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When something is rare, valuable and getting more rare then the price should go up. If the price goes down, instead, then its time to buy more, not less of it.

Since there doesn’t appear to be anything close to a free market for silver nonsensical behavior like this is possible. If the increased buying of new SLV shares as the price dropped, last week, was any indication it seems there were many who agreed with these sentiments.

I have been trying to purchase more physical silver as the price went down but have not been able to find very much of it. I did find some silver eagles at a local coin shop and the dealer wanted $4 over spot for it which I gladly paid.

In situations like this I turn to buying more shares of SLV, although it makes me very uneasy to do so. I don’t like all the layers between shares of SLV and the underlying metal. Owning Shares is definitely NOT the same as owning the metal. It is only the closest you can get to physical silver on the AMEX.

With the spot price for silver being ridiculously low its tempting to withdraw all 401K assets and purchase the actual metal instead. But, the penalties and taxes of the withdrawal have to be factored in. Another thing that makes that difficult is that I probably could not find enough of the physical silver to purchase, anyway. And that makes me suspect whether the management of SLV can find it, as well.

SLV is charged with buying and selling whatever amount of silver is needed so that the value of the shares match the spot price as closely as possible, after expenses and liabilities. I Suppose this takes skill but their trades are meant to be more ‘robotic’ in the sense that the market spot price drives their trading and not their skill at market timing.

As ETF’s age, they have to sell more and more of the underlying commodity to pay for expenses and profits. The older the ETF the less correlation they have with the underlying commodity. GLD is two years older than SLV so has less correlation with physical Gold than SLV has with Silver which is still about 99% (And falling).

While we’re on the subject, another negative for SLV is the sheer size of the silver stockpile the ETF has accumulated, now 206 million ounces. I think it makes for an excellent target for government seizure or other hanky panky some group of pricks might dream up. Who knows if they’re just leasing silver from someone else for a day to pass monthly inspections to satisfy investors of their ‘reserves’.

To sum up, I use SLV only to follow the spot price for the short term until I can manuever a way to minimize the cost of getting it out and into the real thing.

I would prefer to actually invest in real companies. There would be no reason for “investing” in an inanimate object over a company that actually creates value if the means of exchange for all companies in the US was not crumbling beneath their efforts to conduct business.

Some 401K’s are even more restrictive in the choice of investments you’re given. Then, perhaps all you can do is get out of US equities and into europe and asia. But that just gets you out of of one frying pan and into another whose temperature is not yet as hot.

It doesn’t make sense in a normal market to call Gold an “investment”. Gold is just Money, no more, no less.

I do see Silver as an investment, however, even though it is also money, because as a commodity it is currently too rare for its industrial demand. A simple fact that would be worked out in the free market, if there actually was one, for silver. Because it is a monetary metal, like gold, the spot price based on the futures market on the COMEX exchange is absurdly manipulated to make the dollar appear strong.

I’m not complaining about this. I’m glad its manipulated because when the manipulation becomes impossible, the dollar crashes, and silver and gold come back into demand as a hedge then I will benefit greatly from its manipulation.

But, I don’t need to depend on that to benefit. Even as the physical market cannot meet industrial demand the price will go up. And that would be enough for me, irrespective of any monetary premium that may or may not materialize.

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Tags: commodities, dollar, gold, money, silver

This entry was posted on Tuesday, August 26th, 2008 at 11:44 pm and is filed under Finance, dollar, economy, gold, money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.