Jay O'Keefe's Investment Letters

Letter 8       
November 11, 2007


This letter will be short and simple. Its only objective is to suggest that silver offers us the best risk-adjusted potential for gain of any publicly traded investment of which I am aware. This is my opinion. I could be wrong. Like everyone else, I do not know the future. The academicians have ways of calculating “risk-adjusted” potential returns. The formulas are beyond the scope of this discussion, but in a few words, it means a “risk-adjusted” potential for gain takes into consideration the probability of loss as compared to the probability of loss in other investments available.

Silver has been money and a store of wealth for over 4000 years. It cannot be defaulted on because it is no one else’s liability. In addition, it is an industrial commodity, for which new uses are being discovered every year, while the above ground supply has been declining for the last ten years or more. The world’s supply of silver is being used up. (See Silver Annual Total Demand.)

Both gold and silver hit their all time high prices in US dollars in 1980. Today, gold is back within a fraction of that high, while silver is down about 70% from that high. Adjusted for inflation, silver is down almost 90% from its 1980 high. The public is almost unaware of its existence. It’s rarely mentioned in the mainstream media. A few days ago when it hit a 27 year high near 16, it got almost no coverage. I believe it would be dirt cheap at $25 per ounce, a bargain at $50 per ounce, and fairly priced at $100 per ounce. Why is it so cheap in terms of other commodities, and especially in terms of the depreciating dollar? I will refer you to some good material which will help explain the answer.

The real price of silver from 1344 to 1998 (in 1998 dollars)
Below is a chart that illustrates how the market price of silver has risen and fallen over the last 664 years.  It helps illustrate how greatly undervalued silver is today.

Note the yellow line which represents the gold/silver ratio.  Experts estimate the historical average ratio of gold to silver has been around 16 to 1. It has been as low as 10 to 1 and as high as 100 to 1, but it's now about 49 to 1.

Inflation and silver prices
The great changes over the last 100 years are largely due to inflation and partly due to manipulation - some driving the price upward (like in 1980) and some driving it downward (like currently).  Here is a chart that illustrates how inflation has affected the value of the dollar over the last 50 or 60 years:

Silver price chart for investors
For today's investing purposes, here is a chart for silver starting 10 years ago:

10 year Silver Technical chart [Kitco Inc.]

Today, silver is the only investment asset that I am willing to allocate 20% of our net worth to. If you do not own any silver, I recommend you decide on your target position, then begin accumulating toward that position.  If your target position is 20%, like mine, I suggest you buy at least 5% now. Then add in steps until you reach the target. One plan would be to add every 30 to 60 days, at regular intervals, at whatever the price is at that time.  This is called "dollar cost averaging."  BUT, if the price falls below 15 before the next buy point, accelerate that buy to take advantage of the lower price. If it fell down toward 14, buy again, etc. If, instead, it begins rising above 16, I would buy there, then stay on the regular intervals. This plan combines “accumulation,” as previous defined (i.e. buying at lower and lower prices) with “dollar cost averaging” as just defined.

My preferred way of buying silver is bags of pre-1965 US silver coins (dimes, quarters or halves), called “junk silver.” Each bag, whether dimes, quarters or halves, contains 715 ounces of silver. Thus one bag at today’s spot silver price [i.e., the immediate price being traded on the spot market for payment and delivery; also called the cash price] of about 15.50 has a market value of just over $11,000. You should not have to pay more than 10 cents per ounce over the quoted spot price. Recently I have bought some at 5 cents over, and a few weeks ago even slightly below spot. As more people decide to buy silver as an investment, and the coin shops have less supply, the premium above spot will go up. [October 2008 note: due to manipulation by some large traders in the futures market who shorted huge amounts of silver forcing the price down, we now temporarily have two different markets in silver, a “paper” market (futures) and a “physical, cash” market (metals dealers).  Ted Butler explains this phenomenon in his article, An Exceptional Opportunity.]

Find a reputable coin dealer near you.  Investigate if you have to.  There are many good ones out there.  [If you need help, click here.]  Take delivery of the coins immediately, and store them in a safety deposit box or other safe place. NOTE: For your IRA or 401K, you can buy the silver ETF (symbol SLV), which trades on the exchange just like a stock.  Each share gives you ownership of 10 ounces of silver, and is backed by 10 ounces of physical silver on deposit at Barclay’s Bank in London. The silver is audited and reported on weekly, and serial numbers may be obtained as proof. At least, that’s what I have read from sources I consider to be reliable. For more information visit iShares' product information about SLV.

I want to share with you some wisdom from Richard Russell’s Dow Theory Letters for July 9, 2007.

“In every great bull market there is usually one area that serves to surprise every one. Will there be such an area or an item which will surprise as this third phase moves into ‘high gear’? One item (this is simply a guess) comes to my mind. That item is silver, which now sells at an absurdly low price of under thirteen dollars an ounce. In December 1979, one share of the Dow would buy 243 ounces of silver. Today one share of the Dow will buy 1076 ounces of silver. Silver today is dirt cheap…even cheaper than gold.”

For those of you interested in learning more, you can read articles by Theodore Butler. You can read all his research free on www.silverseek.com. Scroll down the home page until you see an essay with his name on it. At the bottom of the article, you will see a link that has an archive of past articles. This is excellent material, and answers the question posed above, and many others.

Adam Hamilton wrote a very good article on June 20, 2008 about the history and purpose of the SLV Silver ETF: http://www.gold-eagle.com/gold_digest_08/hamilton062008.html

Jason Hommel also regularly writes good, astute articles on silver: http://www.silverstockreport.com/

One of his articles, 4 Fundamentals of the Silver Price, is available in Chinese, 關於銀幣價格的四個基本原則 
(銀幣和美供需本質) at http://www.silverstockreport.com/2008/fundamentals-zh.html.

4 Helpful charts: Silver Annual Total Demand, Annual Total Supply, ETF Physical Holdings, Market Balance


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"Well done, good and faithful servant; you were faithful over a few things,
I will make you ruler over many things.  Enter into the joy of your lord"
(Mt. 25:21 NKJV)

If you have not been faithful in the unrighteous mammon, who will commit to your trust to true riches?" (Lk. 16:11 NKJV)

The Apostle Paul wrote, "Now godliness with contentment is great gain. We brought nothing into the world and it is certain that neither can we take anything out. So having food and clothing we will be content with that. But those who want to get rich fall into temptation and a snare and into many foolish and harmful desires, that plunge people into ruin and loss; because the love of money is a root of all kinds of evil; in their greediness some have been led away from the faith and have impaled themselves on many distresses." (1 Tim. 6:6-10 NKJV)

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The information in these letters is the responsibility of Mr. E. Jay O'Keefe, but all your decisions are your own responsibility.

This web page was last updated on 03 August 2009 .