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Last month I wrote about the calm price action in gold that has been the case thus far in the precious metals bull market. This month it is appropriate that I discuss silver since it had a tough May. Silver is a smaller market and therefore much more volatile. Because of that, the same factors that drive gold higher should propel silver to far greater overall percentage returns. However, it also comes with the burden of having to endure periodic gut-wrenching declines such as that which was experienced this month. These attributes balance each other out and I believe it might be wise to maintain positions in both metals. Silver exposure, however, will mean a somewhat bumpier ride than one would be accustomed to with typically conservative holdings. In my opinion, this drawback could be well worth it in order to participate in such an attractive investment.  
 
 
Silver had gone up too far too fast to remain sustainable without a correction. A dramatic and speedy price rise draws in speculators and fast money. At the first hint of downward pressure, these nervous latecomers run for the exits, driving the price down in a self-reinforcing cycle. The CME also poured more fuel on the fire by raising margin requirements on silver futures contracts five times in a row.
 
 
There are several reasons that it could have made sense to hold steady with silver prior to the major shakeout. First, the correction could have come at even higher levels in which case one would have missed further price appreciation. Second, in the event of a major dollar crisis – a wealth-destroying event from which one is explicitly attempting to protect by holding precious metals – silver would undoubtedly enter into a phase of price appreciation that would be almost unimaginable. While the likelihood seemed remote that the recent run-up was indeed the beginning of such an occurrence, it nevertheless was possible. Finally, long-term investors do not play the in-and-out game, which encompasses frictional trading costs and undesirable tax consequences along with being difficult to execute with precision.
 
 
It is important to remember that the factors that have led to gold and silver’s rise are still very much intact. The nation’s fiscal path is unsustainable. Meanwhile the Fed’s policy of money creation enables the appearance that creditors and savers are being made whole while in actuality they are being defrauded. Precious metals are the alternative, acting as a store of value due to limited supply.
 
 
Please do not interpret these remarks as overly alarmist. While precious metals guard against hyperinflation, I believe the most likely scenario is severe high inflation (in which case precious metals would still most likely outperform just about all other asset classes). As such, one can also remain in the stock market as long as holdings are of the high quality blue chip variety and at attractive valuations.
 
 
Michael H. Berlin, CFA, CPA, is the founder and portfolio manager of MHB Equity Partners, a value-oriented private investment partnership. He previously worked at Lehman Brothers, and before that at Ernst & Young. Mr. Berlin holds an MBA from Columbia and a BBA from Michigan.
 
 
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.

 
 
Michael can be contacted at mberlin@mhbpartners.com and at (631) 629-4928.