(And why I bought a lot more silver recently.)
Silver Stock Report
by Jason Hommel, March 24, 2007
This is transcribed from my notes, and the first third of my presentation for the silverseek online conference at http://www.silverseek.com/2007/
First, here’s the silver story in a nutshell.
Silver is money, the only true money of the masses, the people. Gold is for kings. Silver is for change, and is the “workhorse” money.
Silver has been consumed by industry. The world is running out of silver; industry consumes more than the mines produce.
There’s no room for any investment demand to enter the silver market without driving the price sky high. We’ve just begun to see a little bit of investment demand.
There is way too much paper money; the dollar is fruad. There’s nothing backing the dollar. If the U.S. gold hoard exists, it would back only 1% of the value of the dollar. That’s an enormous amount of fraud.
And all frauds have one thing in common. They end very suddenly. The thing that’s going to happen, when the fraud of the dollar ends, is that dollars won’t buy anything. And so what will people be using for money? They will be using gold and silver.
So you’ll have huge amounts of monetary potential demand entering the gold and silver markets.
On top of the scarcity factor, silver could go up a tremendous amount.
The current ratio of silver to gold is 50:1, 50 ounces of silver will buy 1 ounce of gold. The historic ratio is 15:1, that means you can make 3 times your money owning silver, but if we do better than the historic ratio, due to the scarcity factor, we could make 6-10 times as much money in silver than in gold.
That’s why I’m in silver.
But I run silverstockreport.com and own silver stocks due to leverage.
People know that if silver is going to go up, they are going to buy the silver stocks. If the world needs gold and silver that badly, then the companies that produce it are going to be earning tremendous amounts of money.
You want the stocks for the leverage.
If silver goes up 3 times, and you have a marginal producer of silver with a reasonable P/E ratio of 10, their earnings can skyrocket and can go up 3000% as silver goes up three times, so the stock price can outpace silver.
Now, we need to talk about P/E ratios more in a minute, but first, silver.
In the last few years, silver has been going up by 30% per year minimum. And I believe we are now on the edge, on the verge, of silver going up 100% in the next year.
A lot of other metals and oil are up 500%.
Oil was up from $10 to a high of $70, now $60.
Zinc from $.35 to a high of $2.00,. now $1.50/lb.
Copper, from $.75 to a high of $4.00, now $3.00/lb.
Lead from $.20 to $.90/lb.
Nickel from $3 to $22/lb.
Uranium, Indium, Molybdenum, Selenium, Cobalt are all up 1000% or more.
Silver, just to keep up with the other commodities, if silver were to go up 500% from the bottom at $5/oz, that would be would be $25.
And I really think that now it’s silver’s turn.
So, with silver at about $13, we are going to see silver rise to $25, or gain about 100% real quick.
That’s just my opinion, just what I think, just from my experience watching the markets.
But silver’s going to do better in the long run than a lot of the other commodities, because nobody’s going to store, or go out and buy $5000 worth of oil, and store it in 80 barrels on their front lawn.
But anybody can go to the coin shops and buy $5000 worth of silver and put it in the corner of their back closet.
There’s a reason why silver is money and nothing else is! (except for fraudulent paper)!
Silver does the job of money!
Oil doesn’t. It’s too messy, it’s too heavy, too bulky, too inconvenient.
Silver–with such an enormous amount of value packed in such a small quantity is really fantastic.
But people complain that you get so much silver for your money, but that is exactly why you want to buy it!
So, getting back to stocks.
If a stock earns 33% of its market cap in a year, that’s a P/E ratio of 3.
Therefore, I’m not interested in stocks with P/E’s higher than 3, because I believe silver is going to go up 30% in the next year, minimum!
So a stock with a P/E ratio of 3 is a “break even” with silver at 30%.
Again, I’m not in stocks to break even with silver. I’m in the stocks only for one reason–to outperform silver. If the stocks are not going to outperform silver, there’s no reason for me to own them. I have no reason to own stocks that are going to go up less than 30% in a year.
I want stocks to outperform silver!
My goal is to acquire more silver, not to acquire more dollars.
Now think about this:
A P/E of 1 is a “break even” with silver going up 100% in a year. And I expect silver to go up 100% in the next year, or 18 months.
This chart also points to silver rising about 100% in the next year or so:
Now, I’m sure many of you have heard of the Dow to Gold Ratio.
Historically, it returns to 1:1, so that means if we expect $3000/oz. for gold, that’s 3000 for the Dow. Or 30k for each. Either way. Or it could be 50,000 for each, or 100,000.
At that 1:1 ratio, Dow/gold, gold is going up by about 20% per year, bonds are paying 20% per year, and the P/E ratio for the stocks is about a 5, where companies earn 20% per year compared to their market cap. That’s the baseline of normal values. Well, not really, because in a “normal” world, there is no such thing as the fraud of paper money.
The point is that this is the reason why P/E ratios return to such low values. There’s no point in buying a P/E ratio higher than 5 if the price of gold is increasing by 20%! They are on par!
That’s the true “opportunity cost” of not owning gold or silver right now in this bull market.
Gold and silver are going to continue to do better than most stocks, until P/E ratios come back to a normal 5-7.
Now, many mining stocks, especially emerging producers, have P/E or forward P/E ratios of about 1-2 or 3. And wall street is not buying because they don’t understand, and have not done the research to find these stocks, and/or the companies are badly promoted. Some of these stocks, I’m just finding out about in the last month or so.
But still, two weeks ago, I bought silver. I bought a lot of silver. Why?
If silver’s ready to run 100%, I need a P/E ratio of as low as 1 just to compare, just to “break even” with where I think silver is going.
And if silver is about to outperform copper and zinc, then a copper or zinc stock with a P/E of 2-3 may not even keep up with silver.
My own rule of basic portfolio management is to put the most of your assets into the thing that you think will go up the most.
So, I have 17% of my portfolio now in physical silver.
If I include gold and palladium (I don’t own any platinum), I’d have 21% of my overall portfolio in the physical metals. If you want to know more, of what percentage I’ve allocated to about 30 stocks, and which stocks those are that I expect to go up by 30% per year or more, or with very, very low P/E ratios or forward P/E ratios, please subscribe to the “look at my portfolio” at silverstockreport.com.