Tuesday, December 30, 2014

Why Silver Works Best for the Average Person

This blog is directed towards the average person like myself. People and families that just want to make a decent living, give their kids a fair start in life, and be able to retire some day with dignity. Most readers here will probably not be wealthy or have huge investment portfolios to manage. Many will have limited savings to work with. For these reasons, I think silver is the precious metal that works best for long term insurance for most people. Let's discuss it further.

Our main theme here is to watch for signs of major monetary system change that we think are coming in the future. We don't know when the changes will come, but we do think they will involve a loss of purchasing power for the US dollar eventually. If there is another financial crisis, the hit to the dollar could come more quickly and sharply. But if another crisis does not emerge any time soon, the global movement towards a new multi-lateral monetary system will slowly and steadily decrease the role of the US dollar as sole global reserve currency. This in turn will steadily decrease the purchasing power of the dollar while the Yuan rises in influence around the world and in the IMF currency basket for the SDR.

Either way, we need a plan to be insured against the devaluation of the dollar that is reasonable and does not involve too much risk. This is where silver works very well for the average person.

There is no question that gold is the precious metal of choice for central banks, nations, and high net worth individuals. They can allocate a portion of their savings/reserves to gold as an insurance hedge because they have huge pools of savings to work with. Most average people don't have that kind of savings to work with. But most can afford to allocate some savings to silver as an insurance hedge without taking too much risk. 

If there is a big shock to the monetary system that causes people to lose confidence in it and buy precious metals, gold will no doubt go much higher. This is because the demand for it by central banks and high net worth individuals will go up faster than the available supply. But the same should be true for silver. 95% of the global population is going to feel like gold is too expensive for them, but silver will look like a bargain (even at twice the current price for silver). 

Right now silver is an especially attractive buy versus gold because the gold/silver ratio is 75:1 which is way above the historic norm that is closer to 50:1. At times this ratio has fallen as low as 30:1. It is estimated there is only 15 times as much silver on the earth (in the ground) as gold. So gold priced at 75 times the price of silver is very expensive from a both a historical perspective and in terms of the in the ground supply. Click here to see a short video analysis that illustrates this point very well on the charts.

The point is that silver is setup to outperform gold regardless of how prices move. I think this makes it the lower risk metal to hold as long term insurance for the average person who cannot afford to take much risk.

But what if there is no new crisis anytime soon? Most people who follow this topic don't think this is likely. They are convinced another crisis is coming soon. But they also have felt that way now for several years and have been wrong so far. It is entirely possible that a crisis will be avoided for much longer than people expect. This is where silver really shines versus gold for the average person.

Most people simply cannot tie up a big part of any savings they have into something they may have to hold on to for years before they need it. But they can risk putting some of their savings into silver because silver is already at a fairly low price. In a worst case where they were forced to sell it to meet their needs, the risk of taking a big loss is reduced with silver. 

Silver is also in position to hold up and even appreciate decently in price even if there is a real global recovery. This HSBC forecast for silver supports this view. In a real global recovery industrial demand for silver will go up and help support the price. Tax revenues would rise temporarily reducing the strain of the global debt overhang on governments (we saw this in 2014). This would postpone another crisis further into the future. Gold would likely fare poorly in this scenario as confidence in the system would remain high and gold would simply look expensive to the average person. Demand for a crisis hedge by the general public would drop off.

On the other hand, even if silver did fall in price temporarily, it would not need another crisis to rebound in price more quickly. This is due to the industrial demand for silver increasing as the supply levels off and actually falls. This is the current HSBC forecast for silver as things stand today. The demand for gold is more closely tied to something bad happening.


Silver works best as the precious metals hedge for the average person. As an example, let's take someone who has $25,000 in long term savings to work with. That person could acquire about 300 ounces of silver today as a long term insurance hedge with $5,000 of their savings (as opposed to only 4 ounces of gold). In a true crisis where the dollar is losing a lot of value quickly, 300 ounces of silver would be huge because most people will have little or none (sadly to say). Four ounces of gold would have great value as well, but might be harder to use to acquire what you need. A larger number of ounces with a lower price per ounce might actually be more helpful in the real world if you are trying to buy food for example.

Using falling prices for this same example, if silver dropped another 20% in price to $13 an ounce, the loss would only be $1000 of the total $25,000 savings pool (4%). And the price would be more likely to rebound back up more quickly than gold if there was no crisis environment because silver cannot even be mined now for less than $15 an ounce at most mines around the world (even with lower energy prices). 

But if we get big moves up in gold and silver prices and the gold/silver ratio returns to norms (50:1), silver could easily generate double or triple the returns of gold from current prices. (eg. gold @ $2500, silver @ $50 = 100% return for gold and 300% return for silver). From a risk/reward point of view, silver has a downside of perhaps 25% vs. a potential return of 300% using reasonable numbers. $50 only takes silver back to its old highs. $75 silver is not unreasonable at some point in the future based on just normal supply and demand fundamentals over the next 10 years.

All of this suggests that silver is the lower risk precious metal for the average person to hold as a long term insurance hedge for the future. It's also why we believe silver will outperform gold from here regardless of what scenario unfolds in the global monetary system. Acquiring some silver is something reasonable the average person can do to prepare without taking too much risk. The numbers speak for themselves.

Update 12-31-14:  CNBC runs this article on why you should view gold like insurance. It's a good article and goes along with what we have said here on the blog. But, we do think silver will work better for many people. So just substitute the word silver for gold in this article to get the same idea.

Added note: 

A question I get here is how can the average person prepare for change given that so many different future scenarios are possible? On January 1st 2015 I will have an in depth article that talks about this. It will give the history for why this blog was started, what it hopes to do, and offer some common sense ideas that anyone should be able to use to prepare for whatever happens. This article will also be provided as a Google document in Word format so that it can be easily printed and given to anyone interested. Of course it will be free to anyone who can use it. Please do hand it out to anyone you think can use it.

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