown. Exxon Mobil is more than 20 times bigger.

And this isn’t even a proper comparison as we are comparing the entire silver ETF market to a few individual stocks.

This is even more interesting when you consider that it’s the ETF market where most of the public – especially those that are new to the market – first invest in silver. So while the metal has doubled in the past seven months, total investment in the funds is still far beneath many popular blue-chip stocks.
The fact of the matter is that money hasn't even begun to start flowing into silver.

The same can be said for Gold as this chart from Sprott Asset Management indicates.  In 2009 investment in gold and gold mining shares as a % of global assets was less than 1%.

Compare this to investment in Gold and Gold mining stocks in other big bull market years for Gold.

I am personally convinced you will see the world move substantially into Gold and Silver in the coming years repeating the periods of high investment in 1981, 1948, 1932 and 1921.

And because silver is such a small market now, when you combine the investment demand with the industrial demand - I believe silver is set to rise exponentially.

Does that mean silver won't have a pull back?  Of course not. As Clark notes "price will always ebb and flow in a bull market, and an ebb is overdue. The question, of course, is from what price level it occurs. What if a correction doesn’t ensue until, say, a month from now, and the price falls back to… where it is now? I remember some articles in January that insisted silver would fall to as low as $22, and, well, they’re still waiting and have in the meantime missed out on some huge gains. For silver to fall back to $22 now would require a 40% drop; not impossible, but I wouldn’t hold my breath."

I often suggest people check out this youtube video clip that, while a bit sensational, outlines the silver case quite well.

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