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Since it is just about time to man my guns and go short on this particular mania:
The madness overwhelming the silver market has to be seen to be believed. Prices have skyrocketed in the past few days. The U.S. Mint has sold out of Silver Eagles, and is quoting several weeks' delivery.
Everyone is getting in on this. While I was in a local coin and precious metal dealership this week, two well-dressed men came in, eager to snap up some silver bullion bars.
It's getting ridiculous. Here are six good reasons this is a mania.
1. The price spike
Look at the chart. Does that look like a spike to you? It looks like a spike to me. Can you find anyone who doesn't think it looks like a spike?
At $44, silver is now at the highest levels since the tycoon Hunt brothers tried to corner the market, illegally, back in 1981. That's when it skyrocketed – very briefly. Then it collapsed.
Nothing is certain, but spikes are there to be sold. When a price moves that high, that fast, it creates high-danger situation. The few occasions in your life when a spike goes even higher will be more than offset by all those spikes which collapse.
If you buy into this at these levels, be aware of the risks you're taking. You can't buy low and sell high if you buy high.
Silver, price per ounce, 1984-2011
Source: Factset
2. Madness in silver funds
Take a look at the Sprott Physical Silver Trust ( PSLV: 21.83*, -0.28, -1.26% ) , a silver fund run out of Canada. It's very popular with the silver bugs, because it lets you claim your actual bullion and carry it off. That's great if you think all paper assets, including stocks and exchange-traded funds, are a giant hoax.
Sprott's stock is booming. It has doubled since January and jumped again Friday to $22.11, a new high.
News Hub: Gold at Record, Silver Flirts With $50
Paul Vigna discusses why gold prices are a fresh record and silver is flirting with $50 an ounce first the first time since 1980. ( Watch video )
Sprott's assets consist of silver bullion. Value: $18.11 per share. In other words, anyone buying the stock is paying 22% above net asset value. So even while silver has zoomed to $44 an ounce, someone buying shares in Sprott is effectively paying $54 an ounce.
On the other hand, look at the boring old Central Fund of Canada ( CEF: 24.95*, +0.15, +0.60% ) . It's the grand-daddy of bullion funds. It's been around for 50 years.
The Central Fund holds silver and gold (and a little cash) worth $24.32 per share. Just over half of that is in silver. The Central Fund's stock is selling for $24.80.
That's a more modest 2% premium to net assets. But the silver bugs don't want it, because it isn't just silver, and because you can't redeem your shares for bullion.
Who pays a 22% premium when they could pay 2%?
3. Silver vs. gold
This chart compares silver to gold over the past 25 years. And silver, right now, is out of control.
On average, since 1984 an ounce of silver has been worth about 1.56% of an ounce of gold – or, to put it another way, an ounce of gold has been the monetary equal of 64 ounces of silver.
But in today's mania, an ounce of silver is being valued at around 3% of an ounce of gold, or twice the average. The ratio is 33-to-one.
Silver bugs will tell you than once upon a time the ratio was even more favorable to silver than that. In the 1800s silver was valued at 16 ounces per ounce of gold. Will those days return? Silver bugs clearly believe they will. But to bet on that happening is to bet that the market has had the relationship between these two completely wrong for most of the modern era. That's quite a bet.
I am not taking a view here about precious metals generally. The hard money school argues that as paper currencies get debased, scarce and valuable assets simply gain value. I've argued before that there is a reasonable, serious case for gold, even if some of the more popular arguments are total claptrap.
But if silver is a good thing, then gold is also a good thing. What on earth is a case for silver that excludes gold? It doesn't make sense. By modern standards, at least, it now looks very expensive compared to gold. Heaven knows what madness will happen this week, but from a strategic point of view -- that is, over the medium term – this is typically a sell. If you want a precious metal, it would seem to be an obvious conclusion to sell silver, buy gold.
Ounces of silver per ounce of gold, 1984-2011
Source: Factset
4. The conspiracy theories
The major ones claim that giant banks, especially J.P. Morgan Chase and HSBC, are massively "net short" of silver: In other words, they owe huge amounts of silver to others through the derivatives market. So, as a result, they are "desperate" to keep the price down, and they are engaging, or have engaged, in massive manipulation of the market to do this.
Make of it what you will.
Okay, so the theories involve a lot of paranoia. And they raise some pretty basic questions. Like, Why wouldn't these banks just close their positions? And, How can you know a firm's net position if you're only looking at its liabilities and not at its assets?
But let's put those quibbles to one side. You can believe this stuff, or not. But if the silver bugs are right, and the theories have merit, something odd is going on.
The skyrocketing silver price ought to be driving these banks to the brink of disaster. And yet their stock prices are doing very well. HSBC Holdings PLC ( HBC: 54.30*, -0.06, -0.11% ) has risen about 5% so far this year, and about a quarter from last summer's lows. J.P. Morgan Chase ( JPM: 44.71*, +0.03, +0.06% ) is up about 3% so far this year. It's back to levels seen before Lehman Brothers imploded.
If these two banks are bust, they are doing a good job of hiding it.
Perhaps this, too, is a conspiracy. Maybe the Council on Foreign Relations, the Bilderberg Group, the Pope and the Duke of Edinburgh are secretly keeping these banks' stocks up.
If so, I would have thought the easy bet for conspiracy theorists would be to bet on the collapse of these banks' stock by buying "put" options. A $20 put option on J.P. Morgan, good till January 2013, costs just 60 cents per share. If the stock goes to zero, the silver bugs will all be millionaires. All the upside of the silver conspiracy, with very little risk.
5. The bloggers
A lot of the people pushing these conspiracy theories are doing so on blogs.
Big surprise.
There's a lively community of silver bug bloggers. And they are having a fair amount of influence, especially on the naïve.
Make of the conspiracy theories what you wish. But do consider the sources. Before you take some blogger as the independent voice of truth, take a look at the banner ads on his site.
You'll notice they're all for gold and silver merchants. Every time someone visits that blog, gets all excited about the conspiracy theory, and then clicks on an ad to go buy some gold or silver, the merchant pays the blogger a fee.
Conflict of interest? Working an angle? Or just an innocent practice? You make the call. But understand the economics. These guys have a vested interest in panicking people and getting them to buy gold and silver. Fact.
6. A silver shortage?
People are rushing around saying there's a silver shortage. You gotta load up now, man! There's none left! After all, hasn't the U.S. Mint just stopped shipping Silver Eagles?
Some people foolishly try to engage the silver maniacs on this topic, and argue that there isn't really a silver shortage all. They say demand for silver Eagles in this mania has simply outstripped the production capabilities of the Mint.
Phooey. I don't care about any of that. My riposte is simpler: If there's a silver shortage – so what?
Silver isn't water. It isn't bread. It isn't housing, or clothing. It isn't even an iPad. I have gone several decades without possessing much silver – I have some cufflinks - and so far I feel just fine. One day, it's true, I will keel over and die. But even if I filled all my pockets with silver – even if I also poured silver coins down both socks, and stuffed more of them into my mouth, so that I could not, physically, carry one more ounce of silver, anywhere on my body – then the day, alas, would still come when I would keel over and die.
Silver won't save me. Silver is a totally pointless metal. (Okay, it does have some industrial applications — but even there it's generally substitutable. It's pointless, or at least a luxury, for ordinary people.) If there is a shortage, so what? You do not need to go out and stand in line for hours in the hope of buying the last silver coins in your local dealership. You do not need to pay way over face value for silver bullion or a silver trust in a last, desperate move to get some silver before the market closes forever.
Madness.
The madness overwhelming the silver market has to be seen to be believed. Prices have skyrocketed in the past few days. The U.S. Mint has sold out of Silver Eagles, and is quoting several weeks' delivery.
Everyone is getting in on this. While I was in a local coin and precious metal dealership this week, two well-dressed men came in, eager to snap up some silver bullion bars.
It's getting ridiculous. Here are six good reasons this is a mania.
1. The price spike
Look at the chart. Does that look like a spike to you? It looks like a spike to me. Can you find anyone who doesn't think it looks like a spike?
At $44, silver is now at the highest levels since the tycoon Hunt brothers tried to corner the market, illegally, back in 1981. That's when it skyrocketed – very briefly. Then it collapsed.
Nothing is certain, but spikes are there to be sold. When a price moves that high, that fast, it creates high-danger situation. The few occasions in your life when a spike goes even higher will be more than offset by all those spikes which collapse.
If you buy into this at these levels, be aware of the risks you're taking. You can't buy low and sell high if you buy high.
Silver, price per ounce, 1984-2011
Source: Factset
2. Madness in silver funds
Take a look at the Sprott Physical Silver Trust ( PSLV: 21.83*, -0.28, -1.26% ) , a silver fund run out of Canada. It's very popular with the silver bugs, because it lets you claim your actual bullion and carry it off. That's great if you think all paper assets, including stocks and exchange-traded funds, are a giant hoax.
Sprott's stock is booming. It has doubled since January and jumped again Friday to $22.11, a new high.
News Hub: Gold at Record, Silver Flirts With $50
Paul Vigna discusses why gold prices are a fresh record and silver is flirting with $50 an ounce first the first time since 1980. ( Watch video )
Sprott's assets consist of silver bullion. Value: $18.11 per share. In other words, anyone buying the stock is paying 22% above net asset value. So even while silver has zoomed to $44 an ounce, someone buying shares in Sprott is effectively paying $54 an ounce.
On the other hand, look at the boring old Central Fund of Canada ( CEF: 24.95*, +0.15, +0.60% ) . It's the grand-daddy of bullion funds. It's been around for 50 years.
The Central Fund holds silver and gold (and a little cash) worth $24.32 per share. Just over half of that is in silver. The Central Fund's stock is selling for $24.80.
That's a more modest 2% premium to net assets. But the silver bugs don't want it, because it isn't just silver, and because you can't redeem your shares for bullion.
Who pays a 22% premium when they could pay 2%?
3. Silver vs. gold
This chart compares silver to gold over the past 25 years. And silver, right now, is out of control.
On average, since 1984 an ounce of silver has been worth about 1.56% of an ounce of gold – or, to put it another way, an ounce of gold has been the monetary equal of 64 ounces of silver.
But in today's mania, an ounce of silver is being valued at around 3% of an ounce of gold, or twice the average. The ratio is 33-to-one.
Silver bugs will tell you than once upon a time the ratio was even more favorable to silver than that. In the 1800s silver was valued at 16 ounces per ounce of gold. Will those days return? Silver bugs clearly believe they will. But to bet on that happening is to bet that the market has had the relationship between these two completely wrong for most of the modern era. That's quite a bet.
I am not taking a view here about precious metals generally. The hard money school argues that as paper currencies get debased, scarce and valuable assets simply gain value. I've argued before that there is a reasonable, serious case for gold, even if some of the more popular arguments are total claptrap.
But if silver is a good thing, then gold is also a good thing. What on earth is a case for silver that excludes gold? It doesn't make sense. By modern standards, at least, it now looks very expensive compared to gold. Heaven knows what madness will happen this week, but from a strategic point of view -- that is, over the medium term – this is typically a sell. If you want a precious metal, it would seem to be an obvious conclusion to sell silver, buy gold.
Ounces of silver per ounce of gold, 1984-2011
Source: Factset
4. The conspiracy theories
The major ones claim that giant banks, especially J.P. Morgan Chase and HSBC, are massively "net short" of silver: In other words, they owe huge amounts of silver to others through the derivatives market. So, as a result, they are "desperate" to keep the price down, and they are engaging, or have engaged, in massive manipulation of the market to do this.
Make of it what you will.
Okay, so the theories involve a lot of paranoia. And they raise some pretty basic questions. Like, Why wouldn't these banks just close their positions? And, How can you know a firm's net position if you're only looking at its liabilities and not at its assets?
But let's put those quibbles to one side. You can believe this stuff, or not. But if the silver bugs are right, and the theories have merit, something odd is going on.
The skyrocketing silver price ought to be driving these banks to the brink of disaster. And yet their stock prices are doing very well. HSBC Holdings PLC ( HBC: 54.30*, -0.06, -0.11% ) has risen about 5% so far this year, and about a quarter from last summer's lows. J.P. Morgan Chase ( JPM: 44.71*, +0.03, +0.06% ) is up about 3% so far this year. It's back to levels seen before Lehman Brothers imploded.
If these two banks are bust, they are doing a good job of hiding it.
Perhaps this, too, is a conspiracy. Maybe the Council on Foreign Relations, the Bilderberg Group, the Pope and the Duke of Edinburgh are secretly keeping these banks' stocks up.
If so, I would have thought the easy bet for conspiracy theorists would be to bet on the collapse of these banks' stock by buying "put" options. A $20 put option on J.P. Morgan, good till January 2013, costs just 60 cents per share. If the stock goes to zero, the silver bugs will all be millionaires. All the upside of the silver conspiracy, with very little risk.
5. The bloggers
A lot of the people pushing these conspiracy theories are doing so on blogs.
Big surprise.
There's a lively community of silver bug bloggers. And they are having a fair amount of influence, especially on the naïve.
Make of the conspiracy theories what you wish. But do consider the sources. Before you take some blogger as the independent voice of truth, take a look at the banner ads on his site.
You'll notice they're all for gold and silver merchants. Every time someone visits that blog, gets all excited about the conspiracy theory, and then clicks on an ad to go buy some gold or silver, the merchant pays the blogger a fee.
Conflict of interest? Working an angle? Or just an innocent practice? You make the call. But understand the economics. These guys have a vested interest in panicking people and getting them to buy gold and silver. Fact.
6. A silver shortage?
People are rushing around saying there's a silver shortage. You gotta load up now, man! There's none left! After all, hasn't the U.S. Mint just stopped shipping Silver Eagles?
Some people foolishly try to engage the silver maniacs on this topic, and argue that there isn't really a silver shortage all. They say demand for silver Eagles in this mania has simply outstripped the production capabilities of the Mint.
Phooey. I don't care about any of that. My riposte is simpler: If there's a silver shortage – so what?
Silver isn't water. It isn't bread. It isn't housing, or clothing. It isn't even an iPad. I have gone several decades without possessing much silver – I have some cufflinks - and so far I feel just fine. One day, it's true, I will keel over and die. But even if I filled all my pockets with silver – even if I also poured silver coins down both socks, and stuffed more of them into my mouth, so that I could not, physically, carry one more ounce of silver, anywhere on my body – then the day, alas, would still come when I would keel over and die.
Silver won't save me. Silver is a totally pointless metal. (Okay, it does have some industrial applications — but even there it's generally substitutable. It's pointless, or at least a luxury, for ordinary people.) If there is a shortage, so what? You do not need to go out and stand in line for hours in the hope of buying the last silver coins in your local dealership. You do not need to pay way over face value for silver bullion or a silver trust in a last, desperate move to get some silver before the market closes forever.
Madness.
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