3 Friendly Reminders Why I Buy Silver

After a week like last week, people tend to lend a little bit more credence to analysts who recommended buying gold in the midst of a bull market and a gold and silver down trend. I know this as a permanent bull for gold, silver, and other nonrenewable commodity metals – I’m rarely taken seriously as I state my case for buying gold while watching it down over 30% for the year. But, my view on the metal is a view with a long term focus.

My last article on gold came in the face of the Goldman Sachs downgrade, where I advised that the downgrade should be seen as a buying opportunity for those looking to invest long-term. As per what is becoming their usual, Goldman downgrades, gold picks up and rallies the same week. Go figure.

It has been an unceremonious past year not only for gold, but also for silver – which you can see from their corresponding ETFs:

(click to enlarge)

(click to enlarge)

After the rocky start to the week last week, gold was able to post small gains on the week, however silver gave back all of its gains from this week and last week.

It seemed like a good time to go back over a few reminders of why I hold physical silver and silver through an ETF. So, here’s 3 friendly reminders why I buy silver:

1. As a Hedge

After a week like last week, it’s easy to think about picking up gold and silver as a hedge. Investors realize that traditionally the metals have both been used as a hedge – not only against bear markets, but against inflation and currency devaluation.

At their fundamental state, precious metals like gold and silver are both non-renewable, meaning that there’s a finite amount of these items in the world as we know it. Unlike our currency, we can’t just “make more” gold and silver out of nothing. This is why, as we print money, gold and silver’s value continues to rise as the correlation of these metals to amount of printed currency continues to skew out of whack (check out the 20 year charts).

This is where these precious metals find their value, and as such, are used as hedges. As I’ve stated in a previous article, I prefer silver as a hedge to gold right now, but currently hold both:

Gold is the most well known commodity, and as such, is most susceptible to inflation and overbuying in times of panic. Because of this, the gold/silver correlation spread is much larger than it would (or should) normally be. From a buyers stand point, this just means that silver is a better value buy than gold right now.

2. Ratio

What is the gold/silver ratio? As defined by Investopedia:

A ratio (X:1), demonstrating how many ounces of silver (X) it takes to purchase one ounce of gold – the fixed variable. Investors use the fluctuating ratio to evaluate the relative value of silver, which determines if it’s an optimal time to purchase gold or silver. It also helps investors diversify their precious-metal holdings.

The gold to silver ratio has traditionally cycled up and down throughout history, generally reverting back towards 12 to 1 at some point.

Now, the Gold/Silver ratio remains at one of its higher traditional points, forecasting a likely eventual rise in silver pricing as the years progress.

(source - kitco.com)

Simply put, in relation to gold, it’s a good time to hold silver.

3. Worldwide Demand

Not only is silver used as both a hedge and for manufacturing purposes, but silver is also growing in demand within emerging markets. Even though the year has started with sluggish demand, many precious metal outlets (like here, here and here) are predicting that demand will remain consistent at worst and rise significantly at best.

China and India are nearly importing more gold and silver than they ever have. As a matter of fact, Chinese demand for gold was a big talking point in my previous article:

But, alas, our blinders are on because we only pay attention to the short-term with precious metals, which will be the downfall of those who fail to hold silver (SLV) and gold (GLD) (IAU) for the long term.

Even better – all this comes just days after continued reaffirmationthat China wants the gold – badly:

Gold is higher in early Asian hours hitting a nearly six-week high of $1,261.97/oz helped by seasonal buying from China. Traders say physical demand –mainly jewelry, bars and coins–will hold up until the Lunar New Year which starts on Jan. 31 this year.

China is holding tons of U.S. debt, and they’re continuing to gun for the gold, which they’ve been hoarding for years. Why don’t you think the Chinese are sitting back going “They’ve tapered QE down to $65 billion a month! Sell all the gold! It’s worthless!”

This type of demand could catalyze a rise in silver’s spot value in the coming year.

Conclusion

I continue to advocate both gold and silver as long-term holds for investors. While the short-term price action may discourage potential investors, I continue to argue that those fluctuations are a result of local volatility mixed with analyst upgrades and downgrades. Long-term, gold and silver remain two rock solid “safe” vehicles for your money.

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