The silver market surely head-faked me this summer. Silver was massively underperforming gold, which, for as long as I have followed silver, had usually been a big warning sign. But, precious metals are more sensitive to monetarist shell games than commodities in general and they have called Bernanke’s bluff.

As I have mentioned before, gold is the most conservative precious metal. You could even say that it is the most precious as about 85% of use goes for precious purposes (jewelry, coins, bars as a store of wealth, and so on). Silver is only about 60/40 when it comes to its industrial/precious mix, while platinum and palladium are even more industrial than either gold or silver.

You could say that in a strong global economy you want to be overweight silver, palladium and platinum, while in a weaker environment, you want to be overweight gold. In the end they all will all go up a lot when Bernanke succeeds with his mission to reflate the U.S. economy. He is causing quite the international backlash already…

What is a Good Target for silver?

A target is difficult to contemplate as this is a momentum driven-market that is characterized by a massive short squeeze — it can overshoot. The most likely short-term target looked like $32 or so (the roughly $12 difference between the 2008 high and the 2008 low in silver added to the 2008 high).

But, those are short-term considerations. From a longer-term perspective, silver is still well below the highs around $50 seen in 1980, while gold is way above its high at $850 seen that year. In other words, if silver is about to roughly follow gold bullion over the long haul, it can triple from here. Long-term investors should use any corrections to build positions with the understanding that silver is a lot more volatile than gold — on both sides of the market.

Physical Trust in Silver Too

I have to hand it to Eric Sprott. When he says he will do something, he keeps his word.

First, he introduced the Sprott Physical Gold Trust (NYSE:

PHYS), and now he has introduced the Sprott Physical Silver Trust (NYSE: PSLV). As a reminder, a key characteristic of those trusts — which act more like closed-end funds as they can trade at premiums and discounts to NAV — is that you can redeem your cash for gold or silver bullion. The caveat: you have to hold a large enough amount of the trust, which could be out of reach for many retail investors.

I like all of the characteristics of both physical trusts. You could say that they deserve the slight premium as they offer convertibility that any of the other ETFs don’t offer. Currently, PSLV trades at a 8.6% premium while PHYS trades at a 4.9% premium to NAV, but neither has ever traded at an NAV discount.

Since I am certain that markets are not efficient, I think one of these days we will see at least one — if not both — trusts trade at a discount to NAV. It is impossible to say if that will happen this year or next, or at what price. But, since the PHYS launch in February we have seen an overall trend of narrowing of the NAV premium over GLD or the spot market. The PHYS premium went form a high of 23.9% to a low of 2.5%, currently standing at 4.9%.

Small NAV premiums or discounts should not be relevant to long-term holders that plan to hold both over the next three to five years. But, the 23.9% NAV premium was way too much earlier in the year and the market corrected this excess. If PHYS or PSLV ever go discount, consider selling out of other precious metals ETFs in order to buy those.

That would be a great deal.