Gold and silver aren’t lining a cloud these days. They’re under it, big time. Both precious metals dropped sharply recently, extending a nasty slump. Silver, for instance, has lost nearly 50 percent of its value over the last two years.
Is this the end of the long precious metals bull market? Probably not. The cause of the decline may be as simple as the slowdown of economic growth in China and India. People in both countries have long believed more in gold and silver than in paper money. But when they have less paper money, they buy less gold and silver.
Indeed, if you read Shayne McGuire’s’ new book, The Silver Bull Market: Investing in the Other Gold, you’re likely to come away convinced that owning some silver coins is a good idea. They may be a happy alternative to the nearly-no-yield CDs that are starving solvent seniors. The same low-yield environment is doing damage to the pension funds, life insurance policies and long-term care policies on which millions of real people have based their financial planning. At some point, all of those investors may look for a better, more trustworthy alternative.
One thing you should understand right now is that McGuire isn’t one of those TV shills urging you to put every dime of your IRA into gold or silver. Nor does he suggest, anywhere, that we are heading for some kind of Armageddon. In fact, he doesn’t sell precious metals; he buys them. He manages the precious metals portfolio for the Texas Teachers Retirement Pension. Just as he made a prudent and reasonable case for gold in an earlier book, he has now made a strong case for owning some silver.
The operative word here is “some.” Indeed, while he thinks that silver will be a more volatile investment than gold and urges caution, he also makes a strong case that silver may appreciate more than gold as people around the world trust paper money — and the governments that print it — less.
Here are the basic elements of his case for rising silver prices:
Gold and silver have been used as money for centuries. They were a solution to awkward bartering and encouraged trade. Many nations issued coins in both gold and silver. The exchange rate between them was about 15 ounces of silver for 1 ounce of gold.
While gold has been marginalized as a monetary metal and silver has been completely commoditized, both are real assets that aren’t someone else’s liability. They have real value on their own. They are real money. Meanwhile, the supply of paper money, which has no intrinsic value, continues to grow.
A minor resumption in the use of gold and silver as a financial asset would have a dramatic impact on both metals because they are such a small part of the global asset base. The Texas Teachers Retirement Pension is the largest (and one of the few) institutional investors in silver, yet less than one-tenth of 1 percent of its assets are in silver.
The exchange rate between silver and gold is now 58, nearly four times its historical rate, and gold isn’t 58 times as rare as silver. Gold is so valuable that little of it has been lost, while the supply of above-ground silver is shrinking.
Both silver and gold are easily storable and can be removed from the financial system. You can’t do that with cash, stocks, bonds or other financial instruments. Gold and silver can be stored at virtually no cost, something you can’t say about most other commodities, such as corn, oil or oranges.
McGuire’s most powerful argument, I believe, is that silver is everyman’s gold. With the price of gold at $1,400 an ounce, buying a single ounce is a non-starter for most of the world’s population. At that price, buying an ounce of gold is a bit like laying out $160,000 for a single A share of Berkshire Hathaway. Institutions can do it; ordinary people can’t.
But silver at $24 an ounce and a bit more for a silver dollar that weighs an ounce, well, it can be purchased by nearly anyone, anywhere. Better still, it can be purchased quietly and invisibly. It is traded in coin shops and coin shows, not just in the United States but all around the world.
Questions about personal finance and investments may be sent to scott@scottburns.com.