Why This Non-Gold Commodity Is Essential for Your Portfolio

080713_PC_lombardiAs readers of Profit Confidential already know, I have been bullish on both gold bullion and silver prices. I believe these two precious metals have great futures ahead of them, in spite of all the negativity about them in the mainstream media and their recent price slump—especially silver.

According to the mainstream media, that’s because the Federal Reserve is about to stop pumping money into the economy. The U.S. economy is getting better, and the global economy isn’t doing as poorly as many thought it would. Under those conditions, metals like gold bullion and silver would not be wise investments.

But what many don’t realize is that those conditions are not prevailing. In fact, the fundamentals for increases in the value of gold bullion and silver are actually very strong. And that has reinforced my original belief that increases in silver prices will outperform gold bullion prices.

Here’s what you need to know: silver prices will see an uptick because of the most basic of economic reasons—demand will outstrip supply.


Take a look at the chart below. It shows the number of one-ounce silver coins sold at the U.S. Mint this year compared to the same period last year. Clearly, demand from investors appears to be robust and growing.


As silver prices declined, investors bought more than 25 million ounces of it in the first half of this year, compared to just 17.3 million ounces in the first half of 2012—an increase of almost 44%.

Keep in mind that the people who buy physical silver are generally not speculators looking for a quick buck. Instead, they buy when the silver prices are low and hold onto it for the long term.

And it’s not just investors who drive demand for silver.

Silver is also used for a wide variety of industrial purposes. According to a report from Thomson Reuters GFMS commissioned by the Silver Institute, the average demand for silver for industrial use is expected to be 483.3 million ounces each year from 2012 through 2014. (Source: Thomson Reuters GFMS, November 2012.)

Silver is also used in the health care sector, automobiles, and various different technologies—many of which are experiencing growth.

Also working to drive up the price is the fact that production of silver from U.S. mines continues to slow. From 2010 to 2012, silver production declined from 1,280 tons to 1,050 tons—a slide of almost 18%. (Source: U.S. Geological Survey, January 2013.)

And with silver prices taking a nosedive in the paper market lately, it’s likely that production will remain at the same level this year as in 2012, as producers slow or shut down their mines to cut costs.

These days, the bears seem to have forgotten that precious metals like gold bullion and silver have proven to be a store of value for thousands of years. And with silver demand staying staggeringly high, and supply expected to decline over the short term, investors are presented with the same kind of buying opportunity like the one we saw in early 2008.

Michael’s Personal Notes:

Suddenly, the automotive sector is red hot. According to Autodata Corporation, 1.4 million cars and light trucks were sold in the U.S. economy in the month of June. In fact, auto sales in the U.S. economy have increased 9.2% over the same period a year ago, and they are on pace to have their best year since 2007. (Source: Wall Street Journal, July 2, 2013.)

Since the beginning of the year, 7.7 million cars and light trucks have been sold in the U.S. economy.

But is that proof there’s real economic growth? Should we break out our “Dow to 20,000” party hats?

Based on our opinion, those numbers represent a good step in the right direction for the U.S. economy. Traditionally, auto sales figures are a strong indicator of consumer spending. The current trend indicates that Americans are spending money again. But there are a few reasons why I remain skeptical about any real economic growth in the U.S. economy.

The first reason is that according to TransUnion Corp., a credit information company, in the first quarter of 2013, the delinquency rate on auto loans 60 days or more past due increased from 0.82% a year ago to 0.88%.

Even more troubling is the fact that sub-prime borrowers—individuals with lower credit ratings—made up 15% of all auto loans made during the first quarter of 2013. (Source: MarketWatch, June 25, 2013.)

Could we see a sub-prime auto loan crisis in the U.S. economy? It’s not impossible. Over the last two years, balances in accounts from sub-prime auto loans borrowers have increased 11%.

The second reason is that consumer spending, aside from autos, is still very much suppressed in the U.S. economy. And the jobs market report from June showed that the number of people working part-time increased, with the majority of the jobs created in the low-wage sectors. That’s not likely to be a force that drives the U.S. economy towards economic growth.

And finally, while we have already heard enough about how the Federal Reserve will be stepping away from its quantitative easing, it will have a profound effect on interest rates. As I have said many times in these pages, the housing market in the U.S. economy will suffer as lower-wage earners will be faced with higher mortgage costs. And auto sales will be no different; just as it will become more expensive to buy a home, it will become expensive to buy a car.

In the short term, I expect automakers in the U.S. economy to continue to profit from this increased demand created by easy monetary policy; but in the long run, their troubles will become more evident. For example, the eurozone is still a mess, and China’s economic growth continues to become less stable.

Of course, basing your opinion on economic growth on one number—like auto sales—is not advisable when other indicators are suggesting the opposite.