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Is Silver Just Another Speculative Bubble?: iShares Silver Trust (SLV), Silver Wheaton Corp. (USA) (SLW)

Gold recently struck six-month lows as key players like billionaire George Soros and others cut their holdings of the yellow metal. Silver was quick to follow in the sell off. Both the SPDR Gold Trust and the iShares Silver Trust (NYSEMKT:SLV) recently traded lower for five consecutive days.

Investors are now left to wonder if the recent selling pressure is just a sign to come. If a slight change in investment demand from a few fund managers can send gold and silver sliding, what would a reversal in investor sentiment mean for gold and silver?

Silver Wheaton Corp. (USA) (NYSE:SLW)

A bubblicious boom

It would not be fair to discuss only gold and silver’s most recent (very poor) performance. Gold is up some 69% over the past five years while silver is up 62% in the same period despite a recent sell off. Both returns are impressive given that neither gold nor silver have fundamentally changed in the last five years. Gold and silver are, as they have been, mere metals among men.

But what has changed in silver is the amount of speculative investment demand. I suggest that silver investors don’t merely participate in the market for silver, silver investors are the market for silver.

In 2006, when silver was $11.54 an ounce, implied net investment in silver plus silver used in the making of coins and medals was 94.9 million ounces. Compare that to 2011, when silver bugs showed their loyalty to the second-favorite precious metal, purchasing 282.2 million ounces of silver coins, medals, and investment products, according to data from the Silver Institute.

Silver investors’ tremendous impact

Silver investors acquired 27.1% of all silver demanded in 2011, compared to only 10.2% in 2006. In just five short years not only did investment demand grow by nearly 170%, but it also grew so quickly that investors were able to displace the rapid decline in photographic, jewelry, and silverware demand.

Repeat: silver investors have been the primary driver of silver demand, making up so much of the pie that they now displace a decline in photographic, jewelry, and silverware demand over the past five years. Silver investors are the market for silver demand.

In short, investors, not end-users, make up far more of the silver market today. And over the past few years, silver investors have accumulated hundreds of millions of ounces – more than one half year of all production in the finest of purities – which could be quickly and easily dumped upon the market at any given time.

Silver is the ultimate in speculative bubbles. It produces no value, no cash flow, and a single ounce of silver will never turn into two. It is as unproductive as an asset as one can own. Once the masses come to realize that their profits are contingent on new and more silver investment, silver’s meteoric rise will come to an end.

How to place strategic silver bets

Exposing yourself to crumbling silver prices is as easy as sticking to the firms most levered to silver prices.

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