When will silver prices explode?

June 25th, 2010

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David Morgan of Silver Investor Report is a well-known expert on silver. Naturally, he is bullish on silver prices. But for many investors, after having seen silver prices languishing for so long, they feel like giving up.

As we wrote in our book, How to buy and invest in physical gold and silver bullion, there are many reasons why silver is a better choice than gold in terms of price speculation. This is because it is a hybrid between monetary and industrial metal. In terms of supply and demand fundamentals (in the context of industrial use), silver is much stronger than gold (because it has hardly any industrial use).

However, for whatever reason, silver prices are languishing for a very long time. But for David Morgan he has a theory of when silver prices will see its day of vindication. The theory goes like this:

  1. Assuming that one day, people will lose faith in fiat money, gold will be hoarded by more and more of the masses.
  2. Unfortunately, gold is relatively expensive and rare and that means the majority of the masses will miss out on getting some gold for themselves.
  3. When that happens, they will notice that silver is dirt cheap relative to gold (since silver prices have been languishing for a very long time).
  4. Therefore, they will surge towards getting silver.

Given that silver prices are at a far lower base than gold, it doesn?t take much for silver prices to rise in absolute terms in order for it to rise a lot in percentage terms.

That?s when David Morgan believes that we will see silver prices soar. Will that day come? We don?t know, but this is a very good Black Swan trade to get into. If you want to speculate in silver prices, just make sure that the ?silver? that you hold are not empty promises.

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  • Also of note is that silver has a 1,000+ year historical legacy as China's currency of choice. Should the Chinese one day choose to reintroduce commodity backing to the RMB, there's a great chance it'll be done via silver.

    Now THAT'S when we'll see a real price explosion!

  • Pete

    Funny you write this article…I was thinking exactly this on Monday. I got an order in early, then you write an article 🙂

    I also see a pattern whereby silver prices tend to lag gold prices. It doesn't really matter to those who are not about to sell in the short term, however if you have such an obvious leading indicator like gold price, why not?

    The other reason I am becoming more bullish on silver is due to potential Govt. intervention (confiscation!). I wouldn't put it past the Govt. for one second to confiscate all gold bullion in the 'national interest'. They'd probably win votes from it…”working families” aren't exactly loaded up with gold bullion (until they invent a magical 'debt to bullion' converter).

    And as silver:
    -is partly industrial
    -seems to be depressed compared to the gold/silver price ratios of the past
    – is able to be traded for smallgoods
    – is artificially depressed in the markets (maybe)
    – has markets backed by smoke and mirrors
    – is less likely to be confiscated

    …I am becoming more and convinced that it is the best option.

    But then again, it could go back to $5 an ounce. Gold could go back to $400 an ounce too. But it seems very unlikely given current economic conditions.

  • Anon

    Grey SwansWhat’s the point of macro? Please remember this is just for discussion. This isn?t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

  • Yes, China's was still under the silver standard right until the 1930s.

    The only problem with physical silver is that it is very bulky. For example, it is easy to carry $10,000 worth of gold. But to carry $10,000 worth of silver…. you need strong muscles.

  • DavidL

    I live in a small town in the US and I was talking to my local coin dealer. I get mostly “junk” silver US coins from him and a few Silver Eagles. I asked him who besides me was collecting or hoarding metal, because I only ever see people bringing in stuff when I am there. He couldn't think of more than 5 people who were buying, but lots were bringing in old coins and jewelry to sell. This is a poor area, so it is going to take a lot before people have money even for silver. Most Americans don't have any Fiat saved, let alone have any fiat they can convert to Gold or Silver. That said, it is also true that the Americans that can afford it (ie have savings) are not getting into PMs yet. Stocks are still seen as the only way to invest money. No one is talking about gold or silver in a way that is changing 99percent of thinking yet. When that changes gold and silver will take off, unless all that money goes into ETFs that don't really have all that they imply–or no one has any money left for anything other than necessities because they lost what savings they did have in the stock market/housing market/bond market. It seems like the powers that be may be able to keep the spot price down using paper, even while demand is high and supply disappears, or sells at a very high premium to spot.
    My question is when or what will make the physical market spot price decouple from the paper market spot price?

  • Anon

    During the Great Depression, silver prices languished – certainly didn't increase in tandem with gold. What do you make of that?

  • Interesting story, David.

    It's true that the masses are not into buying physical gold/silver yet.

    When the physical price and spot price decouple substantially from each other, it will be a sign of the breakdown of the financial system. The fact that the majority of those with money are still investing in financial assets (e.g. stocks, ETF) shows that trust in the financial system is still there.

  • Anon

    I was actually looking at it too Pete 😉
    Long dated calls on the ETF but the premiums are too high. Looks like the smart money has already been piling into it.
    When the rolling fiat money crisis gathers pace especially next year, it will be interesting times indeed.

    BTW the other Anon isn't me, I am an eternal silver bull 🙂

    Please remember this is just for discussion. This isn?t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

  • Anon

    btw last time I saw these excessive type premiums was when I was going long the VIX back in April and looking for VIX calls. And I thought the premiums were crazy – and we know how that ended!

    Please remember this is just for discussion. This isn?t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

  • The Great Depression may not be a good comparison for today. There are some differences (though they may not be the reason to explain why):
    1. During that time, the US was still under a gold standard. China was under the silver standard.
    2. It was deflation during the GD.
    3. The industrial use for silver really came about in the 1960s.

  • DavidL

    Yes, it is strange to me that the trust is still there. I've spent a little bit of time figuring out that the financial wizards are in it for themselves and the small investor is out of luck. I don't invest anymore, I buy insurance and I keep some dry powder ready for quick speculations, maybe ride the coattails of the powers that be if I'm lucky. But lately I don't even do that because it takes too much effort to figure out the game of the day and without the access the big banks have. Recently heard a Precter interview where he said how few people were interested in stocks in the 1950s, but eventually that switched, not risk aversion is slowly coming back and stocks will lose favor. Interesting times…..

  • Great article, Anon!

  • Hi David!

    Yes, it is strange to me that the trust is still there.

    Robert Kiyosaki reckons that the reason is due to lack of financial education. He wonder why investors will flee to US Treasuries as flight to safety when the US is following the same path as Greece- he blamed that on lack of financial education too.

    But he is in the business of selling financial education…

  • Ekadey

    hi, i just like to know that is this good time to buy siver?