Monday, March 7, 2011

Is $36/oz Silver Cheap or Expensive?

How do you know if something is cheap or expensive?  Most novice investors look at the price of silver and say it is overpriced because they could have bought it last month for $28.25/oz.  Stay away from these people as they will be the ones that finally convince themselves to go "All In" on the bull market at the very top.  They do it every time and subconsciously they can't help themselves.

Last month I wrote that I was still acquiring silver at $30/oz and described why.  I would not be surprised to see a shakeout in the market and frankly have been shocked that it has not happened yet.  This shakeout event will provide another nice entry point for silver buyers.  At the risk of sounding like a broken record, there are some large paper short positions that are trapped in the market.  The COMEX does not have the silver necessary to deliver and is settling positions in cash and offering up to a 25% premium in order to keep peace.  As I have urged many times, please do your homework before buying a "physical" silver fund.  Calling your broker is not homework.  Reading the prospectus or a summary is the only acceptable method of discovering whether a fund has actual silver or paper silver.

See for example this chart below that shows the price of one trustworthy silver fund who keeps a 450 page pdf file on it's website listing the serial number from every bar held by the fund.  For beginner chartists, the while line is the fund's share price, the blue line is the funds net asset value per share and the green chart below shows the difference between the two.

What conclusion can we draw from this chart?  People in the know are paying up to 20% over the net asset value for the shares of a fund that actually has the metal.  What does that tell you about where silver is headed over the next few months?

While a shakeout is highly likely at some point, I feel that $50/oz silver before the end of the year is virtually inevitable.

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