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Observations about silver

John Lee of posted some observations about the silver market that should be of interest to silver investors, despite Lee’s website being dedicated to commodities traders, not investors. I will comment on some of Lee’s observations, but time does not permit me to comment on all of them.

Lee started by noting that in August 2004 he laid out four reasons for preferring silver over gold. At CMIGS, we have long told our clients that in precious metals bull markets silver turns in bigger percentage gains than gold. Lee’s observations for silver’s and gold’s price increases since 2004 back up our claim. We assert that silver remains the better investment. However, silver has its drawbacks.

Silver’s bulk and weight make it unsuitable for some investors. If you’re storing your silver at a depository, silver’s bulk and weight are not issues. (Lee dismisses costs of up to 2% a year, but I consider 2% a year a significant cost.)

But, for those investors who take delivery of their precious metals, silver’s bulk and weight have to be considered. Think about this: $20,000 in 1-oz Gold Eagles can be carried around all day in your pants pockets. However, $20,000 in silver is about seventy pounds. For some investors, silver’s bulk and weight make it prohibitive, and especially for investors putting large sums in the metals.

However, for investors that have elected to put precious metals in their IRAs, silver’s weight and bulk are not considerations because the silver is stored in precious metals depositories and does not have to be handled by investors.

Lee knocks the criticism that “Silver is an industrial metal and not an investment.” I agree, and for reasons in addition to the ones he notes.

The main reason for buying silver (and gold) is to get out of dollars. A quick glance at a graph of the dollar’s decline against a basket of currencies sends shivers down the spine. Except for a few rebounds, which lasted only a few weeks, the dollar’s decline over the last year can only be described as precipitous.

Is there relief in sight? Not from any of the presidential candidates likely to be the next occupant of the White House.

John McCain is dedicated to a military “solution” in the Middle East. And, by his own admission, economics is not his strong suit. The war in Iraq is now expected to have total costs of up to $3 trillion.

Neither Obama nor Clinton, despite attempting to establish themselves as some sort of peace candidates, has put forth realistic plans for exiting Iraq. And, if either of those two win the White House and in some miraculous way get us out of Iraq, each has massive welfare spending programs that will continue to put downward pressure on the dollar.

Wars have been the biggest destroyers of currencies thought history. Welfare states have been second. Considering these facts, the outlook for the dollar is dismal.

The primary reason silver outperforms gold in precious metals bull markets is that the masses overwhelmingly opt for silver over gold. The masses are not yet in this market. The masses are the people on the street, most of which are presently oblivious to what is happening in the financial world. When the masses wake up, they will buy silver instead of gold simply because they will get more pieces of metal for their money.

Let’s say the masses start buying silver and gold when silver hits $55 and gold $2,000. (I’ve lowered the gold/silver ratio because it will shrink as gold and silver move higher; however, the ratio chosen is not a prediction but was used to illustrate a point and at the same time acknowledge that as prices move higher the ratio will shrink.) At $2,000 gold, a person with only $20,000 to invest would get a mere ten ounces of gold (premiums ignored).

However, at $55 silver, $20,000 would fetch some 360 ounces of silver. Ten 1-oz Krugerrand gold coins or 360 one-ounce silver rounds? For the guy on the street, the choice will be silver.

Finally, in the aggregate, the masses have much more money than the wealthy. Although the gold/silver price ratio will shrink as precious metals prices march higher, it will be in the third and final phase that the price of silver will outperform the price of gold the most.

For me, silver’s supply/demand fundamentals are bonuses. But, the real reason for buying silver is the steady, and increasingly fast, destruction of the dollar. When the masses come to the precious metals, the dollar will be in its final days. Then there will even be talk of a new currency for the United States, but that’s a topic for another time. Meanwhile, make your choice: silver or gold, depending your circumstances and what you think the future holds. Both remain the ultimate hedges against currency debasement.