Why It’s Time to Invest in Silver: This Precious Metal’s Rally is Just Getting Started
by David Fessler, Investment U Analyst
Wednesday, December 2, 2009: Issue #1149
You don’t have to look too far these days without hearing someone talk about how high gold prices could go. The topic is fiercely debated in the mainstream financial media at the moment – especially for investors who are late to the party.
But are they really late, or is the “party” just getting started? Yes, investors who bought the gold ETF, SPDR Gold Trust (NYSE: GLD), or gold miners like Newmont Mining (NYSE: NEM), or Yamana Gold (NYSE: AUY) a year ago have seen their investments soar by 54%, 83% and 184% respectively.
But gold continues to soar. And large open market purchases from central banks in China, India and Russia are only helping the price surge more. (Just one year ago, some of these same central banks were actually selling gold in an attempt to fill an annual 10,000-ton supply gap.)
When gold rallies, it often drags other precious metals along for the ride. Chief among them is silver. But according to one closely watched indicator, silver has lagged a bit. And that opens the door to an opportunity that well-respected commodities experts, like Jim Rogers, say could be at hand…
Silver: The “Other” Gold
Gold and silver are like blood brothers – generally in sync with each other and tending to move in the same direction.
The relationship is such that there’s even an indicator that measures it – the gold/silver ratio. Many investors use the ratio to spot extremes in the pricing of either precious metal, and to spot trends, whether up or down.
With gold at $1,191 and silver at $18.63, the ratio currently sits at 64:1 – well above its one-year low from September. But in 2008, the ratio hit 84:1 before retreating.
With individual investors and central banks still buying gold, its meteoric rise shows few signs of stopping… at least for now. As a result, the gold/silver ratio suggests that silver has some catching up to do.
But silver has one advantage that gold doesn’t…
The Supply-Demand Equation Bodes Well for Rising Silver Prices
Unlike gold, silver is used in more commercial and industrial applications. The list is extensive – electrical contacts, mirrors, jewelry, currency coins, photographic films and as a catalyst in many chemical reactions.
However, silver production is dropping. Much of it comes as a by-product of other mining and refining, primarily lead and zinc. But due to plummeting prices created by over-supply, many lead and zinc mines were mothballed back in 2008.
As a result, silver production stalled with lead and zinc – and inventories are now at historic lows.
That’s the supply side of the equation. But what about industrial demand?
In short, it continues to rise. So with silver supplies lagging, silver prices are likely to head in one direction: up.
There’s another big difference between gold and silver…
Don’t Ignore Silver… Take the Rogers Route
Most fund managers won’t touch silver with a 10-foot pole. The reason? At around $9 billion, the size and liquidity of the silver market is roughly 20 times smaller than the gold market.
However, it might be a mistake to ignore silver. With supplies continuing to fall and demand continuing to rise, the metal could very well make a very dramatic move to the upside over the next three to six months – even if gold prices fall.
Then there’s Jim Rogers…
As recently as October, Rogers, founder of the Quantum Fund, suggested that the U.S. dollar will continue its decline and that hard assets like gold, silver and agricultural products represented good value in the upcoming inflationary environment.
So if you want to gain some exposure to the silver market, you could consider a few shares of the ETFS Silver Trust (NYSE: SIVR), or silver miner Silver Wheaton (NYSE: SLW).
A deteriorating U.S. dollar suggests that while gold’s meteoric rise still has room to run, silver’s run is yet to get started.
Good investing,
Dave Fessler
Any investment contains risk. Please see our disclaimer.
9 Responses to “Why It’s Time to Invest in Silver: This Precious Metal’s Rally is Just Getting Started”
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David Fessler is the energy and infrastructure expert for Investment U.
Very interesting article. Is it true that J.P. Morgan has a very large short position in silver as the result of the Bear Stearns Failure/Takeover?
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There would be a pullback for gold price soon, and then up to $1500 level in 2-3 month; with silver up to $25 at same time.
Would u bet on it?
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That is a possibility, especially considering how gold prices are currently soaring. However, with that said, silver production is down. The question is now, will it recover or not? It can, but there is no guarantee.
Good investing,
Investment U
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I think gold has more room to down from today, then coming up; silver is more stable but less profit in near future comparing to gold.
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Everyone keeps talking about Gold and Silver…what about Platinum. I don’t see anything being said about this product…and it has always outpaced Gold.
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Great article. I have the SLV so how is that different from the SIVR? Thanks
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one is an ETF fund the other is a gold mining stock.
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I don’t quite catch up with the gold/silver ratio part:
“With gold at $1,191 and silver at $18.63, the ratio currently sits at 64:1 – well above its one-year low from September. But in 2008, the ratio hit 84:1 before retreating.”
Since the lower the ratio means the higher the silver price, isn’t it?
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After days of my question raised, I still don’t understand the logic of investment U.
Do you mean that the gold/silver is low for now, lower than that of 2008, so it will go further lower?
That doesn’t make sense.
It seems that the ratio moves down due to gold price slides or silver price rises or mixed result.
I just don’t understand you. Please give me a response. Thank you!!
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