I have been thinking ever more carefully about physical silver and gold over the past two weeks – in part because I own both.
What to do, given the price rise in the past few days (at 12:30 p.m. ET today physical silver was U.S.$42.59, up U.S.$0.47 on the day, and physical gold was U.S.$1,484.55, up U.S.$9.47 on the day) – sell some or all, hold and do nothing, or buy more of one or both? So I have been reading and thinking. Some of the things I am focusing on are:
· philosophically, what do I believe about physical silver as a ‘safe haven’ holding, and do I believe it to be ‘as good’ a safe haven holding as physical gold? My answer: I don’t think silver is gold’s equal as a safe haven holding. I consider silver’s price more volatile, and I find silver to be a far more complex metal to understand from a demand/supply perspective than I find gold;
· how much of the apparent ‘investment demand’ for physical silver is coming from people who are ‘jumping on the silver bandwagon’ as a result of possibly overreacting to silver’s rapidly increasing price – up about 50% in the past 75 days? Is a lot of this demand ‘lemming like’ in circumstances where many of those buying physical silver haven’t researched and thought about the factors that drive the silver price? I suspect there probably is some of this in the silver market at the present time, but have no idea how much;
· will there be a Quantitative Easing #3 in the U.S. after June of this year (when QE2 ends according to latest U.S. Federal Reserve statements)? My current view (which might change tomorrow, next week, or next month) is that QE3 (perhaps with a time gap between the end of QE2 and the start of QE3 as the Republicans voice constraint over QE3 but in the end give in to it) is more likely than no QE3. I do think there will be ‘big interplay’ and much ‘gnashing of teeth’ between the Republicans and Democrats during the upcoming Washington debates over the U.S. Debt Ceiling and the 2012 U.S. Federal Budget, and that those debates will include acrimonious debates over QE3. If there is a QE3, I see further erosion of the U.S.$, which ought to be good for the silver price;
· if there isn’t a QE3 will this mean the U.S. will have to raise interest rates, and will it have to do that in any event in order to sell Treasuries to third parties to fund its debt? If the U.S. raises interest rates the U.S.$ ought to strengthen, at least for a period of time, and I think U.S. interest rate hikes likely would have a negative affect on both the gold and silver prices, perhaps impacting the silver price more than it impacts the gold price in percentage terms.;
· I am well aware of all the ‘stuff’ written about how small the physical silver market is (I agree that it is small), how industrial demand for silver is growing and how there is a growing ‘silver scarcity’ (industrial demand is what for me primarily differentiates silver from gold, and makes silver for me more complex to figure out), how investment demand for silver is in its early stages (implied net investment in physical silver was up 40% in 2010 over 2009 according to one of the articles listed later in this commentary), how the price of silver is manipulated (I don’t’ know that it isn’t, so far think this is mostly allegation, but also think that where there is smoke there usually is fire), and all the talk of the silver/gold price ratio being far too high in historic terms (I personally don’t think this matters, as I see this ratio as an ‘effect’, not a ’cause’), etc, etc. Frankly, when I put all this in pot and stir, I reach the conclusion that there are positives and negatives in the pot that I have trouble assigning weights to;
· that anyone who has a paper profit on physical silver and sells it may have (at least in Canada) income tax to pay, leaving one with less fiat currency to reinvest than the gross market value of the physical silver sold. For an individual in Canada who is able to treat a realized gain on physical silver as a capital gain, the effective rate of tax on unsheltered gains can be as high as 23% of that gain. I have never seen a commentary discuss the income tax effect on proceeds from the sale of physical silver as part of a buy/sell physical silver decision;
· I am also concerned that the equity markets are overheated, and could drop (perhaps precipitously) on negative Sovereign Debt news, Middle East violence escalation, unexpected events, etc., or simply run ‘run out of steam’ because of a continuing deterioration in the U.S. economy.
So what to do? Frankly, having regard for my own circumstances, I am prepared to hold my physical silver position for the time being, but plan to watch things very closely every day, and make a new decision on my sell/hold/buy view each day. My worry is that I am allowing ‘greed’ to influence my ‘hold’ decision – where one of my basic market beliefs is ‘Every Day You Hold Is A Day You Have Bought All Over Again’.
Note that I have been careful to reference ‘my own circumstances’. I stress that in order to highlight that no one should take the foregoing as investment advice – it isn’t, and isn’t intended to be. Every investor’s circumstance is different. If you hold or are contemplating holding physical silver, you should not do that unless you rely on your own understanding of the physical silver market – or rely on your investment professional(s) for advice.
Four articles you might want to read are:
· ‘Silver: Too Far, Too Fast‘ – reading time 2 minutes;
· ‘The rise and rise of silver and gold‘ – reading time 2 minutes;
· ‘What to Do in Case of a Silver Crash‘ – reading time 2 minutes; and,
· ‘Silver: Toppy or Just Warming Up?‘ – reading time 2 minutes.
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