Silver Speculator or Silver Investor?

By David Morgan            July 26, 2006 www.freemarketnews.com

I received an invitation to write a timely piece for the launch of this web site devoted to the silver industry. Thinking about what would be of value to the reader at this point in the market it suddenly hit me that many people that think they are silver investors are really speculators.

Personally, I have nothing against speculation and in fact many from the mainstream financial press would consider any commodity based “investment” to be nothing more than speculation at best anyway.

When the silver-investor.com website was begun in the year 2000 a full six months went by before we had our first subscriber. Things have certainly changed since that time until present and many of the opportunities that we laid out for our subscribers do not exist anymore.

I recall a speech I gave in early in this bull market and it involved a New York listed silver company that was the best performing stock in 1979 for the entire NYSE. Silver and silver investing was all anyone could talk about near the end of 1979, the silver market had move up considerably and many investors were in a panic to find precious metals investments. Fast forward to the beginning of this bull market and this same stock had done an equal performance going up ten fold any yet the general market participant and even the precious metals investors were basically unaware of this important fact. In other words this significant move was largely ignored across the board.

I would like to re-emphasize the point that we were talking about a NYSE company that was selling at fifty cents in danger of being removed from the New York listing and this company made it up to the five dollar level several months later. This is the type of speculation we like, risk is low upside is great and most factors about the company can be fully investigated.

Today, these types of opportunities are practically non-existent. Certainly, opportunities do exist and they always will, but the almost “sure” thing is difficult if not impossible in the mining sector presently. This does not mean you should not investigate this sector only that there are many more choices and sifting through all the possibilities can be cumbersome.

As far a silver itself, it is much closer to a sure thing because of the dynamics for silver are so extra ordinarily bullish. This article will not outline the fundamental case for investing in silver.

Before looking deeper into silver investing versus speculating I wish to bring to the readers attention that any serious metals investor should sign up for our free mailing list that provides the “Ten Rules of Silver Investing” for you.
Go to http://www.silver-investor.com/joinfreelist.html
An outline of the Ten Rules is below, this is only an outline each rule is explained in detail and may help the novice as well as the seasoned professional to obtain better results.

Here is an outline of the rules.

1. Why silver, Why Now?
2. Start small- keep it simple.
3. Boost the buying power of your dollars with mining shares.
4. Dollar – cost average to lower your costs – and increase your discipline.
5. Do not get a raw deal from your dealer.
6. What’s yours is yours – so keep it that way.
7. Silver speculation’s like cough syrup- good in small doses-- But too much can make your portfolio sick.
8. A little information can mean a lot more dollars.
9. Collecting silver is an art- but not really an investment.
10. What percentage is the correct amount?

At this time we are looking at rule #7 it reads

7. Silver speculation’s like cough syrup- good in small doses, but too much can make your portfolio sick.

Depending on your individual goals and our personal tolerance for risk, a small portion of the assets you commit to silver can be used for speculation, perhaps in futures contracts or options on futures. Never forget, however, that this type of trading is speculation, NOT investment.

Commenting on the above, we have seen many speculators that have been attracted to the silver market based upon the supply and demand fundamentals and consider the “trade” to be a no-brainer. However the novice trader usually sets up a commodity trading account and goes long silver without adequate capital or a disciplined plan. Shortly, into the market the trader loses money and immediately looks to place the blame for the loss somewhere.

Often the trader finds those that write about the fundamentals as having flawed analysis or move the blame for their loss on to anything outside of themselves. Unfortunately many of these novice traders that were once bullish silver, never come back to the market and usually extol the virtues of staying away from silver at all costs.

In our view most people should steer away from futures or options. We have been consistent from the very beginning to purchase physical metal for cash and this should form the basis or your foundation. Once the investor has established a core holding in physical metal the next area is to obtain mining equities in producers that have sufficient room for growth. In our view get real, get physical and purchase real silver. The purchase of real metal that you can actually touch is truly an investment. Anything above and beyond the physical metal is some type of derivative.

Certainly a producing mining company is a real tangible asset, but a share in such a company is only a claim on the real asset not the asset itself. Therefore investing in top tier mining companies might be considered to be “investments” but they carry greater risk and at times greater rewards but not always.

During the second leg up of this major precious metals market more investors will be moving into the sector. Most mutual fund managers and institutional managers have very strong guidelines that in several cases prevent them from placing money in micro cap junior mining companies. This is not to say it does not occur, only that this is not where the big money is flowing; the large moves generally are in the more liquid mining equities that have market capitalizations of 300 million to one billion dollars.

This is where we have focused our efforts for this phase of the precious metals market. Actually, we prefer mid cap companies because they are faster growing and more dynamic that the largest companies in the sector. This is where the safest and in many cases easiest money will be made over the next several months. The problem becomes one of timing or money management because the volatility has increased substantially.

As an example in the few days it took to compose and finalize this article one of our favorite silver stocks has gone up over twelve percent. However, during sell-offs the move down can be equally dramatic.

The next level that we look to is the junior sector and this is certainly the most risky but also offers huge potential thus the best place to speculate in our view. We make no excuses there really isn’t any investment per se in this sector; at least for all practical purposes any money placed here should be “speculative” risk capital.

Nothing can be more frustrating to precious metals investors than having a basket of junior mining companies and watch gold and silver move up and yet their personal holdings are basically treading water and really not performing as well as the metals themselves.

Many “investors” only have speculative types of mining companies and this presents more possibilities but is also an opportunity to under perform the general precious metals market.

As I have stated many times, never in my career has a junior mining executive come to me and stated, “we have an average project, in an area that is somewhat risky, our management team is adequate, and our funding is minimal.” No, indeed the story usually goes something like; we have the best possible project, in a very safe area, top-level management, and money in the bank!

Bottom line is most of these companies are what are known in the business as “story stocks”, a story stock is more or less a bet on the story. That is the mining company is very near a recent large discovery, or the management has a proven track record of making discoveries, or so much money has been spent on the property previously by a major and they walked away because it was not big enough but this is perfect for you Mr. Investor. The stories take on all types of forms and there are combinations of these general themes.

What can happen is some people (speculators) fall in love with the story and will hold a company that really has little chance for success. Cheap stocks are cheap for a reason, they are generally extremely high risk, have large burn rates of cash (drilling we hope, not just promoting) and the odds are at least two thousand to one against you. Having said all of this, many people still love cheap stocks they think or believe that the story they have is so compelling that it is just a matter of time.

What is the correct approach? Actually there really is not a right or wrong way to participate in this market. Basically is boils down to each individual investor/speculator, however for most a good balance of well known mid tier companies, sprinkled with some high risk/high reward juniors is the most prudent approach.

High priced stocks are high priced for a reason, they have value, many facts are know about the projects such a production rates, outlines of future production, cash costs, total costs, reserves, management and most of all profit or loss. These are the types of investments that the fund managers and institutions have made and will continue to make well into the future. Don’t overlook a mining equity just based on price, remember the higher prices are usually the best companies and don’t you deserve the best?

In this business it pays to stick with the winners and use discipline in all aspects of your portfolio management. So, let me conclude with rule eleven which does not exist, in the original work. You should have fun, make it interesting, and find a style that suits you personally.

Finally, the book on silver investing I have committed to writing is finally available

You can preorder the book here.

By David Morgan

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.