One of the reasons so many people get burned in the market is because they start buying as they see prices going up. Most of us remember the insanity of the dot-com bubble in the late 1990s. From 2000 and 2005, it was the real estate bubble. Today as I write, it's oil, gas, gold, and silver.
Once gold passed $600 an ounce and silver broke $10 an ounce, many of my friends came to me and said, "Oh, now I understand what you've been saying about gold and silver. Tell me where I can buy some." I'm afraid the only thing they understand is that the metals' prices are going up -- and as famed investor Warren Buffett says, "The dumbest reason in the world to buy a stock [or gold, silver, oil, Barbie dolls, or Mickey Mantle cards] is because the price is going up."
Understand or Walk Away
One of the key words Buffett often uses is the word understand: "Investment must be rational. If you can't understand it, don't do it."
Currently, I've been recommending that people look at oil, gas, gold, and silver (see "Investing: Go for Gold and Silver, Not Green" and "The Coming Oil Crisis"). I'm excited about silver because as I write, it's relatively inexpensive. I'm also excited about silver because -- unlike real estate, which can require a lot of money, some finance skills, lots of due diligence and property management skills to do well -- silver is affordable to the masses, and management skills are minimum. Just buy some silver, put it in a safety deposit box at a bank, and your management nightmares are over.
Today, for less than $20, anyone can get into the silver speculation game. On top of that, silver is easy to buy and somewhat liquid. All you have to do is find your neighborhood coin dealer and start trading.
My question is: Do you understand silver? Do you know why silver is a good investment? Do you also know why it's a bad investment? If you don't know the answers to these questions, I would recommend that you stick with what you understand.
Although not a silver expert, I'll share with you the reasons why I'm bullish on the asset:
Silver is a consumable precious metal. Unlike gold, which is hoarded, silver is used industrially. For years, before digital photography, it was used in film for cameras and movies. Today, silver is used extensively in electronics.
The reason this is a good fundamental reason to get into the metal today is because silver stockpiles are dwindling, so its price is driven by supply and demand.
It's a precious metal. Silver has been used as real money for centuries. We humans have an ancient fascination with this metal, as we do with gold. For years, I have visited gold and silver mining sites all over the world. That's something that has always amazed me, regardless of whether I was in China, South America, Mexico, Africa, or Canada.
I still remember standing on a mountaintop in Peru, doing my due diligence on a gold mine and looking at tiny caves dug into the side of a mountain. The caves were the mines of ancient Incas who were seeking gold, long before the Spaniards came and stole their wealth and country from them. Standing on a 14,000-foot mountain, where I could hardly breathe, I wondered what motivated those ancients to live in such an arid and hostile environment and delve for gold. Then I realized I was there for the same reason, only centuries later.
The primary reason I'm in real estate, oil, gold, and silver is because the U.S. dollar has become the peso the world. It's becoming more and more worthless as the U.S. is the world's biggest debtor nation.
Just how badly is the U.S. borrowing money? According to the Treasury Department, America's first 42 Presidents (from George Washington to Bill Clinton) borrowed a combined total of $1.01 trillion from 1789 to 2000, Between 2000 and 2005, President George W. Bush has borrowed $1.05 trillion -- and he's got a few more years left to go.
I'm not confident that our political leaders have the guts to do what's required to put the U.S. back on a sound economic footing. This is not to blame either Republicans or Democrats. I blame Americans for wanting their Social Security cake and Medicare ice cream, too. It's the entitlement mentality that grips the U.S., from the President on down, that needs to be changed. Too many Americans have come to expect the government to solve our personal problems (see "Why Many Aren't Securing Their Financial Future").
So if you think America's politicians and citizens are willing to make the changes necessary to strengthen the U.S. dollar, then don't buy silver. But if you're like me and don't expect us, as a nation, to take our medicine, then short the dollar -- and the way you short the currency is by going long on gold and silver.
Equities (stocks) and commodities (gold, copper, oil, and silver) are counter-cyclical. On average, equity prices go up for 20-year periods, and commodities go down. Then they reverse directions. Looking back in time, equities (stocks) began their run-up in 1980 and imploded in 2000. In 2000, commodities began their run-up, and equities headed down. In other words, around 2016 to 2020, start getting back into stocks and out of commodities./p>
A silver exchange traded fund (SLV) was launched on Apr. 28. That means silver, the commodity, can be traded as a paper asset. This makes silver easier for the masses to buy. They don't have to take delivery of the physical metal. Millions of pensions can now hold silver as a paper asset. The ETF will have to actually buy the silver and store it for the investor. This should add to the scarcity of the metal, which should reduce supply and increase prices.
So that's a simple explanation of what I understand about silver -- and why I'm bullish. I'm not buying silver because the price is going up, I'm buying it because I believe I understand why its price is rising.
I could also be wrong -- but at under $20 an ounce, silver is a good buy, in my opinion. I believe it's the last great affordable investment for the masses. And when the masses find out, another bubble will inflate and, of course, at some point burst.