Sunday, May 8, 2011

When to Exit Silver?

Not Quite Yet: James Turk, Gene Arensberg and Antal Fekete’s take on exiting silver.
Exit SilverBecause silver is a much smaller and more volatile market than gold, we’ve watched it roar back from $8.70 in October 2008 to today’s approximate $38.00 per oz. It continues its seemingly unstoppable bull run and many experts predict $50 per oz before the year is out. It’s painfully evident that the general public has yet to catch onto why they should position themselves in physical gold and silver, but for those who have, let’s talk exit strategy for silver.
I’ve recently learned the mere mention of exiting silver strikes fear in the hearts of many diehard silver bugs around the world, but let’s take a look how we can use silver’s imminent breakout to our advantage. I’ve asked a variety people what their thoughts are on the matter and when asked if and when they would exit silver, many flatly said, “never”. I’d like to direct these people to the following for their consideration:
In a recent correspondence with James Turk, Founder/Chairman of GoldMoney he said, “Most people are probably aware that I am more bullish on silver than gold from a long-term point of view, but they are also aware of my proviso. Silver is more volatile than gold. For example, look what the gold/silver ratio did in 2008, climbing from 46 to 84 in a few months after the Lehman collapse. More recently, the ratio declined from 60 to 39 in about 6 months. This volatility means that silver is not for everyone. But if you are willing to accept the volatility, then I recommend having 1/3rd of your bullion portfolio in silver and the remaining 2/3rds in gold. As the ratio falls, the percent of silver in your portfolio in dollar terms increases. I expect the gold/silver ratio to fall within the next 2-4 years to at least 20-to-1, and I would not be surprised if it reverts to its historical average of around 16-to-1.”
If you agree with industry legend, Turk’s predictions; then instead of selling silver and jumping on a doomed sinking ship (fiat currency), it makes sense to use arbitrage to increase the amount of ounces of gold bullion you own throughout the bull market. Swapping silver for gold along the way to make gains. The questions are when and how much to swap.
Gene Arensberg who writes the highly acclaimed and popular, Got Gold Report, recently told me “I think that we are transitioning into a new era for silver and we cannot rely on the recent past for guidance. The recent past was dominated by massive government dishoarding of silver metal for decades. People got used to having cheap silver but it was an artificial illusion.” Gene pointed out a recent entry titled “GGR Excerpt – The Silver Plan” that discusses his personal plan to exit the silver market: “Since we currently have no need for the silver we have accumulated in years past, we have personally adopted a single plan for our physical silver holdings. We intend to wait patiently, for years if necessary (haven’t we already?), for the time when less than 30 ounces of silver will “buy” an ounce of gold. At that time we plan to convert one-quarter of our silver into gold one-ounce coins. At 25:1 we will convert another quarter. And at 20:1 or better, yet one more quarter will go for the gold. And if silver manages to get all the way to a 15:1 ratio to gold again (see the star on the graph), like it did in January, 1980, the last of our silver will be converted to real money.”
Historical Gold/Silver Ratio
Historical Gold/Silver Ratio
Antal Fekete, a Monetary Scientist and Mathematician who lectures on Austrian economics said this on the subject: “There is a plausible argument for silver catching up with gold and the bimetallic ratio going to 16. I would look at this as a pendulum-like action between 100 and 16.” According to Antal, there are a lot of advantages in buying silver and he’s aware that people are playing the gold-silver arbitrage game, but cautioned to keep some physical silver. In dire economic times, you wouldn’t want to show your gold (people may kill you for it). People should keep small denomination physical silver for small transactions.
I enjoyed this tongue-in-cheek remark from a silver bug when he said he’d exit silver when rap stars on television are flashing chunky silver chains and 10 oz silver bars in their videos, or when his next door neighbour starts buying it. However, the general sentiment among the silver bug community is to hold onto their physical silver as a hedge against inflation and protection for possible hyperinflation. Some silver bugs intend to hold their physical metal and then pass it onto their children as an inheritance that will not go into probate, or to perhaps make a real estate purchase with it when the timing is right. The bugs will certainly not part with their silver for “worthless fiat” currency as they believe that they are holding “real money”. Since Nixon floated gold on the open market in 1971, the Au Ag ratio hit a low of 17:1 in 1980 due in part to the Hunt brothers’ efforts to corner the silver market. Today, in 2011, the current ratio is lingering around 38:1. After reading Gene Arensberg’s plan and viewing his chart here, there were opportunities to swap some silver for gold, but I believe the best opportunities are still to come. Recently, Eric Sprott of Sprott Asset Management was quoted that record low gold/silver ratios are to come and are headed to 20:1 or lower – Some experts feel it could even overshoot to 10:1 because gold may face strong resistance at $2000, while silver will simultaneously barrel on its trajectory.
It makes sense to have the largest portion of your physical metal holdings in physical gold as it offers easier storage, has less volatility and has been the money of kings for over 5000 years. If you`re in a position of holding a lot of silver and little to no gold, a practical way to attain this goal while at the same time capitalizing on silver`s impending breakout, is to watch the gold to silver ratio decrease and swap a portion of your silver holdings for gold at particular milestones. For the record, I’m not a speculative investor and will remain long on both gold and silver as a safe haven and insurance policy against depreciating currencies. I’m not a financial advisor in this jurisdiction or any other.

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