By Laura Crigger
For our first "Bulls & Bears" 2011 feature on Hard Assets
Investor, we turn to a hot topic over the past few months: silver.
Although gold nabs most of the headlines, it's silver that has
truly outperformed - the metal's price soared an astonishing 84
percent last year, beating 30-year highs and sparking questions
about a possible impending bubble.
Can silver rise even further?
For the bullish perspective, we turned to David Morgan, the
and editor-in-chief of the monthly precious metals research
guide, "The Morgan Report." A frequent voice on HAI, Morgan is
one of silver's most vocal bulls, and has spent more than 30
years educating investors about opportunities in this
For the bearish view on silver, we spoke with Jim Lowell,
chief investment strategist at Adviser Investments and editor of
the Fidelity Investor newsletter. Lowell is an outspoken and
prolific author, lecturer and commentator on the topic of
investing, particularly with ETFs, and his market views and
opinions have appeared in dozens of outlets, including Bloomberg,
MarketWatch, CNBC, Forbes and Fox Business News.
How their views differ may surprise you - but not as much as
where they agree.
BULL: David Morgan: Correction Coming, But $40/oz Silver
Hard Assets Investor: We hear a lot of chatter these days
about gold being near a bubble. But in 2010, we saw silver's
price rise more than 80 percent. Should we be asking instead
whether silver is overheated?
David Morgan, editor of
The Morgan Report
Well, from which context? On a very short-term basis, I would say
yes. Anything that goes up almost 80 percent in just a few short
months, you've got to question whether or not it can sustain that
type of momentum.
From a short-term perspective, it's probably going to need time
to catch its breath back and consolidate, etc. But from a historic
perspective, it's far, far from where I expect it to go on a longer
term. In other words, I expect it to fly far higher than $30 going
out two, three years from now.
HAI: We're still way below the inflation-adjusted high,
Precisely. As good as it's been - and it's been great; an 80
percent rally is fabulous - but in 1979 to 1980, silver made a 450
percent gain from August to January. It went up six times quicker
than it just did. That doesn't mean we'll see a repeat but if you
want to know what a bubble looks like, that's the one.
HAI: Are silver prices right now supported by fundamental
supply and demand? Last year we saw a 64 million oz. surplus in
the market, so what's pushing prices up?
Well, it depends how you define it. The two best studies in the
world found that all mining activity and recycling (supply)
together is greater than all demand. So that would obviously say a
surplus. But remember, there was a deficit for 16 straight years.
And if you look at it from the perspective of gold, the amount of
gold that's above ground would take care of demand for 40 years,
where silver might have six months.
The point is, the amount of demand for silver has continued to
increase other than the financial crisis years - basically '09.
Investment demand continues to be greater and greater every
So, to answer the question, "Are fundamentals supporting the
price of silver?" The answer's yes.
And the fundamentals support silver more so than gold from the
industrial standpoint. Say I am Dow Chemical (
), DuPont (
) or another silver user. I don't warehouse much of it anymore,
since everybody uses just-in-time inventory. Silver's been to
$30/oz and then it gets back down to $25/oz; well, $25/oz might
look like a pretty decent price for me. Not to necessarily
warehouse it, but to get an order in so I've got one more month in
my factory, and so on.
The investment side is very similar to gold's. Most people, now
that silver is above $20/oz, are looking at silver in a similar
manner to how they look at gold: as wealth preservation, as money.
All those same, well-worn phrases about the gold market and why
people invest in gold are used now in the silver market.
HAI: Have the dynamics of silver demand definitively
shifted over the past year or two? After all, industrial usage
was once silver's main demand driver, but now investment demand
has become such a major force in the market.
Well, yes and no. What's really moved the silver market, if you
want to trace it to a single point in time, I think it would be
April of '06, when [[SLV]] (the iShares Silver Trust) started.
There was pent-up demand, primarily from money managers who were
restricted from buying commodities by law. But since an ETF is a
stock, they're allowed to buy that, even though it is a commodity.
It solved their problems.
So you saw this huge amount of investment demand that continues
to grow. It's grown at a 14 percent compounded growth rate since
April 2006, up until about the last quarter of 2010. Can it
continue at that rate? The answer is no. It can't. There's just not
that much silver to invest.
HAI: Earlier, you said you thought silver was primed for
correction soon. But despite that, do you see prices in 2011
continuing their overall upward trend? Or will this pullback last
for a sustained period of time?
Right now, my take is that we are going to get a pretty good
pullback, particularly in gold. It's easier to analyze than silver.
That could be a matter of months - two, three, four maybe. And
we'll hit a bottom in there and then we'll start back up.
So my prediction for the year ahead is we're going to see some
pain in the silver market. The guys that got in at $30/oz and
thought it would go to $40/oz may be disappointed. It may get below
$25/oz, it may get down to the 200 moving day average. I don't
know. I doubt it would get that low but it could. Wherever it goes,
Then it's going to build back up from that level, come back up
and take out the old highs. So, do I expect it to be higher over
2011 than 2010? Yes. How high? $40/oz. But it's going to take some
time to do that.
The problem with making these forecasts is there's always a
black swan out there. I'm really not a gloomer, but I am a realist,
and there's a lot of black swans out there. If the euro has another
big problem that can't be squeezed over by the debt markets coming
to their rescue, then all bets are off.
HAI: How is today's rally in silver different than the
last one in the 1970s and 1980s?
First, it's a global market. Last time it was driven by a very
small group of people in the United States. This time, it's a
global market that's hedging their bets against the reserved
currency of the world, the U.S. dollar. Last time, you couldn't buy
silver over in the bank in China. You can now. Russia wasn't
investing in the silver market last time, at least for investment
purposes. They are now. I mean, basically you can now buy silver
and gold worldwide.
The other thing that's so interesting about silver now is that
the supply has gone down. When the Hunts ran the price up to $50/oz
- and it only traded there for a few days, and I want to be clear
about that; but nonetheless, it
trade there - there were 1.5 billion ounces more silver available
then today. So now you've got much less silver to invest in.
HAI: So at this point in the silver rally, do you prefer
silver equities or the physical space?
Oh boy. That's tough.
HAI: I know.
When you start out, I think you should start with physical metals.
The reason for that is to get familiar with it, which sounds kind
of corny. But you're less likely to get scared out of the market
when you buy coins or bars.
HAI: Interesting you say that, because many investors
approach the space with experience in stocks. And you'd think
they might feel more at home with the equity space.
That's true. But the problem with equities, especially from the
newer folks, is they're only a mouse click away. And you get that,
"Oh my God!" feeling. So I would say physical first and then
Equities are undervalued, but part of my analysis for the long
term is that the S&P looks pretty toppy here to me. I know
there are lots of arguments (in favor of recovery); I know that
there's $2 trillion that these larger, better-managed corporations
have on the sidelines. But I don't like what I see in the general
equity market in the U.S. right now. I think the rally is done
temporarily, because of just the momentum and the amount of volume.
There's not huge volume coming in anymore.
BEAR: Jim Lowell: Silver's Fear Trade Dissipating; Time
To Get Out
HAI: You were big on silver last year. But you sold off
all your positions recently. What made you change your
Jim Lowell, editor of
Any time anything goes up over 100 percent inside of a 12-month
time frame, I ask myself whether it's going to get better or worse
We put silver into our model portfolios back in March or April
of last year with a very bullish call, using the ProShares Ultra
Silver ETF [[AGQ]]. Since we purchased it, that position had risen
about 178 percent - enough to, in and of itself, trigger some
But back then, I didn't just buy the ProShares Ultra Silver ETF.
I paired it with the ProShares Ultra Short Gold [[GLL]] ETF. So
what I was really doing was making a bearish call on gold, but
saying that I thought I was probably early on that call, and wanted
to offset it with a good enough hedge. So that, if I was wrong, I'd
be able to still come out ahead.
Net-net, that pairing gave us about a 58 percent return. Gold
was up about 26 percent last year. So this year, the sale of silver
was triggered by taking gains, but also, I wanted to get out of
gold just wholesale. I just wanted to be out of the metal. Because
gold, of course, has no real industrial applications the way silver
does. You can't build a catalytic converter without silver, for
At these levels, you've really got to ask yourself what will
propel gold much higher. And, if gold can't go much higher, then
silver really can't either, since it trades as a multiple on the
fear trade of gold.
HAI: Is that fear still present in the
Absent the eurozone collapsing, I think that fear is dissipating.
The themes and threads of global economic recovery are definitely
getting twisted a little bit tighter and stronger, even if they're
still uneven, at best.
So my call to get out of silver and to get out of gold reflects
the fact that I think the gold trade is done. I think silver as a
correlated trade is likely mostly done. There are also better
places to put your money that didn't rise 178 percent last year. In
particular, I wanted to build up a position in [[RPG]], the Rydex
S&P 500 Pure Growth ETF.
My sense is that precisely what has kept individual investors
away from the market and loading up on gold for the last 2 1/2
years is what's going to drive them finally back into the market
this year; namely, the dissipation of fear. But they're not going
to chase the smaller-cap, the higher-risk stocks. They're going to
look for battleship balance sheets, liquidity and probably even
yield. That definitely favors the mega cap side of the market.
So we got out of gold, out of silver - out of gold chips into
We hear a lot of talk about gold being in a bubble. Is
silver getting overheated too?
Absolutely. I think those bubbles tend to inflate in a correlated
manner. It's very rare that silver trades up sustainably without
gold doing likewise. And the inverse is also true. It's very rare
that gold starts selling off and silver doesn't follow suit.
In neither metal is there a supply problem. Wherever you are
trading a commodity that has had multiple significant run-ups
year-over-year, without any supply problems, you've got to really
zero in on the psychology of demand. So I think both metals head
south sometime this year, I think probably sooner rather than
So is today's high silver price supported at all by the
It's very hard to say. I mentioned catalytic converters and we've
seen car sales begin to come back. Obviously, you can also argue
that gold does have an industrial application inside of the telecom
universe, too. And that's fine. And you can continue to argue
But it's a harder argument to make stick over time. Really, I
just don't think that one can argue that there are fundamentals
behind a commodity running up when there's not a supply issue. If
there was some sort of constriction, like what we see in the softer
commodities - wheat, sugar, cocoa - all these are at high levels,
but I'm not bailing on them. Just turn on the news. Look at what's
happened to Australia, the fifth-largest producer of cane sugar.
And you know that, if that country is under water, well, their
sugar crops are under water.
So, there are fundamentals in some parts of the commodity
market. Not in silver, not in gold. Copper, you could definitely
argue, on the fundamental side. But there are more-diversified,
less-risky ways to play that metal. For example, you could own the
ETF that just concentrates in Chile, whose major export is
We've seen a significant rise in the level of investment
demand in silver over the past few years. Will investment demand
continue to trump other sources of silver demand, like jewelry or
I just don't see the consumer demand for silver being anywhere even
close to the demand for gold. I don't see industrial demand for
silver putting enough of a constraint on supply.
When fear bursts - right now, it's sort of a slow leak - but
when that bursts, these metals are just going to fall from the sky,
silver and gold.
HAI: That'll leave a lot of people who were banking on
[[GLD]] and [[SLV]] out in the cold.
It absolutely will. And, unfortunately for them, their hedge
against the metals play is probably long-term Treasurys, which also
are going to fall.
You know, fear does funny things to the way in which you think
you have safeguarded yourself. One of the ultra-shorts that we do
have in the newsletter model portfolios is the ProShares Ultra
Short 20-Year Plus Treasury ETF, [[TBT]]. I think that's an easier
and safer bet. Because even absent a rate hike, or any sign of
inflation, just a rumor of one or the other can cause problems in
that end of the market, as we just saw six weeks ago
So yeah, there are a lot of investors who thought they purchased
something that could never go down in value, that was ultra-safe,
who are going to be looking at, I think, a 30 percent loss inside
of the next 12 months.
So what's the best way to approach the silver market
You could short it. We're not holding a short position in silver
inside of our model portfolios; again, because I think there are
just better ways to make money with less risk in this year's
market. But, if you're a trader, and you're looking for a
speculative way to engage in the precious metals market, at this
particular moment in time, I would be very focused on the
Would silver equities be a better play instead?
Certainly one way you could play it is with the mining stocks.
Unfortunately, when you look back over sort of rolling time
periods, there's a very high degree of correlation between the
price of metal and the price of those stocks. So when I'm out
prospecting for returns in 2011's market, I've left the silver
mine. I've left the gold mine. And I've left the metals. I see
green in better hills.
So is there anything that could make you feel more
bullish, and move back into silver?
Fear would make me move back in. If I were to take my ultra-short
position off of the long-term Treasurys, I'd basically also be
throwing in the towel on my current cautiously optimistic belief
that we are in slow recovery mode. If something dramatic occurred,
derailing that macroeconomic view, I would look to go long Treasury
and go long gold and silver.
But, it would be unlikely for me to ever own silver if I didn't
also want to have some position in gold. If I was very bullish on
fear, I'd be long both. Last year, by going ultra-long silver, I
wanted to hedge what I felt was an early call on getting out of the
gold trade. But this year, I just don't see any fundamental
momentum, technical, or even psychological reason to own
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