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The Future Price of Silver - A Review of Economic and Behavioral Principles

Tuesday February 26, 2013 14:37

When forecasting the future price of silver from a fundamental perspective, it can make sense to review the basic principles of economics and behavioral science as they apply to the silver market.

These principles typically relate to fKw=actors that are driving higher future purchasing power of silver or factors that are making silver more valuable as a wealth saving asset.  Other key contributing factors to silver’s currently undervalue pricing tend to block awareness with respect to the true value of silver.

When the prevailing silver market manipulation by the relative few shorts is eventually overcome by the common sense of the much larger horde of private investors, the market for silver will revert back to the fundamental principles that have been driving the price of silver higher for years.

Principles Driving Silver’s Price Higher

The interplay of the following economic and behavioral principles is underpinning the silver market and should eventually push the price of silver higher:

  • Inelastic Demand

Regardless of price, metallic silver has strategic importance in industrial and medicinal applications for which it cannot be readily replaced. Nevertheless, only a small per unit supply is needed per use since tiny amounts are needed to keep production lines flowing.

  • Inelastic Supply

The supply of silver does not readily respond to changes in its price since limitless paper silver can be created to manipulate the price of the physical metal.

  • The Availability Heuristic

This is the tendency among investors to make judgments regarding the frequency of an event on the basis of how easily they can recall related instances.  This primarily unconscious strategy helps people simplify their investment choices by reviewing the examples they already have ready access to within their memories.

  • The Pareto Principle

When applied to demand, this principle indicates that a market move in silver will be initiated by only a small number of early players or the hinting of confidence loss in paper currencies.

  • Occam’s Razor

Humans tend to look for complicated solutions when simpler ones are available.  This simplicity principle suggests that the hypothesis that requires the fewest assumptions should be chosen. It’s no complex conspiracy that banks are allowed to have access to manipulative positions, where they profit as a result.

Factors Blocking Awareness

The following factors seem to be blocking awareness of underlying pricing factors like the true value of silver, the depth of the ongoing financial crisis, and the need for diversification outside of dollar denominated assets:

  • Normalcy Bias

The slow bumpy nature of the decline in the economy allows for excuses to be made based on the normalcy bias, which is a state of mind people often enter when facing a disaster. This bias causes people to underestimate the possibility of the disaster and its effects, and it typically results in their inadequate preparation for the disaster,

  • Confirmation Bias

Most people truly believe that things cannot really be all that bad or that the economy is simply undergoing a downturn within a typical business cycle, which will end soon enough. They also tend to believe that governments cannot go broke and that printing money can lead to real economic growth.

  • Insidiousness of inflation

The insidious nature of inflation, which is both thievery and a tax on the common person, tends to allow it to creep up on investors gradually over time, so they typically do not prepare their portfolios adequately for this hidden cost.

  • Malthus and the Myth of Progress

Thomas Malthus postulated that unchecked population growth would prevent the creation of a utopian society. The "Malthus was Wrong" fallacy, also known as the “Myth of Progress" has become the belief that humanity is necessarily on an "upward" trajectory regardless of how many people are fighting for exponential growth at the expense of the world's clearly finite resources, and silver is one of those valuable items in finite supply.

The Key to Financial Survival

Ultimately, perceiving the need to immediately prepare for a coming or worsening economic crisis comes down to playing the "What happens next?" game.

Furthermore, investors need to remain realistic with respect to the time frames involved.

They also need to understand that just because they were comfortable yesterday, does not mean they will be better off tomorrow.  Preparing for the worst makes sense so that you can be pleasantly surprised if the future turns out to be brighter.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit http://www.silver-coin-investor.com


By Dr. Jeff Lewis,
Editor, Silver-Coin-Investor.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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