The Calm Before The Precious Metal Silver Storm

There is an eerie calm in the precious metals market as investors continue to pile into the broader stock indexes. Precious metals sentiment which was flying high last year when the Dow Jones Index fell 2,000 points, is now at an all-time low. Highly fickle investors have no idea that they will lose a great deal of their “supposed” paper wealth.

The word out on the street, as it pertains to the precious metals retail sales market, is that investors are no longer waiting on the price of silver to fall to start buying, rather they are now waiting to see what happens to the broader markets. Speculation is that if Trump can get the corporate tax cuts passed, then the Dow Jones will head up towards 25,000 or higher.

While this is a possibility, investors should realize the market is already seriously overextended. Sure, it could continue to move up, but the correct way to invest in precious metals is not to make a perfectly timed purchase when the rest of the market is crashing, rather it should be done on an ongoing basis. Investors should be purchasing metals over some time, not one large amount due to the timing of a market collapse.

If we look at the Dow Jones Index versus the Silver Price, we can see a very interesting trend that took place when the Fed announced QE3 back at the end of 2012:

At the end of 2012, the price of silver started to decline as the Dow Jones Index continued higher and higher. Some precious metals investors are worried that the next time the stock market crashes, so with the price of silver, as it did in 2008. However, this time will be different because the silver price fell by more than 70% from its high in 2011, whereas the Dow Jones Index has surged toward the heavens.

As I mentioned in my interview on Crush The Street, there was a near-record GOLD ETF Inflow (364 metric tons) when the Dow Jones Index fell 2,000 points during the first quarter of 2016. The only other large Gold ETF inflow surge (450 metric tons) was during the first quarter of 2009 when the Dow Jones Index was crashing into the toilet to a low of 6,700 points.

What is going to happen when investors get spooked as the Dow Jones corrects 5,000 points or more??

Well, I can tell you that we will see record flows in the Gold and Silver ETFs. However, I don’t believe it is wise to go from one paper asset to another. And, I am not the only one to believe this. If we look at silver investment demand in physical bars and coins compared to ETFs since 2007, this is the result:

From 2007 to 2011, total physical silver bullion bars and coin demand was 687 million oz (Moz) versus 419 Moz for the net silver ETF (and similar products) inventory builds. But, look what happened from 2012 to 2016. Physical silver bar and coin demand nearly doubled to 1,152 Moz, while the net build in silver ETF inventories only increased by 112 Moz.

This means, investors put ten times the amount of money in physical silver than into paper silver ETFs. Of course, when the markets finally crack, mainstream investors will move into the silver ETFs because they don’t know any better. However, it will be the precious metals investors who will be buying physical silver hand over fist.

Unfortunately, trying to time the market crash and purchase silver when the situation gets ugly will likely not work out as many expect. Rather, I see a silver market that is overwhelmed with very little available physical silver.

It is impossible to forecast when the broader markets will finally correct and likely crash. But, I would not try to time this market to get into physical silver. I am not giving out advice, but instead stating what is sound logical reasoning.

Lastly, it is not a matter of “IF”, but a matter of “WHEN” the stock and bond markets are going to crack. Yes, the Fed and Central Banks have defied gravity for nearly a decade by propping a market that died in 2008, but time is not on their side.

Mark my words.