It doesn’t matter whether you’re a short-term investor or a long-term one, because the one basic rule remains the same: you buy shares on the downside that have huge upside potential.
But take careful note of what this formula really means. The best investors concentrate on limiting downside as a first step, and only after seriously analyzing the downside risk do they start looking at a stock’s upside potential.
Remember the old adage about how the best defense is a great offense? Well, market trading is counter-intuitive because it’s often quite the opposite. You really want to be playing more of a defensive game than anything.
What we’re looking at today in commodity markets is a fantastic opportunity to put all this into practice. Silver prices are at a multi-year low, which gives you a good window of opportunity to structure your trades in the grey metal on the low-downside.
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But why am I advocating for silver here?
Silver is, of course, “real” money just as gold is. Both have been used as historic currencies, and people have been turning to them as safe havens in moments of crisis for centuries. Silver is a fantastic place to park your wealth if you’re worried about devaluation in virtual money and are looking for a disaster-proof insurance policy.
Would it surprise you to find out, then, that silver’s industrial use is more than three times its use for jewelry and as a safe haven? More than half a billion ounces a year are used in the manufacturing of solar panels, electronic equipment, photography, water purification, nanotechnology, and biomedical engineering. The amount that went into silver coins and bars was 250 million ounces, while another 215 million ounces went into jewelry.
Translation: if you think of silver in terms of jewelry and coins, think again. Because it’s an extremely important ingredient in high-tech industries.
Silver prices rose from $4.00 per ounce in 2001 to $21.00 per ounce in 2008. Following the 2008 financial crisis, silver went into freefall and dropped to $9.00 per ounce before skyrocketing to almost $50.00 per ounce in 2011.
Now, the effects of this drop are felt most keenly by silver producers. In a low-price environment such as the one we are seeing today for silver, these mining companies are getting paid less to do the exact same work with the same expenses. Lots of producers, in fact, had to put a pause on their high-cost mining operations.
But wait, doesn’t a decline in physical disruption mean a smaller supply of actual silver? Furthermore, because of fast expansion of the industries that use silver, along with the grey metal’s slumping price, shouldn’t demand start to rise quickly?
Decreased silver production means a smaller supply. And low prices should lead to higher industrial and investment demand. It’s a recipe for higher silver prices to come.
If you look at the year-over-year chart below, the rise may well have already started.
Chart Courtesy of www.StockCharts.com
As you can see, the rapid drop in silver prices looks to be leveling off as it finds its bottom. Going on historical data, this could well be a sign that silver is poised to rise. If the economic fundamentals we’ve been talking about here are any indication, prices will begin to slowly rise.
Translation: silver shares could skyrocket.
Keep in mind that silver is a commodity, and commodities have a tendency to be volatile. The grey metal may bounce off the bottom for some time before it begins its inevitable climb.
Now, lets talk about the downside risk here of a silver investment. How can you work to reduce it?
It’s fairly simple actually, and you can do it in three ways.
One way is to get into a diversified fund which holds multiple shares of different precious metals companies. This curbs the chance of your hard-earned investment flopping because of one company’s poor performance.
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Another is to utilize a stop loss. You can simply sell off your shares and take a small loss if silver drops below a level you view as too dangerous.
And finally, you can keep your investment position small. Aim to make your silver investment only one part of your overall investment portfolio so that even in the worst case scenario, you won’t suffer a financial meltdown.
Best of all, even if you implement these risk minimization strategies when silver investing, you are in no way, shape, or form limiting your upside potential.
Even a 100% gain is in the realm of possibility.
So if you have a mind for investing and a nose for good defensive strategies, silver investing might just be for you. When done properly, risk can be reduced substantially without hurting your chances of making big bucks.