SILVER HIT 31-YEAR HIGH
Silver is exploding higher to new 31-year highs at the same time gold is trying to recapture its all-time highs. While gold and silver generally move in the same direction, they have slightly different cycles. It appears it is silver’s time to shine.
Some readers seem to be getting the impression that I am not bullish on silver, which is absolutely false. I am hesitant to add at current levels, but I still have a very healthy long position in silver. This has to do with the way I invest. I generally like to add on weakness or when an asset is oversold.
If I believe an asset is way oversold, I have no problem applying modest leverage. So when I say I’m not adding, many times it means I’m not adding on leverage. The last thing it means is that I have sold out of my position.
Silver is overbought here, but that does not mean it can’t go much higher. I even warned last spring that gold and silver were going to be overbought and stay overbought. Every asset has huge trending moves that make oscillators useless. This may be one of those times.
One of the problems of speaking to such a broad audience is that everyone has different investment philosophies. Some people want profits in the next 6 months while others think in terms of years. Some people are seeking protection in retirement while others are trying to leverage and gamble as much as possible.
I have a long time until retirement, so I trade in and out with a very small portion of my portfolio. However, people focused on retirement should probably be buying and holding.
Gold: Silver ratio
The 15:1 gold to silver ratio that often gets thrown around was set by Isaac Newton when he was Master of the Mint in England. The United States in its infancy had a very undeveloped monetary system so they adopted this ratio as well. The only problem I see with silver is that even if it is monetized, it can easily be demonetized like it was in 1873. By 1894 the gold:silver ratio had doubled. Recently the ratio was over 80. So while the ratio will likely fall as the possibility of a new currency arrangement rises, there is a limit to how much it can fall.
I think a gold:silver ratio of, say, 30 is reasonable. Let’s think this through. If gold were to rise to $3000, this would mean a silver price of $100, or a rise of over 200%. Silver shares would rise even more. At $5000 gold, silver would be over $166, which is a rise of over 400%.
The way I currently think about silver, I will not be aggressive at a 30:1 gold:silver ratio. I may change my mind, but I think the risk/reward scenario won’t be compelling at this level.
That being said, I am bullish on all things silver. Corrections in silver can be nasty, but I will be adding on corrections. Silver’s rise is just one small part of the current environment of changing paradigms.
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