Posted on 09/15/2011 5:14:04 PM PDT by blam
Awaiting The Inevitable Correction In The Silver Price
By Eric Fry
09/15/11 Laguna Beach, California – The International Can-Kicking Team is busy again today, as the European Central Bank, US Federal Reserve and three other central banks linked arms to kick the European debt crisis down the road until the end of the year.
Specifically, the Can-Kickers announced that they would provide three-month US dollar loans to European banks to insure that the banks have enough liquidity to make it to the end of the year.
If past scams of this nature are any guide, the “short-term” assistance will somehow morph into long-term or permanent assistance, funded by taxpayers. The markets are rallying because this scam “sends a powerful message,” according to one financial news source.
Message received: When all else fails, launch a massive bailout.
The markets will probably continue rallying a while longer, and the gold price will probably continue to retreat (just as Bill Bonner has been predicating). But the longer these counter-trend moves proceed — i.e. stocks up, gold down — the better the opportunities for forward-looking investors to re-weight their portfolios.
The recent selloff in gold, for example, is providing a glittering opportunity to add a little more weight to the precious metal sector. And as we mentioned in yesterday’s edition of The Daily Reckoning, gold stocks, rather than gold itself, seem particularly compelling at the moment.
Following up on this theme, we present the nearby chart for your consideration. First, the conclusion: Gold stocks are as cheap as they have been in a decade. Now the details: The chart below shows the price-to-EBITDA ratio of the XAU Index of stocks, both in absolute terms and in comparison to the price-to-EBITDA ratio of the S&P 500 Index. This ratio is a measure of price-to-cash-flow and tends to illustrate valuation more accurately than the more familiar price-to-earnings (PE) ratio.
In absolute terms the price-to-EBITDA of the XAU Index is currently around 7.5 times, which is only about 10% higher than the price-to-EBITDA of the S&P 500 Index. Both of these metrics are as low as they have been in a decade.
Obviously, however, “cheap” does not mean “buy.” Cheap stocks have a tendency to get cheaper, on the way to becoming way-too-cheap. Gold stocks are cheap, but they could still fall to way-too-cheap. Silver stocks, on the other hand, may already be way-too-cheap.
A Daily Reckoning reader named Kyle Sorgel makes the argument:
Within the precious metals sector, silver mining stocks may be the very best bet…
A consensus estimate of the total amount of silver mined from 3000 BC to now is about 44.4 billion ounces and for gold is about 4.25 billion ounces. This yields a gold-to-silver ratio of about 10.44, a far cry from the current gold-to-silver ratio of 45. In modern times, mines are pulling less silver out of the ground, relative to gold, than they did in ancient times. Total annual mine production of silver is only 8.6 times greater than total gold production. Furthermore, and most importantly, 53% of the total silver demand is used in industrial processes versus gold’s 11%. This means that every year 53% of the total supply of silver is USED UP, meaning it’s gone, vanished, disappeared.
Silver is an extremely versatile metal and as time has progressed science has found multiple uses in which silver provides a benefit that no other metal can provide (even gold). And since the silver is used in such trace amounts, most of it can’t be recovered.
Based on these facts, it seems inevitable that the large price disparity between gold and silver should narrow over time.
Mr. Sorgel’s argument is compelling. But please remember, dear reader, inevitable is not the same thing as imminent.
*
The price of gold and silver stocks must, without doubt,
have already factored into them the inevitable nationalization that will come about when the fiat money junkies loose, as they must, without doubt.
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I’ll buy when it drops to $36/oz
It’s only dropping because I bought a little bit.
oh, well...buy more please
Who has the lowest markup over spot these days? E.g. buying physical silver, not mining stocks.
Goldmart? Apmex? ...
I own quite a bit so your killin’ me with your buying frenzy 17th! Stop please!!!
I like Apmex except for the delivery charge, it matters when you are a small buyer
I like Apmex except for the delivery charge, it matters when you are a small buyer
Check out Blanchard
Gainesville Coins is pretty good.
Check out the fine print and terms on all of them. Markup over spot price, bank wire vs. other forms of payment (credit card), etc.
I bought from Apmex before (when it was about $13/oz). But Goldmart so far has cheaper “over spot” price, but a $16 shipping fee for orders over $1000.
I’ll have to check out Blanchard.
Sadly, I lost all of mine in a tragic canoe accident.
Have to start back at square one.
I’ve been using eBay but in this roller coaster market sellers can’t keep up with spot prices
I do like Great Southern Coin, shipping is “free” and can use PayPal, so already factored into the price
What are the “multiple uses” of silver, aside from an investment?
Here’s Just One:
More than 150 million ounces of silver annually are used in the world’s chemical industry for the production of two compounds – ethylene oxide and formaldehyde.
http://www.silverinstitute.org/silver_uses.php
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