Investing In Silver: Double Down On The White Metal's Gains

Gold remains the favorite of precious metals investors, but silver is now a strong number two...with a bullet.

That means you should consider investing in silver now before it goes even higher.

In case you haven't noticed, after wallowing around in the mid-20s for months, silver prices have shot back over $30 an ounce.

And thanks to wildly bullish technical and fundamental indicators, silver could soon retest its 2011 high, or even blow through it.

If that happens, silver's run-up will hand investors a fortune, so here's how you can cash in.

Strong Signals for Silver Price Rally

From a technical viewpoint, the rally in silver may be just beginning.

You see, the silver futures markets are in what's known as "backwardization."

In other words, it costs more to buy silver today than it would to buy silver a month from now, or six months from now.

For instance, the September 2012 silver contract closed on Aug. 27 at $30.90. The December 2012 contract closed the same day at $29.64. And the March 2013 contract closed at $27.28.
It's a rare condition that occurs when the current cash price is higher than distant contract prices.
It's a rare condition that occurs when the current cash price is higher than distant contract prices.
There are also signs that industrial demand is improving. Unlike gold, silver has a bevy of critical industrial uses. There's silver in just about every electronic device out there - from televisions to computers to cellphones to tablets.
On top of all that, the latest Fed minutes suggest the central bank is ready to begin another round of quantitative easing, which has been favorable for silver and gold. Europe and China are also in stimulus mode.    

Why Invest In Gold?

Investors should have some gold in their portfolio, according to a recent research report from Trinity College. The report found that buying gold is a good hedge against declines. That's because gold prices increase dramatically after a stock market crash, but only for about 15 days. After that, gold prices tend to lose relative value against stocks, which often rise again shortly after a crash.

This research showed that gold prices increased from 1999 through 2006, while the stock market declined from 2000 to 2003. Gold prices spiked when the stock market crashed, as scared investors panicked, sold their stocks and bought gold. However, when panic was over, the money moved back into stocks, and gold was no longer a better investment.
Gold should not be bought alone as an investment.

Gold itself is speculative, and can have high peaks and low valleys. That makes it too risky for the average individual investor. Furthermore, despite the peaks and valleys, over the long run the value of gold doesn't beat inflation. Instead, gold should only be part of a diversified portfolio which includes other commodities such as oil, mining and investments in other hard assets.

For similar reasons, gold also tends to gain in value as the value of the dollar declines. Many investors also buy gold as a hedge against inflation.

Gold Price Holds Near $1,710, Awaits Fed, Bernanke

The gold price stabilized near $1,710 per ounce Wednesday morning as investors awaited the outcome of today’s Federal Reserve meeting. Gold prices have come under considerable pressure over the past two weeks amid broad-based weakness in financial markets and a rebound in the U.S. dollar.  On a month-to-date basis, the spot price of gold is now down by 3.8% and on pace to snap a four-month winning streak.

Gold stocks mirrored the stability in gold prices, as the Market Vectors Gold Miners ETF (GDX) oscillated between gains and losses near $50.95 per share.  The GDX has fallen 5.1% in October and is at risk of posting its first losing month since May.

On Wednesday, the majority of large-cap gold stocks posted modest advances.  Barrick Gold (ABX) rose by 0.1% to $38.93 per share, IAMGOLD (IAG) by 0.5% to $15.40, and Kinross Gold (KGC) by 0.8% to $9.96 per share.

Silver held steady alongside the gold price this morning, inching up by $0.07, or 0.2%, to $31.77 per ounce.  However, gold’s sister precious metal has experienced a challenging period of late as well, dropping 8.0% thus far in October.  Furthermore, silver is also on track to post its first losing month since May.

As for the Federal Reserve, while last month’s Federal Open Market Committee (FOMC) meeting marked the start of the open-ended third round of quantitative easing (QE3), today’s session is expected to contain far less significant announcements.  Instead, most market strategists are anticipating that Chairman Ben Bernanke and his fellow central bankers will focus more on their forecasts for the U.S. economy given that QE3 is only in its early stages.

With the Fed unlikely to launch any additional accommodative monetary policy measures at today’s meeting, gold prices could remain under “modest” pressure in the near term – according to analysts at HSBC.

Value Investing Is Not Necessarily Buy And Hold Investing

Many consider Warren Buffett as a great example of a successful value investor and Mr Buffett does ask the question if he will be comfortable holding a company for decades before he decides on making an investment in the stock. However, this is merely to ensure that the company he is considering investing in has quality of earnings and a sustainable competitive advantage that will confer a level of safety should something unpredictable occur in the future. 

Please note that even Mr Buffett will exit a position quickly (or as quickly as the liquidity allows) if he determines that the investment no longer has a merit.
Value investing is a process that aims to deliver outstanding long term returns. However, this should not be confused with the notion that value investors tend to buy stocks and hold them for the long term.

Value Investing is Essentially a Timing Exercise

It is not market timing in the sense most of us understand. Value investors choose to buy a stock when it is cheaper than the intrinsic value of the stock and sell it when it becomes more expensive. 

A company can come out with a news that could not have been predicted. The same stock that was overvalued at a given price, may suddenly become undervalued AT THE SAME PRICE. A new joint venture, FDA approval when the expectation was more delays, striking gold, whatever. Reverse may be true as well. A value investor tries to “time” the value of the company, whereas a market timer will completely miss this development as it is not something he is concerned with.