Legendary speculator Rick Rule is famous for saying that the way to make money in the resource sector is to invest when we think we know the answer to a “when” question. The way to lose money is to gamble on questions that begin with “if.”
A “when” question is one where we can objectively see a trend in motion toward a certain investible outcome. The speculation is not whether the value-adding outcome will happen—just when. We may have to be patient waiting for payday, but if we are, and we’re right about the trend, we do get paid.
For example, the price of copper was around 70 cents at its previous cyclical low, and it cost about $1 to mine it. Copper prices had to increase. If not, this essential ingredient to modern industry would not be produced, and the global economy would crash. The question was not “if,” but “when.” People who speculated that copper had to go up and had the patience to stay in the trade until it did, made fortunes.
I see uranium in very much the same way today. The world may someday no longer need to mine uranium, but that day is decades in the future. Not enough uranium can be mined at current prices today. That’s been true for a while (as it was for copper), but I’m not asking what happens if uranium goes up. I’m asking how much I could make when it goes up.
Not so with “if” questions. The answer to those can always be “no.”
All the patience in the world won’t do us any good if the answer to an “if” question is no.
Despite this, many people gamble on “if” questions all the time. For instance:
There’s some “if” in every speculation, of course, because no one can know the future. Even when we think we’re asking a “when” question, we may sometimes be wrong. But remember: the answer to an “if” question can always be “no.”
When we stick to “when” questions, the odds are much more on our side.
I’d guess that almost everyone reading this article already understands this. And yet, it’s so tempting to stray from the path of righteous when-ness…
For example, I’ve heard from readers who’ve been much impressed by some silver bulls talking about what would happen if central banks or other major institutions would start buying some silver along with their gold.
It’s an exciting idea. It can be used to generate some amazing price projections that look credible, because they’re based on verifiable math and conservative assumptions.
But did you notice the killer word?
It doesn’t matter how conservative one’s assumptions are, when the question is an “if” question.
It would be silly to suggest, for instance, that central banks might buy as much silver as gold. That would currently take up about 84 times more space. But what if they diversified just a bit, and shifted, say, 5% or 10% of their buying to silver? Given how tiny the silver market is, that would send silver prices to the moon. There might not even be enough silver for it to be done at all!
But hold on; why would a central bank even consider buying silver?
Now that silver doesn’t circulate in modern coinage, most governments have liquidated their stocks and show zero interest in replenishing them.
Sure, silver has many industrial uses, and speculators like me prefer silver because it’s more volatile. I’m more bullish on silver than gold over the next year. But none of this matters to central banks or large institutions charged with guarding wealth, not maximizing gains.
For purposes of diversification into precious metals as a safety hedge, silver and gold are much the same thing. Their differences are not to silver’s advantage: silver takes up more space and it tarnishes.
An imaginary 5% figure isn’t conservative if central banks have no interest, no intention, nor any visible inclination to buy silver at all. There is no trend in motion to back this idea of major institutions diversifying into silver. Even a 1% assumption wouldn’t be conservative.
The idea of institutions like central banks diversifying into silver isn’t just an “if” question, it’s an “if” question to which the answer seems clearly to be “no.”
I’m sorry if this offends some silver bugs. Please remember that I’m not a silver bear. But it’s my job to offer you the best critical analysis I can, not to be a cheerleader.
The important takeaway, however, is not about central banks and silver. It’s about the importance of being on our guard against gambling on “if” questions rather than speculating on “when” questions. And that can really hard when an exciting “if”-based story appeals to something we already know or believe.
Tuesday, October 22, 8:37pm, EST, 2019