The Logic of Switching Some Gold Into Silver

    

On August 9, I made a decision to switch some of my physical gold into physical silver. This is a decision I have been studying and praying about for at least three years. I consider Ted Butler to be the leading silver analyst in the world. An interview he did with James Cook on August 8 became the final motivation to act on this long held conviction that the intrinsic value of silver today is significantly higher than its present market price. The same is true of gold, but to a far lesser degree. To put this into much more easily understood terms, I believe an investment of $1,000 in silver today will yield a return several times higher than $1,000 invested in gold over the next three to five years, if not over the next few months. The following will put this transaction into its proper perspective in my portfolio: My allocations prior to transaction: 16.4% gold, 31.0% silver, 36.4% cash, other assets 16.2% My allocations after transaction: 11.1% gold, 36.3% silver, 36.4% cash, other assets 16.2%

Related Articles A Great Way to Increase the Safety and Potential of My Silver Why the Urgency in Fully Allocating in Gold and Silver? Gold, Silver and 200-Day Moving Averages (Letter 24) Silver (Letter 8)

The net change at the moment of the transaction was that 5.3% of my portfolio changed out of gold into silver.

IMPORTANT NOTE: I do not make specific recommendations. We are all in different financial positions with different goals and risk tolerances. What I do is disclose my transactions and portfolio allocations. You may use them as a guide to the extent you deem right for your situation.

Q&A

Below are some questions I've received regarding this transaction. I have tried to answer each as best I can. My prayer is that these questions and their answers will be of value to you as you manage your own investments.

Q1: Trade your gold for silver!!! Are you losing your mind?

A: That's a real possibility and the reason I wanted to make this transaction before it is completely gone. It's one of the strongest convictions I have ever had.

Q2: You don't believe in those conspiracy theories about market manipulation and missing silver, do you?

A: Some conspiracy theories are just bad speculation, but it's important to not ignore the important ones, especially as facts come to light. Until three years ago I had serious doubts about conspiracy theries about manipulation of the silver price. But today there is almost no doubt in my mind that some of the them are real. Dozens of experts, internet sites and even the main stream press are exposing them. Even the CFTC and Department of Justice have investigated them and conducted hearings. The volume of information is compelling and beyond this discussion but easily available to anyone interested. (For more information and links, see Silver Revisited.)

Q3: Jeffrey Christian of the CPM group (that also runs the Comex) says it's no big deal if there's a delivery default, since they can also make cash payments, right?

A: I'm not an expert on commodity futures law, but my understanding is that typical commodity futures contracts give the investor who holds them long the right to take physical delivery of the commodity he purchased if he pays the purchase price in full. I have actually done this with silver. I understand there are some contracts which allow the exchange to settle in cash if the buyer agrees to it at the time of purchase. The problem is, at what price? Obviously, events could occur which would trigger a run on gold or silver and skyrocket the price higher in the cash market long before any cash settlements could be effected in the futures market. Even if the Comex halted trading in the commodity, it wouldn't affect the market price of the metals in the cash market. Let this serve as a warning of the danger of holding paper forms of gold and silver instead of physical possession of your metals.

Q4: Isn't the market so small that the price will always be manipulated?

A: I don't think so. It's true that the small size of the supply makes it easier for a few large banks to manipulate the price. But that's not the problem. The problem is that investors are willing to invest without taking physical possession of their metals. If a meaningful percent of investors switched to holding the metals in their possession, it would end the manipulation immediately, and the price would adjust to near its intrinsic value based on supply and demand.

Q5: But central banks don't store silver, do they?

A: That's my understanding. At one time the government held a large store of silver but it has all been sold. Central banks may have held some silver in the past but I have not seen nor heard of it in any of the inventory reports.

Q6: Didn't Richard Russell say he just has gold and cash?

A: That's what he has been saying over the past year or so. But he often mentions that silver could turn out to be the surprise big winner before this metals bull market ends. I have also heard him mention silver favorably a number of times over the past five years, and I have never heard him say that he owns no silver. I believe he would answer a question on his current feeling about silver.

Q7: Why not wait until gold goes to 1300?

A: If that's your conviction, that's what you should do. Personally, I don't think the potential of this switch has anything to do with the price of Gold. It's the ratio of the gold price to the silver price that is the key. For over 600 years, until about the 1930s, the price of gold per ounce sold for about 16-20 times the price of sliver i.e. (the gold/silver ratio was about 16). During the years from 1933 to 1970, the ratio rose as high as 153 then fell all the way back toward 20. In 1971, after Nixon closed the gold window and ushered in our current era of fiat currency, the ratio began rising steadily reaching a high of 100, currently trading at about 66...even as over this period the world inventory of silver has steadily declined while the world inventory of gold has steadily risen. The inventory of gold will probably not decline while a substantial part of the silver is consumed for industrial and other purposes. Both are held as a store of value but the supply of silver is tiny and vanishing. Hindsight suggests to me that this period of fiat currency was also the period during which both gold and silver have been manipulated to make the fiat dollar look better, and in recent years (about 25 years according to Butler) as a source of profits for a few large banks using their electronic trading techniques and naked short selling on the Comex to extract profits from investors.

Q8: Why not wait until the CFTC or Justice Department actually does something to JP Morgan?

A: In a word, because I have no confidence that they will act soon enough even though they are on record as saying they are going to install rules which will end the manipulation. My confidence is in enough investors waking up to what is and has been happening and starting a run on the physical market. This is what we saw in the 1970-1980 bull market in gold and silver. It took only a few weeks to put both metals into the bubble phase. When people fear the rapid loss in purchasing power of the dollar, they will act. It is best to be positioned ahead of this phase and not be scared out by the violent fluctuations in the prices leading up to the bubble phase.

Q9: What if we have deflation or a repeat of late 2008?

A: This is a real possibility. Deflationary episodes can come at any time and are unpredictable, as in the case of 2008. They are usually fairly short in duration since the government usually panics and rapidly increases the money supply laying the ground work for the next increase in the value of physical assets. Often gold and silver fall little or even go up during a deflation. But nothing is guaranteed. That's why I always want a good cash allocation which acts as a hedge against deflation. This is the Permanent Portfolio concept which has served well through all financial climates.

Q10: Why not just get the physical silver - 90% coins or 100-oz bars, etc?

A: This is an excellent question. Beyond any question this is the safest thing to do. I have made the decision to hold a portion of my silver in the Silver Bullion Trust (SVRZF) because it adds arbitrage opportunities in addition to the increased value of silver. The trusts created by Central Fund of Canada (SVRZF for silver, GTU for gold and CEF for a mix of both metals) are the only paper forms of gold and silver I trust. I have written extensively on my reasons for doing so, which include my 45-year confidence in their integrity and safety, the ease of owning them in IRAs and 401-Ks, and others which I will not repeat here.

Q11: You are now 11.1% gold, 36.3% silver, 35.6% cash and 16.2% other assets. One man, Mike Maloney of Goldsilver.com, says he has 90% of his personal savings in silver and 10% in gold. Do you plan to stick with your current allocation or perhaps shift to even more silver in the near future?

A: Another good question. As enticing as Mr. Mahoney's allocation sounds now, the years have taught me that nothing is certain, and it is not possible to know all future events which could affect any investment. I consider some diversification as a necessity even though most investors way over- diversify in my opinion. My approach is to have a limit which I will invest in any single asset. That limit is about one-third. The exception would be cash under certain conditions which could go as high as 50%. My working limit for gold plus silver is 50%. Since I am approximately there now, it is highly unlikely I will switch any more of my gold to silver.

Q12: Why bother following markets anymore? They are all rigged, and you have all you need for the rest of your life. Why not just relax and play a lot of golf or travel the world?

A: My first thought for an answer is Chapter 17 of my book, Biblical Economics. The title of the chapter is Retirement. You can read or download it (10 pages) by clicking on the links in the previous sentence. It really speaks best to the question in my opinion. Beyond that I would say that it is my belief that God owns all the material assets we hold. We are merely managing them for Him (see Chapter 4 of the book). My objective is to increase His estate not mine, and further my objective is to maximize the portion of my estate stored in heaven and minimize the portion stored on earth (see Matt 6:19-34). If in fact that is the objective in my heart, and God is the sole judge of that, He may choose to prosper my investment in silver. But He is under no obligation to do so even if my heart is right. He knows what is best and will do what is best. I rest in that belief.

Regarding the rigging of the markets, I believe this assertion is to a large extent correct. I have believed this for some years now. That communicates to me that it is utterly foolish and close to impossible to out-trade the huge bank investment departments, hedge funds and electronic trading systems. As Jim Rogers says, "I am the world's worst trader." And my firm conviction is that he would be far better at it than the rest of us, but he's wise enough not to do it. But there is a way of investing which will not be defeated by the market rigging. That's what a large part of our web site is devoted to explaining. In a word, learn what is undervalued from the experts, buy it when it is hated by the crowd and wait patiently for the crowd to liquidate its overpriced assets and migrate into the undervalued assets. The market rigging can do little or no damage if you follow this strategy. One simple example. We are perhaps mid-way in the liquidation of stocks which began in 2000. Stocks are still over-valued. We are not yet mid-way (in terms of price movement) into the secular bull market in physical assets which began in 2000. The major part of the gains still lies ahead. The bubble phase has not yet begun. In my opinion, silver is the best single opportunity of which I am aware in this trend.

Now faith is the substance of things hoped for, the evidence of things not seen. But without faith it is impossible to please him: for he that cometh to God must believe that he is, and that he is a rewarder of them that diligently seek him. (Heb. 11:1,6)