Warning Fools! Silver Will Fall by 66%

[bobbyw24]

The silver bubble took on a new dimension this month, with the price of the metal rising nearly 30%. Last Monday, share volume in the iShares Silver Trust ETF (NYSE: SLV ) was five times its daily average in the first quarter. While many investors may cite capital preservation as a reason to buy silver, an analysis of the historical data suggests that those who pay nearly $50 an ounce will eventually suffer massive losses.

Gold's real return: aero
Like gold, silver has lived up to its billing as a store of value -- if you measure your holding period on a geological timescale. Using data from precious-metal dealer Kitco, I constructed a series of inflation-adjusted silver prices going back to 1800, according to which the metal generated a historical average return of 0.4% per annum. (Much of that small premium over inflation is due to price appreciation over the past 10 months. If we use the price of silver in mid-2010, the average annual return falls to 0.1%).

There is no reason for investors to expect anything more from silver: Why would a metal -- a commodity with no yield -- accrete value? But silver's price volatility disqualifies it even as a stable store of value. For proof, just take a look at 10-year trailing real returns since 1810 (based on average annual prices):

The silver bubble took on a new dimension this month, with the price of the metal rising nearly 30%. Last Monday, share volume in the iShares Silver Trust ETF (NYSE: SLV ) was five times its daily average in the first quarter. While many investors may cite capital preservation as a reason to buy silver, an analysis of the historical data suggests that those who pay nearly $50 an ounce will eventually suffer massive losses.

Gold's real return: aero
Like gold, silver has lived up to its billing as a store of value -- if you measure your holding period on a geological timescale. Using data from precious-metal dealer Kitco, I constructed a series of inflation-adjusted silver prices going back to 1800, according to which the metal generated a historical average return of 0.4% per annum. (Much of that small premium over inflation is due to price appreciation over the past 10 months. If we use the price of silver in mid-2010, the average annual return falls to 0.1%).

There is no reason for investors to expect anything more from silver: Why would a metal -- a commodity with no yield -- accrete value? But silver's price volatility disqualifies it even as a stable store of value. For proof, just take a look at 10-year trailing real returns since 1810 (based on average annual prices):

The silver bubble took on a new dimension this month, with the price of the metal rising nearly 30%. Last Monday, share volume in the iShares Silver Trust ETF (NYSE: SLV ) was five times its daily average in the first quarter. While many investors may cite capital preservation as a reason to buy silver, an analysis of the historical data suggests that those who pay nearly $50 an ounce will eventually suffer massive losses.

Gold's real return: aero
Like gold, silver has lived up to its billing as a store of value -- if you measure your holding period on a geological timescale. Using data from precious-metal dealer Kitco, I constructed a series of inflation-adjusted silver prices going back to 1800, according to which the metal generated a historical average return of 0.4% per annum. (Much of that small premium over inflation is due to price appreciation over the past 10 months. If we use the price of silver in mid-2010, the average annual return falls to 0.1%).

There is no reason for investors to expect anything more from silver: Why would a metal -- a commodity with no yield -- accrete value? But silver's price volatility disqualifies it even as a stable store of value. For proof, just take a look at 10-year trailing real returns since 1810 (based on average annual prices):

http://www.fool.com/investing/genera...all-by-66.aspx

[MRoCkEd]

[Bruno]

People said that at $25, $30, and $40 also. Time will tell.

[Bruno]

Dupe post

[Bern]

... Why would a metal -- a commodity with no yield -- accrete value? ...

In that question, the author announces his complete ignorance of the issue. It's not that metals are "accreting value". It's that the measuring stick you are using to measure value is changing. The author has a fundamental misunderstanding of what money is and a complete lack of historical perspective on the "great" Keynesian experiment that's in it's dying days. Everyone loves the returns on a Ponzi scheme until it collapses.

[matt0611]

In that question, the author announces his complete ignorance of the issue. It's not that metals are "accreting value". It's that the measuring stick you are using to measure value is changing. The author has a fundamental misunderstanding of what money is and a complete lack of historical perspective on the "great" Keynesian experiment that's in it's dying days. Everyone loves the returns on a Ponzi scheme until it collapses.

Lol yup.

Same thing could be said for anything:

"Why would oil, a commodity with no yield -- accrete value?"

Some people are so ignorant of economics and prices, its so sad.

[Gideon]

In that question, the author announces his complete ignorance of the issue. It's not that metals are "accreting value". It's that the measuring stick you are using to measure value is changing. The author has a fundamental misunderstanding of what money is and a complete lack of historical perspective on the "great" Keynesian experiment that's in it's dying days. Everyone loves the returns on a Ponzi scheme until it collapses.

I would argue that the author is not ignorant, but seeking to deceive and prepare ETF investors to exit the market at the first sign of weakness.

Ironically, a decent downward correction in the FRN price of Ag would be great for the many folks who are waiting for an opportunity to buy, so that when a significant price correction does occur, we will experience a phenomenal rush into physical PM purchases.

I hate to patronize this tool for more than he is worth, but keep in mind that it is not the price of silver, gold, fuel and food which are rising.

Rather, it is faith in the FRN which is waning on a global scale, and therefore we can expect rampant fiat devaluation to further drive demand for physical metals and other tangible commodities.

The FRN is fr*ckin doomed!

[Jordan]

In that question, the author announces his complete ignorance of the issue. It's not that metals are "accreting value". It's that the measuring stick you are using to measure value is changing. The author has a fundamental misunderstanding of what money is and a complete lack of historical perspective on the "great" Keynesian experiment that's in it's dying days. Everyone loves the returns on a Ponzi scheme until it collapses.

Exactly. The author is accepting the view that this time isn't different. Most silver investors are buying silver because they think this time is different. Of course, "this time isn't different" crowd has a better track record seeing as 99.9999% of the time this time isn't different. However, maybe the silver bugs are right this time in that it is different, and they'll reap the rewards if they're right. So too will the silver shorts. This is like having a priest and atheist argue; each would argue a reality that they've created within their own belief. At the end of the day, neither will understand the other, since an assumption (acceptance of their own truth) was made at the most basic level of their thought process.

Also, I've started to come to the understanding that silver price could go up forever, simply because there are so many people who see it as the ultimate asset class. Ever seen Kitco's forum? LOL. It would be interesting to do a study on libertarians and metal holdings. If libertarians can send a politician many millions of dollars, one has to wonder how much gold and silver these same libertarians can buy. I'm almost convinced that a small minority of investors who are buying gold and silver like there is no tomorrow can control the buy-side of the equation, and push the price higher and higher and higher. There aren't many sellers in this group of investors, and should they continue to accumulate, the price of gold and silver could go up forever...err, at least until they start selling.

On a side note, anyone remember that JP Morgan story? The one where JP Morgan was allowing investors to open trading accounts denominated in gold? Has there been any recent news about it?

Not sure how popular the program actually was, but I have a feeling that JPM is making a mint writing calls on the holdings. Sure, you're looking at like $3 per month per ounce, or ~2% per year, but even at that rate cash flow is cash flow. They have to be loving the idea that gold is negative carry, seeing as they pay 0% interest on the gold and generate yield with it.

Gold and silver, when owned in more "financialized" instruments, is actually positive carry, but the yields are pretty low. However, when money is cheap, those who can borrow at low rates can buy gold and silver--or any commodity, for that matter--and generate a positive yield greater than their carry costs.

[Gaddafi Duck]

What point is he trying to make? In the very long run, gold maintains its purchasing power--that is what he established and everyone knows that. But I myself will sell gold when the market is much higher from here. My holding period on gold is only several years, as is most people's. If you bought gold in the early 1970's and still have it today, you are doing pretty good. But if you sold the gold in the 1980's, invested in the stock market instead and eventually dot coms in the 1990's then sold, then repurchased gold in 2000, then you'd do much better than just outright ownership of gold from the 1970's until now.

The same is true if you bought stocks in the 1980's but held them until today..You made a big bull run, but now you've been stuck in a bearish slump for a decade when you could've amplified all those gains in 1998-2000 by plowing them into undervalued assets like commodities.

In 5-8 years, the same will be true only in reverse..probably by then, bonds will be much more lucrative than owning expensive precious metals. It'd be prudent to switch out asset classes, but again, if you plan on owning gold from now until you die, you'll weather some bad storms, but you'll make it through a couple or so bull markets.

[Carson]

I've been thinking this is very little to do with the value of silver or gold but more a thing to do with the value of the dollar.



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