Sprott: Gold vs. Silver

[hrux]

The folloiwng is an excerpt from Eric Sprott's March newsletter.  I am curious to get everyone's opinion on investing in CEF and including silvr as part of the PP?

Follow the Money
By: Eric Sprott & Andrew Morris

You know silver’s doing well when the commentators start giving it the ‘gold’ treatment. Silver’s recent rise has been so spectacular that it’s caught many investors off guard. It’s natural to be sceptical when you don’t know the fundamentals driving strong performance, and many pundits and commentators have been quick to downplay it as a result - much like they do towards gold when it enjoys a run. Silver is also an awkward metal for them to categorize. Is it a commodity, a monetary metal, or both? And which side is driving demand? If it’s industrial demand, that’s ok, because that’s bullish. But if it’s investment demand for silver as ‘money’, well then that’s sort of bearish, isn’t it? The fact remains that most commentators have failed to grasp the monetary shifts that silver is signaling today, and in doing so they’ve failed to appreciate just how high it could actually go.

The financial media’s failure to grasp the benefits of precious metals ownership continues to perplex us, and it’s not just the commentators who are prone to perpetual disbelief. The sell side analysts are equally as irresolute. According to Bloomberg, the ‘expert’ consensus silver price forecast for 2011 is $29.50, representing a 31% discount from the current spot price. This same group of analysts also predicts prices will decline another 25% in 2012 and a further 9% in 2013 to $20 an ounce. When you consider that the silver price has appreciated by over 21% annually over the past 10 years, these forecasts suggest a very dramatic change in the long-term trend. Will this reversal come true? Probably not. These were the same analysts who predicted that spot silver prices would average $18.65 this year - so they’ve missed the mark by over 100% thus far.

[MOD: Please do not post entire articles as this is a violation of copyright rules. Excerpts only please. Thanks -- Craigr]

[MediumTex]

Silver is not appropriate for PP purposes, other than perhaps a small allocation (less than 15% of your PM holdings).

Central banks don't stockpile silver.  It's an industrial metal that has a history of intermittent monetary usage.

Right now silver is rocking, but parabolic moves typically end in tears.

Just stick with the PP formula.  It works.

[moda0306]

I at one point was a huge fan of silver, but at this time I must agree with MT.  Nothing is as (all but) ignored for industrial uses but adored by central banks as gold.  It's not going to behave like any other metal, and is really the only thing that belongs in the PP.  If you need an illustration of the difference between gold and any other commodity (even silver) take a look at a comparitive chart of 2008-2009 (sorry I don't have one handy on short notice).  Where they start to make a large split is when the housing/banking/credit sky started to fall.

The PP would have taken quite a hit with both stocks AND your precious metals portion nose-diving in 2008.

[KevinW]

"Inflation Proofing Your Investments" contains a detailed analysis of why gold should be used in the PP, and why silver specifically should be downplayed or avoided.  The short version is that the gold market is virtually all monetary bullion with a tiny industrial component, and the silver market is the opposite.  Inflation protection is linked much more strongly to the monetary aspect, so gold works better.

[escafandro]

Hi, I hold CEF for my gold allocation, so far spectacular gains +40% in less than one year. But lately I seen some bigs up and downs (-4.88% today for example, similar down about 20 days) And I think maybe is not the best option for the gold allocation because is in a bubble or something like that.

Is more effective to the PP philosophy sell CEF and buy GTU?

(dificult to do this because the gains, but maybe necessary, and I´m and amateur investor too, not even english speaker, sorry for the grammar, so I have many doubts in how to implement the PP strategy well)

regards

[moda0306]

Rates weren't all that high in January '72 were they?  I think about 6.5% correct.  Interesting observation, though.  It's hard to believe stocks have had such a historically difficult time eeking out an inflation-adjusted gain.  What are you using for your inflation figures... Sorry I know you've shown information on the subject before.

[MediumTex]

Hi, I hold CEF for my gold allocation, so far spectacular gains +40% in less than one year. But lately I seen some bigs up and downs (-4.88% today for example, similar down about 20 days) And I think maybe is not the best option for the gold allocation because is in a bubble or something like that.

Is more effective to the PP philosophy sell CEF and buy GTU?

(dificult to do this because the gains, but maybe necessary, and I´m and amateur investor too, not even english speaker, sorry for the grammar, so I have many doubts in how to implement the PP strategy well)

regards

Selling CEF and buying GTU would position you better for permanent portfolio purposes.

[escafandro]

At this moment the premium of GTU is 2.8% and the CEF is -1.1%.
Is this fact relevant if I change from CEF to GTU?
regards

[murphy_p_t]

MT's comments ring true...

(I love what's its doing for my VP, however)

[MediumTex]

At this moment the premium of GTU is 2.8% and the CEF is -1.1%.
Is this fact relevant if I change from CEF to GTU?
regards

I wouldn't let that premium and discount to NAV stop you from doing something that would otherwise be good for your portfolio.

A 2.8% premium on GTU is not high.

Just make sure you understand all of the potential tax issues involved in using these funds.

[escafandro]

Just make sure you understand all of the potential tax issues involved in using these funds.

As a foreigner I don´t pay US capital gain tax. So I think I´ll ok with this issue.
Thanks for the feedback, I change to GTU next time when I put more money to the PP (I use Value Averaging aproach).
regards