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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Silver Offers the Only Positive Return

Commodities / Gold and Silver 2011 Apr 14, 2011 - 02:38 AM GMT

By: Dr_Jeff_Lewis

Commodities

When thinking about an investment, the best managers look for returns that beat what they perceive to be average.  In the long run, wealth is a relative measure—today, even the poorest people are wealthier than the richest people five hundred years ago, though we’d still say that today’s poor are poor.


Investments work along the same lines, with the simple concept being that an investment must have performance that is preferable to your current financial trajectory, and it must have a return that beats holding money in cash, as well as the negative returns incited by inflation.

Whether or not you are a current silver holder or not, ask yourself one simple question: what price would it take for you to sell your metals or buy government debt?  At what rate would it be favorable for you to invest your money in stocks, bonds or any other investment?

Now, take that number, which is likely quite high, and compare it to past performance of all the markets out there.  You can compare it to stocks, bonds, and commodities, and see simply which asset type has produced returns that you would see favorable.  It would be a safe bet to see that the returns and performance that you want out of your investment portfolio haven’t been found in stocks nor bonds for the past twenty years.

Silver Bubble is Not

For the individual investor, an exercise that looks into what he or she wants in an investment isn’t a daily happening, though it is for the institutional investor.  The markets measure just like wealth—you can do well, as long as the other guy doesn’t do as well as you do.

So when the hysteria of a bubble emerges, investors should ask bubble promoters where they should go from silver.  Should they buy stocks, which are priced as many as twenty years into the future?  Should silver investors pile into fixed-income investments and take home 4-5 percent per year?

It is here that we reach the end of such an argument.  Not only are the opportunities present in stocks and bonds weak, but they’re also offering returns that aren’t consistent with their risk profiles.  So why would you hold silver, if you wouldn’t own cash flowing stocks, bonds, or an assortment of mutual funds?  Because silver is the new cash.

Investors who have amassed massive positions in the metals markets are telling the market that the options aren’t exciting.  If you’ve only a small selection of underperforming bonds, underperforming and expensive stocks, or negative-return generating cash, is it really much surprise that you want an alternative?  Traditional investments have a best possible outcome of returns equal to a few percent per year, after inflation, and cash has a best possible outcome of negative returns each year.

The bubble isn’t in silver ownership, but in low rates and indebted economic institutions.  When investors hold commodities, they’re holding the new cash, and they are insulated from risk to a degree that everyone should appreciate.  Silver is “in a bubble” because the remaining opportunities are stuck in a rut.  At what point would silver investors swap their holdings for paper assets?  You might have to bring back Volcker to make that happen.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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