Silver and the New Economy

First and foremost, I have no more interest or controlling stake in any stock or metals market than the "average Joe." I’m not advising anyone to do anything, or not to do anything; I’m simply illustrating historical events as I’ve seen them, and using those events to try and predict the future. Of course, no one can guarantee future results, so use the gray matter between your ears, research for yourself, and take whatever action (or inaction) you’re comfortable with.

Legalities aside, let’s get right to it…

The stock market is very volatile, which any stock trader with his/her weight will tell you is a good thing. Volatility means change, it means that people are desirous to buy and sell their stocks and commodities, which means the laws of supply and demand are in full effect — that’s also good. Any market where people are neither buying or selling is "stagnant" and without movement, you can’t make money — or lose it.

Every market will stagnate to some degree or another. At other times that market will be in a bearish sell off — a bullish buy-fest. What’s interesting to note is that when one market is up, another is down — and vice versa. That’s the core of diversification: in the most simplistic terms, if you have two stocks/commodities that are exactly complimentary to one another, if you have one share/contract of each and they move in equal numbers exactly opposite to one another, you’ll always net even (you won’t win or lose any money). So why would someone do this? The hope is that stocks/commodities will appreciate in value over time, and that the diversification will help protect your portfolio through the ups and downs. Of course, you’ll never find and exact compliment to any given stock/commodity, let alone a pair with a 1:1 ratio, so you have to have a more broad diversification than just the two compliments.

Here’s what I’ve seen over the last decade or so…

As the stock market has fluctuated downwards, precious metals (particularly silver and gold) have increased in value. There are two reasons behind this:

1. The value of the dollar goes down, so the price for silver and gold goes up. It’s not that the silver or gold are worth any more than they were previously, rather, the dollar is worth less in comparison.
2. The value of the precious metals goes up. When "soft" investments go down, people tend to buy up "hard" investments (stocks are just paper that may be worth nothing tomorrow, whereas metals are tangible "things" that will always have worth, they should never go to zero, and even if they do it should take a very long time to do so).

So, all that having been said, in the last two decades I’ve seen silver jump from ~$4/ounce to ~$21/ounce, that’s pretty impressive (500%), but it’s over a substantial amount of time.

Silver in recent days (the last couple weeks) has been climbing steadily, going from ~$16/ounce to over ~$20/ounce. The Fed has cut interest rates several times (the last being three-quarters of a percent, which is HUGE!), the mortgage industry is in a world of hurt, the Legislature has announced an economic stimulus package to "infuse the economy with money", and the stock market has lost a couple thousand points off the DJIA (DOW). Lots or craziness.

But, because my portfolio was diversified between both stocks and precious metals, I’m actually making money in the aggregate. Those who are just in the stock market are hurting badly.

Where to start?

First, silver costs significantly less than gold per ounce, and in a pinch should be easier to sell/trade/barter — imagine someone with a 1oz silver coin worth $20 buying something, versus a 1 ounce gold coin worth over a thousand dollars. It’s easier to get started in silver, and easier to spend if need be.

Second, it’s easy to start acquiring silver coins. Many denominations of US coin minted in the early 1960’s or before has silver in it. Dimes, quarters, half-dollars, dollars, they all have some amount of silver in them. Hang on to them! A 1962 quarter is worth MUCH more than 25 cents in silver content alone. These are called "junk coins" and usually don’t have much value as collector’s coins, but they do have worth in silver. They make a different kind of "plinking" sound when dropped or rattled with other coins, some people think they’re fake because the look and sound different. You can buy these coins from coin shops, pawn shops, and always want to be on the lookout for them when change is given. You can also buy them by the bag from metals dealers.

Next up are silver coins. Canada Maple Leafs were popular years back and US Silver Eagles are the popular silver coin to day. They both weight 1 ounce and are both fine silver (.999 or higher; not "junk" like quarters and half-dollars). These usually run a couple dollars more than "spot" (the price of rough silver in bars). Once you’ve got a decent amount of these coins it’s time to start thinking about bars.

Bars are tricky, you typically jump from 1 ounce coins to 100 ounce bars. They cost just under 100 times the money, and weigh 100 times more than the coin — which you could have guessed. They’re also much more difficult to store and transport — and spend! You can also get 10 ounce mini-bars. I don’t have any in my portfolio, but I hope to before too long.

They also make 1,000 ounce bars, but, obviously, these are even harder to transport and spend, and I consider only for the serious investor.

Silver Stock

There’s no such think as "silver stock," just stock in silver companies. I do hold some shares of Sun Dragon (OTC: SDRG), but it’s not doing so well, even though silver is. And it’s very possible that even a silver mine’s stock could disappear overnight. It’s stock, so it’s not much of a diversification.

Paper Silver

It’s hard to store silver securely and confidently. Safe deposit boxes are pricey (though tax-deductible), and who wants to risk holding silver in their home (yikes!). So some companies offer to "hold" your silver for you, or to "store" it for you. Typically these are the same companies that you buy the silver from. Sounds good so far, right? Sure, until you ask them to provide you with the serial numbers and individual weights of your bars. Good luck with that, most won’t do it. Even if they do, wait 6 months and ask them again, did the numbers and/or weights change? Why? Because they’re not holding silver for you, in fact, they may not be holding any silver at all! Just the paper that says you have so many ounces of silver with them… It’s an I-O-U. That is scary. Don’t do it. Buy your silver, have it delivered, and find some way to store it (bank deposit box, gun safe, etc.).

Commodities

It’s true that there is no "silver stock" but you can trade commodities. If you don’t know what those are, you should find out, I’m not going to go in to it here. You can also trade futures, which are contracts to buy a certain amount of a commodity at a future date for a given price. You can then sell that as the contract matures for (hopefully) more than you paid for it, and the buy gets the "right" to buy so many units of that commodity for less (hopefully) than the going price. Win-win, right? Yeah, but risky. You can lose your shirt very quickly.

Now what?

Get started. Start where you can and build. Let me know how it goes!