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The Best Way to Trade Silver – Don’t

Dominic Frisby

It’s a subject that’s almost impossible to ignore for today’s Money Morning: silver.

It has broken out to new highs. Again. On Monday it touched $34 an ounce, four times the price it was in late 2008. But at these levels, should we be buying, selling or holding? What to do?

Thinking can be a dangerous business

Sometimes I think too much. Thinking can be a dangerous thing. Often it’s better to, as one of my closest friends is fond of saying: “Keep it simple”. Let me explain.

I have always said that of all the metals silver has the most potential. There is its monetary appeal. As a precious metal, investors are seeking it out because of its increasing value at a time where governments are debasing their currencies.

And there is its industrial appeal. It is finding more and more uses each year in industries that, recession or no recession, are growing. I’m talking particularly about its use in electrical and medical applications.

Meanwhile, there is an ever-increasing supply deficit. Nick Laird of Sharelynx (www.sharelynx.com) has charted this:

Global silver production

Nick says: “Note that since 1950, almost 925,000 tonnes have gone into demand, with 570,000 tonnes of this having come from production. This leaves a shortfall of 350,000 tonnes, which has come from central bank sales, stockpiles and scrap. This deficit equals approximately 16 years of production”. The scrap is running out.

Meanwhile, on the futures exchanges, there seems to be a genuine supply squeeze which is pushing prices higher and higher. And since one of the bigger sellers, JP Morgan, announced the closure of its prop trading desks in late August, the price has catapulted higher.



Silver price

One day silver, much as it did in 1980, is going to rise higher than your wildest dreams. (That $50 number from 1980, is somewhere north of $200 in today’s money.) And it’s going to move so fast, the only way to be sure of exposure is to keep a position at all times.

But perhaps the simplest way to play silver would be to buy a huge position, leave some sell orders in at $50, $100, $150 and $200, then go somewhere where you can ignore the noise: perhaps a round-the-world trip only to places with a poor internet connection, and probably avoiding North Africa.

Silver is one of the most frustrating metals around

For, despite all this potential, silver really can frustrate. It never quite rises as high as it ‘should’ – until now. It is also a surprisingly small market, so when a lot of buyers or sellers come in the price can move quickly in either direction.

In fact, as anyone who was long in 2008 will vouch, it can fall a lot faster than it rises. Indeed I expect that many of the nasty rumours surrounding the metal and artificial suppression schemes are born out of this frustration.

In fact, many years of following silver, looking at what it should do compared to what it actually does, have made me rather cynical about the metal. Too cynical.

The way I have reconciled my cynicism with the huge potential of silver is to keep one long position open at all times, and to have another position which I trade in and out of.

Back in November I recommended selling some silver at $30. I saw it as a huge number. I caught an intermediate top and for a couple weeks thought I was pretty clever. Judging by the number of emails I received, so did a lot of readers.

But the problem then is getting back in. I bought a little back at $26, but not as much as I would have liked, given that it’s now at $34. Thank goodness for that position which I never trade.

That’s what I mean by thinking too much.

The best way to play a bull market – just sit

An old pro might say, you never go broke taking a profit. Manage your risk, take money off the table on the way up, and so on.

But the bottom line is that gold and silver are in a bull market. Bulls have a habit a throwing you off. Yes, gold and silver aren’t cheap any more. Yes, you’re coming late to the party. But the best way to trade a bull market is not to. Stay long and strong.

I am minded here of old Mr Partridge, the veteran trader in Edwin Lefevre’s Reminiscences Of A Stock Operator, which tells the story of Wall Street legend, Jesse Livermore. The firm was not happy that Partridge was giving “very little in the way of commissions”. But every time old Mr Partidge was given a tip to sell in order to buy back at lower prices, he would thank the tipster politely and just say, “It’s a bull market”. He didn’t want to lose his position. Here’s what Livermore learnt from him:

“And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It always was my sitting. Got that?

“My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level, which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.

“Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end.”

This bull market is nowhere near over. Gold and silver are going a lot higher. Maybe not this week, maybe not this month, maybe not even this year, but they are. Enjoy the ride.

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