Silver is on the Scoreboard

You’ll notice a new tab on the site called “Scoreboard”. Basically, I’m sharing my investments, so you can see for yourself whether I know anything about the subjects I feel confident enough to write about. It will allow you, fair reader, to judge my expertise and motives. Its a gesture of openness and accountability that I’d like to be a hallmark of this site, and I don’t think you’ll find anything like this in mainstream media commentary. I’m not going to say how much I’ve invested because I’m not comfortable with revealing the extent of my poverty, but knowing when and for how much I opened and closed positions should be sufficient to make your own judgments.

I made the first trade of my life a few weeks ago. I bought shares in SLV, an exchange traded fund (ETF) that owns a pool of silver. It is supposed to track the price of silver while giving the added convenience of being able to be sold at a mouse click and not having storage costs. I was promptly taught a lesson in market timing; as of yesterday, my position was down 5%. I got some of that back today, but that is irrelevant. I took the position to hold for a period of 1-5+ years, and I’m still feeling confident.

Here are the reasons I think this is a good investment.

1. I expect inflationary monetary policy, and silver is an inflation hedge. Precious metals generally don’t have intrinsic value. They are valuable because people want them. They want them to use as money. Everyone recognizes the value of gold and silver, and that means you can exchange it for goods and services. There is a circularity there, but they lack intrinsic value in the same way fiat money lacks intrinsic value. When people begin to doubt the value of fiat currency, they trade their dollars for shiny stuff. Suspecting that people will make this trade and that there will be more dollars in the system soon, I took this position.

There is no neutral position right now. Leaving my money in a bank account is tacit investment in dollars, and I’m no longer comfortable leaving what little I have exclusively in greenbacks. By investing some of it in silver, I diversified my assets.

2. The current ratio of gold/silver prices has significantly diverged from the historical ratio. I chose silver instead of gold because the historical ratio of gold/silver is 40/1, and silver is worth less than 1/40 of gold right now. Assuming this is somewhat indicative of relative value, either gold is overvalued or silver is undervalued. Looking for the cheaper one to buy, I went with silver.

3. Silver has substantial industrial uses in addition to its monetary status, so forget what I said about intrinsic value. There may be greater demand for gold as money right now, but silver has the bonus of being used in things like solar panels, water purification, and food packaging. Energy, water, and food are all things people need, so that has to be good for demand, right?

Here are the reasons I’m a little uncomfortable with this investment:

1. SLV has been the best performing ETF over last year. It is not good to chase yield or buy high. The past doesn’t predict the future. My investment has less to do with the supply and demand for silver than speculating on monetary policy and investor behavior. The expectation of further inflationary monetary policy could already be “priced in” at current levels, providing no further protection. I didn’t buy at its absolute peak, but I still bought an asset that has gone up 100% in the past year on my technical assessment rather than fundamentals.

2. There are questions about SLV’s assets. There are those that say SLV does not actually own all the silver in its account. I’ve done some research and come to the conclusion that you can’t really know. The account gets audited, and the bars are there. The issue is whether the bars themselves are subject to other claims. If they are, then the issue is what bona fide purchaser laws govern. I’m not really interested in taking the time to figure out these things for myself right now. The asset tracks the price of silver. Its easier for me to own than actual silver. The ETFs that let you redeem your shares for physical silver trade at a 20% premium over their asset values, and I’m unwilling to pay the markup. I may be really sorry one day that I didn’t, but in any scenario where that might happen, I think I would have moved to physical silver before it happens. Is this hubris, laziness, or a reasonable risk? Probably a mix of all three, but you can decide the proportions.

3. There is an expected increase in the supply of silver in the next 3 years or so. This diminishes the non-monetary rationales for owning silver, but again, I’m trading primarily for its monetary function. I’m expecting the money supply to increase a faster rate than the silver supply and more investors to move into silver as a result. For me, this just mitigates the bonus industrial aspect.

So there it is. I’ve compounded the anxiety of being in the market right now with the anxiety of being wrong publicly. Lets hope I’m right.

(Please comment here rather than on social media sites, so everyone can engage each other in one conversation.)

Image courtesy of sirquitous.

  • Ryan Michael Bleek

    This is really interesting. Anytime I listen to or read investment advice I always think, “Why don’t you just tell us what you actually own?” It’s the only meaningful measure of a person’s confidence their own advice.

  • Ryan Michael Murphy (@NouveauSouth)

    I don’t see any reason why the financial press doesn’t do this other than fear of undermining their own reputations or disclosing conflicts of interest. How they’ve done in the past in no measure of the quality of their reasoning on the issue at hand, but it does leave you wondering whether you should be listening to this person in the first place.

  • James
    • Ryan Michael Murphy

      I just hope those J-Holes make my day on Friday.