Why It's Time to Invest in Silver

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Why It’s Time to Invest in Silver: This Precious Metal’s Rally is Just Getting Started

by David Fessler, Energy and Infrastructure Expert
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

An Investment U… Extra: Think gold prices are high in the United States? Take a look at Vietnam, where the price recently hit $1,300 per ounce. The reason? Supply and demand.

Two years ago, investors in Vietnam looked to gold as a hedge against inflation, just like everyone else. And for good reason, too: In 2008, inflation in the Southeast Asian country was already over 20%.

As a result, nervous Vietnamese investors began buying gold. Lots of gold. The government took notice and, concerned that too much of its citizens’ cash was flowing into the metal, shut down gold imports.

And as gold’s upward surge has intensified over the past few months, Vietnam slapped a $60 per ounce premium on the yellow metal.

But when gold soared above $1,120 an ounce two weeks ago, the price topped $1,300 an ounce in Vietnam, as investors scrambled for as much of it as they could get. That prompted the Vietnamese government to backtrack, dropping import controls and allowing prices to equalize with those of the rest of the world.

If you’re looking for a smarter, simpler way to buy either gold or silver (in addition to the two investments that Dave mentioned above), look no further than the EverBank Metals Select Account. As the dollar languishes and inflation lurks around the corner, an account offers important, cost-effective diversification into these traditional safe havens. For more details, go to EverBank’s site here.

9 Responses to “Why It’s Time to Invest in Silver: This Precious Metal’s Rally is Just Getting Started”

DR JOHN RITOTA Says:
December 2nd, 2009 at 1:05 pm
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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Alan Says:
December 2nd, 2009 at 1:10 pm
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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Investment U Reply:
December 3rd, 2009 at 5:11 pm
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,

Dave & Investment U

Reply
Alan Reply:
December 8th, 2009 at 1:48 pm
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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Jim DeShong Says:
December 2nd, 2009 at 3:29 pm
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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Sal Piccolo Says:
December 3rd, 2009 at 11:05 am
Great article. I have the SLV so how is that different from the SIVR? Thanks

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Paul Hasforth Reply:
December 6th, 2009 at 12:49 pm
one is an ETF fund the other is a gold mining stock.

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Hank Fu Says:
December 5th, 2009 at 4:06 am
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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Hank Fu Reply:
December 14th, 2009 at 2:18 am
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!!

Reply