February 27, 2010
Silver is up over 44% in the last nine months. But thanks to a new campaign by the Chinese government, silver is about to take off higher. Much higher. Here's how to play silver for a "triple" this year...
By Peter Krauth, Contributing Editor, Money Morning
Once upon a time, the Chinese government forbade ownership of all precious metals.
But now, the ban has been lifted. In fact, China just introduced silver bars for investment. And now, state-run China Central Television (CCTV) is running a campaign encouraging the population to invest in silver.
That means there are over a billion potential new silver investors hitting the market. This is especially significant when you consider the average savings rate in China is 30 to 40%.
But the flood of new Chinese silver investors isn't the only factor driving up silver prices. The increased use of silver in everything from solar cell technology to medicine is pushing up prices as well.
Read on to discover exactly why silver will make savvy investors rich in the year ahead... and find out the one stock to buy now to take your portfolio to new highs.
Chinese Demand for Silver
Take a second to think how much of an impact this will have on the silver market - the sheer amount of people, and at such a high rate of savings.
Then you factor in Chinese demand for things silver is need to make - cell phones, computer, batteries, silverware and jewelry. China's silver consumption already accounts for 70% of the global total of industrial use, and its middle class isn't even close to reaching its spending potential
What's more, those aren't the only reasons analysts are predicting silver prices can reach as high as $100 this year and $250 by 2015.
Demoting the Silver-Gold Adage
China's impact on the silver market isn't the only thing catching the attention of silver analysts. The silver-gold ratio tells a compelling story about the price of silver. Put simply, the ratio means how many ounces of silver it takes to buy one ounce of gold. Historically, that ratio has been about 15-to-1. Right now, that ratio is hovering around 59-to-1.
For silver to 'correct' by returning to its long term silver/gold ratio of about 15, gold at $1,000 means silver should be priced at $66 already.
You'd be hard pressed to find anyone who believes that 59-to-1 will hold up much longer because it basically means silver is cheap compared to gold, which opens the door for investors to come in at a good price, such as China. All of China.
More Pressure on Silver Prices
As the global economy expands its size and reach... as technology advances... and as more ways to buy silver becomes available... as silver supplies have dwindled... more factors began affecting the price of silver more exclusively - for better or worse. Some are:
• Silver's Industrial Uses: For decades, silver has been more than a collector's item. It has dozens of uses outside the storage vault. It's used to make currency, jewelry and silverware. Silver is used to produce highly reflective, architectural mirrors. It's heavily used in the medical field as an antimicrobial - a killer of some bacteria, algae, fungi and viruses. In the labs, silver is used in photographic films and as a catalyst in chemical reactions. And more applications are arriving soon, including using silver in photovoltaic cells in solar-power technology and in rechargeable silver-zinc batteries. In fact, silver's use for industry has gone from 35% of total annual production ten years ago to more than 50% today. One source claims that figure is actually 90%.
• Silver Supply/Demand: Supplies of available silver have dropped by 86% in the past two years. Commodities research firm CPM Group says the current amount of above ground refined silver has fallen from 2.2 billion ounces in 1990 to less than 1 billion today. At the same time that supply is falling, demand is rising... especially industrial demand. The pressure on silver prices will get even stronger as individual investment demand (including the whole Chinese market) goes up.
• Silver Market Size: Silver is a less-active and lower-volume market than gold, which means that purchases even by individual investors can make an impact on silver prices. Better said, 100 silvers buyers purchasing the same amount as 100 gold buyers will have a bigger impact on the market. Think how much prices can spike when millions of Chinese investors flood the market with silver purchases. Now, combine that with the global return of industrial silver demand.
Silver Price Projections
Money Morning's Martin Hutchinson believes silver and gold will continue climbing into 2011 and beyond. If enough investor momentum gains - and if China's push for individual silver investment intensifies - he believes silver could peak past $100 either this year or next.
But, that's just the beginning. Silver could top out at $250/oz. in the next five years as global mine production crawls in the face of increasing consumer and industrial demand. That's an increase of over 1,150%.
Bear in mind that silver prices have been moving faster than gold. So those who want to invest in silver better pull the trigger soon, or watch silver's price explode from the sidelines.
What's New at S&GS
We're working to help make the checkout process clearer to users, and are working to find a direct credit card payment system that won't expose S&GS or our customers to unnecessary invasion of privacy brought on by the regulatory process that oversees these functions.
Pay Pal is our 3rd party credit card processing service. We selected it because it provides the most functionality. For those who don't want to have a Pay Pal Account, we can still 1) invoice you through Pay Pal (which allows you to by-pass the PP account function 2) we can take Credit Card information by phone now, and users can also pay through 3) Gun Pal (the NRA version of Pay Pal).
We've added a Comment Box at the bottom of the checkout page where you can indicate one of these preferences. If no preference is indicated, the system will assume you want to pay by Cashier's check, unless you click the Pay Pal processing button above.
Reason to Fear ETFs
Regardless of their expensive annual fees, frequent tracking errors, and the simple fact that you'll never be able to actually touch the gold or silver your ETF claims to hold, there are several more reasons ETFs should never be used by precious metals investors. An important rule change by COMEX, the American Commodity Exchange, allows ETF substitutes for precious metal delivery.
Paper as Metal
To address a "temporary" problem of liquidity, COMEX has systematically created an even bigger problem for investors. The exchange allows investors to make good on their futures contract positions with gold and silver ETFs rather than the real assets, thus opening up the door for hugely distorted market prices. In other words, traders are now able to settle their futures contracts with a paper certificate, not physical metal as has always been required.
How it Works
Under the clause 104.36 in the COMEX rulebook, exchanges can take place on the exchange as long as the products meet certain criteria. After sorting through legalese, investors find that the criteria isn't as demanding as one would expect from a multi-trillion dollar exchange, but is actually quite loose. COMEX requires that exchanges be made in economically equal products. For instance, a 1000 ounce silver ETF position can be substituted for 1,000 ounces of physical silver, despite their inherent differences.
This creates immense problems for investors, as well as the exchange itself. First, no silver actually trades hands, but only a silver derivative that has supposed claims to silver. Second, the exchange-traded fund is economically similar in that it has equal worth to the same amount of silver; however, investors cannot receive physical delivery from the ETF issuer. In essence, purely derivative investments are equal to physical metals in the eyes of COMEX, even though the reality is quite different.
By Dr. Jeff Lewis
Edited by John Fisher
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