Should I sell my silver?

Received via email.

Having trouble viewing this email? Read it on our website.

Sovereign Man

Notes from the Field

Date: April 26, 2011 
Reporting From: Manila, Philippines

[Editor's note: Tim Staermose is filling in for Simon today.]

 
Silver's rise (in US$ terms, at least) over the past several weeks has been nothing short of phenomenal.

The chart has effectively "gone parabolic," and people I've never met have started to e-mail me (in my capacity as a registered investment advisor) for advice on silver.  

It doesn't matter whether it's silver, tech stocks, emerging markets currencies, or pork belly futures... any time these two events coincide (a parabolic chart pattern, and strangers asking me for advice), it sets off ALARM BELLS in my head.  

I'm going to go out on a limb and say that right now, the fundamentals for silver DON'T matter.  Many of the latest crop of silver "investors" have no clue about the fundamentals.  

To try and divine what comes next, it's more useful to use a general framework for understanding financial markets than to look at the supply and demand characteristics of silver.  Because, right now, the market is being driven chiefly by investor psychology.  

It's a cliché to say it, but ultimately, all financial markets are driven by fear and greed.  Actually, I'd argue that they're driven almost exclusively by fear. Let me explain...

In the initial stages of a bull market, it's the fear of the unknown that keep the masses out of an asset class.

They think to themselves, "Yes. I can see it's cheap.  I can see the fundamentals stack up.  But what if, blah blah blah.  Why is no one buying it?  There must be something wrong with it.  Best to steer clear."  

For those who overcome this initial fear, or skepticism, and do get into the market, once it starts going up and they have a profit, once again their primary, over-riding emotion is fear... fear of losing their profits.  Or, even worse.  The fear of a profit turning into a loss.  

So, what do most of them do?  They sell out for a small profit.  That's why it is said that bull markets are constantly climbing a "wall of worry."  And that's why ALL markets have corrections.  Corrections happen when enough people are FEARFUL of losing the gains they've made so far, and start to sell out in large enough numbers to temporarily reverse the trend.  

Near the top of a bull market, when most have finally overcome their skepticism, and the savvier participants have taken advantage of one of the numerous corrections to buy into the market, fear again comes to the fore.  For those not in the market yet, even at this late stage, what finally pushes them in is the FEAR OF MISSING OUT.  

All their friends and colleagues are cleaning up in the market.  How stupid they would look if they don't get a slice of the "easy money" too.  And so, they pile in like lambs to the slaughter.  

I don't think we're at that point -- yet -- with silver. But we are at the stage where many people who are already in the market are FEARFUL of losing their profits.  

On this basis, as a student of market psychology, I suspect a correction is overdue.  Again, I don't claim to have any specific fundamental insight into the silver market.  I am speaking from a general standpoint.  

So what should you do?  

If you own physical silver, the logistics of taking profits on your stash are probably quite complicated.

Shipping, and converting a large amount of physical silver to cash temporarily, may not be straightforward.  

But there are other ways to soothe your "fear of losing your profits."  You can buy temporary insurance against a correction.  Or, if don't actually own any silver at the present time, you can speculate on a correction.  

Long-term ETF positions are risky, but you may consider a short-term position in the ProShares UltraShort Silver ETF (ZSL on the New York Stock Exchange).  This instrument is designed to move TWICE as much as silver bullion, but in the OPPOSITE direction.  

For example, if silver falls 5% in a day, this security should GAIN 10%.  Of course, it works both ways.  If silver keeps on rising, then the price of ZSL will lose twice the amount silver rises by.  

During this bull market, silver has already seen one "correction," during the financial crisis, of more than 60%.  That was an anomaly.  But, a typical 10% or 20% correction would not be surprising to see at some stage -- quite possibly soon.  

Any time any market has gone parabolic, it has played out that way.   (Indeed, a correction may already be underway as I write.  I've just checked and I see silver is off by more than 3% in Asian trade).  

Just so you know, my own money is where my mouth is.  I've personally bought some call options on ZSL which will make me a tidy gain if silver suffers even a modest pull-back-- I put the trade on early in the day on Monday with silver above $48.  

I'll have much more to say on silver, and other precious metals, in future missives, as we see how events unfold.

Until tomorrow, 

Tim Staermose            
Editor, SovereignMan.com 


Did you receive this email from a friend?   Sign Up to receive Notes From The Field. 





Neither this email communication nor content posted to the website SovereignMan.com is intended to provide personal financial advice. Before undertaking any action described in this letter, financial or otherwise, you should discuss your options with a qualified advisor-- accountant, financial planner, attorney, priest, IRS auditor, Tim Geithner... Also, nothing published in this letter constitutes encouragement to avoid or evade tax obligations in your home country.  Furthermore, you should understand that SovereignMan.com may in some instances receive financial compensation for products and/or services which are mentioned in the letter, and in other cases, SovereignMan.com receives no compensation.  The needs of the community come first, and the presence or lack of financial compensation in no way affects the recommendations made in this letter.

When Gold Tops - Simon Black

Received via email subscription:



Sovereign Man
Notes from the Field


Date: December 21, 2010
Reporting From: Auckland, New Zealand


My friend Doug Casey has frequently written that you'll know the bull market for gold has peaked when there's a picture of a golden bull tearing up the dollar or the New York Stock Exchange on the cover of Time Magazine.

I have a similar view, but with a different indicator.

I'm sure you've seen those TV commercials, fliers, and billboards that say "WE BUY GOLD". The business model is simple-- they take in whatever gold you can find around the house (a false tooth, granny's wedding ring, etc.) and trade you for worthless paper money.

If that's not bad enough, they capitalize on people's ignorance of the gold market and offer a ridiculously low valuation, sometimes less than 50% of the spot price for gold. People are getting ripped off, and they're happy about it because they're able to sell their 'junk' for a few extra bucks.

These are the types of things that are common in a rising bull market that has plenty of room to run-- the public, largely ignorant about gold, is happy to trade physical wealth for worthless paper.

At the top of the market, we'll be seeing the exact opposite. The public will have wised up; the vast majority of people walking the streets will know the price of gold and be able to distinguish a Maple Leaf from an American Eagle.

At this point, everyone will want to own gold, and the signs will change from "WE BUY GOLD" to "WE SELL GOLD"... and they'll be everywhere.

Entrepreneurs, flush with all the bullion they've been racking up over the years from false teeth and wedding rings, will start unloading their gold holdings to the very people who supplied them to begin with... all at a handsome profit.

In certain parts of the world, we're already seeing early signs of this. I've seen hoards of Chinese people queuing up to buy small gold bars in Shanghai during their lunch breaks. Same in India.

Gold "ATM" machines are sprouting up in Europe and Asia-- you can pop a few hundred euro (or your credit card in some cases) into what looks like a vending machine, and out comes a small, assayed bar of gold.

I've been following the spread of these machines with great interest, and I noticed that the first of them arrived to the United States in Boca Raton, Florida a few days ago.

Don't get me wrong-- this one machine doesn't constitute a top. Not even close. There would have to be thousands of these machines across the country at McDonalds and Starbucks before that happens. If you need extra convincing, ask your neighbor what the price of gold is.

Years from now, though, I'm willing to bet that the sucker who ends up paying the highest price ever for an ounce of gold before the metal starts to decline will probably do so standing in front of one of these machines at a shopping mall somewhere in suburbia.

Another 'top indicator' that I look for is the occupancy rates for safety deposit box facilities like The Storage in Hong Kong or Commonwealth Vault right here in Auckland.

When these firms have a long waiting lists, or new facilities are sprouting up, it suggests that public awareness for gold is increasing... and the more that happens, the closer we get to the top.

Again, this is also starting to happen. Singapore's recent Freeport facility leased out to capacity almost instantly, and you're hard pressed to find an available safety deposit box at any of Singapore's banks. Buy hey, that's Singapore... not exactly representative of the entire world.

Here in Auckland, Commonwealth Vault has plenty of availability, and they charge peanuts.

Bottom line, while some of these 'top indicators' are starting to emerge, I think it will be several years before they're ubiquitous. People are only starting to wake up to the reality that unbacked paper currency is fundamentally flawed, and it will be a long time before this belief becomes widespread once again, just as it was in ancient times.

In the meantime, as long as central banks keep pumping their currencies full of hot air, gold should continue to have strong, long-term growth potential as the 'anti-currency'.


Until tomorrow,


Simon Black
Senior Editor, SovereignMan.com


 Sign Up here to receive Notes From The Field.


Neither this email communication nor content posted to the website SovereignMan.com is intended to provide personal financial advice. Before undertaking any action described in this letter, financial or otherwise, you should discuss your options with a qualified advisor-- accountant, financial planner, attorney, priest, IRS auditor, Tim Geithner... Also, nothing published in this letter constitutes encouragement to avoid or evade tax obligations in your home country. Furthermore, you should understand that SovereignMan.com may in some instances receive financial compensation for products and/or services which are mentioned in the letter, and in other cases, SovereignMan.com receives no compensation. The needs of the community come first, and the presence or lack of financial compensation in no way affects the recommendations made in this letter.