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Seven Reasons Silver Can Make You Rich

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It's safe, like gold. It's cheaper than gold. And it has a brighter future.

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Editor's Note: J. Edwards is the main contributing author at GoldStockMania.com. His research is focused on gold and silver penny mining stocks.


I know most investors are looking for that one ultimate investment that will right all of their past wrongs. You know, make up for all the losses or non-starters they may have accumulated over the years. That one investment that will perhaps buy them a permanent vacation somewhere with white sand beaches, buy a nice cabin in the mountains, get them into the house of their dreams, or whatever does it the most for them.

There is great profit potential for junior gold mining stocks, but I want to talk about why I'm very, very bullish on silver -- the metal that is overlooked by most but will make the few who own it extremely rich. While gold will have a spectacular performance over the course of this bull market, it is silver that will be the MVP. Silver is about as close as you can get to a sure bet. Here are seven reasons why silver will make you rich:

1. Gold-to-Silver Ratio

Historically a gold-to-silver ratio has been maintained between gold and silver where a certain amount of silver could buy one ounce of gold. In fact, a long time ago, there used to be a US law that fixed the gold-to-silver ratio at 1:15, which then allowed 15 silver ounces to buy one ounce of gold. Since 1840, the gold-to-silver ratio has ranged from 1:15 to as high as 1:97. Today's gold-to-silver ratio sits at about 1:63. Many analysts believe that this ratio is currently out of whack and will return to historical levels, which, according Ted Butler and others, has averaged 12 to 15 ounces of silver to one ounce of gold. If the ratio returns to historical levels it would require a substantial rise in the price of silver. At $1150 gold, silver would need to be around $76 per ounce.

2. Inflation Past and Future

Just as gold is a great inflation hedge, so is silver, which has been known as the poor man's gold. The dollar has lost more than 98% of its value, as clearly shown in Gold Vs. Dollar, What a Knock Out. This is just considering the inflation effect over the past 100 years or so, but what about right now and the near future? The erosion of the dollar continues at an accelerated pace not seen before in the history of this country, and thus makes it imperative to take the necessary precautions to protect the value of your savings now. I haven't seen anything more compelling than silver to protect and dramatically increase wealth at the same time.

The Federal Reserve is working overtime printing dollars and inflating the money supply, which means every new dollar it creates is taking away value from every one of the dollars in your pocket. This is where gold and silver really shine because this type of monetary expansion has, historically, always driven up the price of gold and silver. You can see just over the last year or two how the Fed has really kicked it into overdrive. The inflationary effect of the spike you see on the graph hasn't yet hit, so it's still time to get positioned for the inflation tsunami and load up on silver while you can, while it's still cheap. There's no end in sight and they plan to print more dollars until their little printing press breaks. Wait until you see what they do to the dollar for an inflationary encore.

Chart of US Monetary Inflation



3. Increasing Silver Industrial and Investment Demand

Last year, global silver demand hit 888 million ounces, while worldwide mining production totaled only 680 million ounces, thus creating a 208 million ounce deficit. Many people don't know that silver is the most used commodity in industry next to oil. Industrial demand continues to pick up with new applications for silver coming to the market all the time, such as silver zinc batteries. The silver zinc battery market alone is forecast to be a large driver going forward for silver. If you're looking for more reasons, try Ten Thousand Reasons To Buy Silver, which goes into more detail about the numerous industrial applications that require silver. Yes, there are many of them from water filters and Band-Aids to electronics such as cell phones and RFID tags.

Silver investment demand is on the rise as well and perhaps may soon surpass that of industrial demand. Just as people are turning to gold in the great flight to quality, silver is also starting to attract demand from investors. One of the biggest wildcards in the mix is China. Until recently, the chinese government didn't allow its citizens to buy precious metals. It has done a complete reverse and now highly encourages all of its 1.3 billion citizens to buy, buy, buy. Don't forget about its neighbors, you know, the other country that has more than 1 billion people: India. The Indians have a long history and tradition of buying both gold and silver. I believe silver demand in India will increase as the price of gold rises.

Demand is also picking up in the United States, with the US Mint reporting record silver eagle coin sales for January 2010; it was the best silver eagle sales in the history of the US Mint for the month of January. Furthermore, the mint recently announced more record silver eagle coin sales for the month of March 2010 and for the first quarter of 2010, when the US Mint sold more than 9 million silver eagles. At this rate, silver eagle coin sales will consume all the US silver production for 2010, which is typically around 40 million ounces of silver annually. This is very significant because whoever typically buys US-based silver will need to find it elsewhere because the US Mint, by law, is required to use only silver produced in the United States. Don't even think about getting it from China because the country consumes every ounce of gold and silver it produces and won't export any. I wonder what the US Mint will do when the silver demand exceeds the amount of silver of produced in the US.

4. The Real Silver Advantages: Leverage and Availability

Because of the erosion of the dollar and other fiat currencies, more people are waking up and running to gold for asset protection, meaning gold will naturally not be as affordable as silver. One could argue that we've already reached this point. People will come to reason that they can get the same level of protection as purchasing gold but at a more affordable price by purchasing silver instead. The latecomers to the party (which will be the majority, see When Will You Buy Gold?) who missed out on the chance to buy gold when it was only $250 per ounce will want the next best thing, which is silver. Likewise, many investors will also see that they can get a much higher leverage on purchasing silver. So if gold is starting to get too expensive for your wallet, then why not get some leverage by purchasing silver? The best times to buy is whenever the prices are falling. Because you get way more ounces of silver for your money than gold, you naturally get more leverage. Leverage, coupled with a great investment, equals great profits. Just be clear, do not buy silver on margin. Short-term volatility makes buying silver and gold on margin too dangerous.

No matter what you've heard or read, there is only one real way to buy silver and gold, and that is physical. If you're not buying physical silver and/or gold, then more than likely you have a paper claim to someone else's physical silver or gold (see GATA.org for more). Either make a trip to a reputable local coin shop or buy gold and silver online at trusted bullion companies. You should really do both for geographic diversity. I also like the online storage options because it's so easy to buy, sell, and securely store precious metals.

Silver availability is like a game of musical chairs, when the music stops someone will be without a chair. The amount of aboveground silver has been just about exhausted over the past century. I've seen estimates as high as 1 billion ounces of silver worldwide above the ground. Even in this worst-case scenario and assuming that all this silver is for sale (which most of it is not), all the silver in the world could be bought for just $18 billion dollars. This is a drop in the bucket when compared to much larger markets such as gold, oil, US Bond Market, etc. So silver availability is a huge advantage for silver investors as there is trillions of dollars that is very likely to one day come chasing a very tiny silver market. I've seen silver stockpile estimates around 300 million ounces and lower. See more on this below.

5. Dwindling Silver Stockpiles

Going back in history, governments around the world used to have huge silver stockpiles. Around the 1950s, the US government alone had 3.5 billion ounces of silver, the largest stockpile in history. Since then, according to the CPM group, just about all of these stockpiles have been sold off/consumed. The CPM data show that world silver stockpiles have gone from more than 2 billion ounces in 1990 to less than 300 million ounces in 2007. Furthermore, silver demand has outpaced silver production by 156% annually for 19 consecutive years. According to Ted Butler's article, Why Silver Is More Valuable Than Gold, more silver has been consumed than produced for more than 60 years now. Available silver stockpiles have tanked to an estimated 140 million ounces, or only a four-month supply of silver. No matter whose estimates you believe, the real point to get from all of this is that the quantity of silver has been disappearing at an alarming rate while demand is substantially increasing. Conditions are ripe for a shortage. Now contrast this to gold, which after mining for the past 5,000 years, we still have about 90% of all that gold still here with us. All the silver mined over the same period is now mostly gone.

6. Eventual Comex Short Squeeze

Some people just like to play with dynamite for one reason or another. There are a handful of bullion banks that fit this description that hold excessive short positions in both gold and silver. However, the short positions held for silver are much larger -- in fact, they're the largest for any commodity. At varying points, there have been silver short positions 80 times greater than gold short positions. These bullion banks, according to Ted Butler and Gata.org, are primarily led by JPMorgan (JPM) and HSBC (HBC). Although it's hard to imagine anyone willing to make such stupid bets, the bullion banks known as commercial traders have shorted more than 200% of all known silver inventory.

Here is an excerpt from Silver Short Squeeze Could Be Imminent, a statement made by the National Inflation Association earlier this month:

NIA believes the precious metals markets are currently being artificially suppressed by paper gold and silver that doesn't physically exist. At last week's CFTC hearings, Jeffrey Christian of the CPM Group admitted that banks have leveraged their physical bullion by 100 to 1. This means for every 100 ounces of paper gold/silver that trade, there could be as little as one ounce of physical gold/silver in the vaults backing it. However, Mr. Christian sees no problem with this because he says "it has been persistently that way for decades" and there are "any number of mechanisms allowing for cash settlements."

What Mr. Christian fails to realize is, most investors around the world holding paper gold/silver believe they own physical gold/silver. There will come a time when these investors don't want cash settlements in US dollars, but they will want the physical precious metals themselves. When investors around the globe eventually call for physical delivery of their precious metals, NIA believes it will result in the biggest short squeeze in the history of all commodities.

The problem with shorting is that eventually the short positions have to be bought back. Finally, when the stars align and the conditions are right, you'll see the mother of all short squeezes -- perhaps the biggest ever seen. (For more, see A Gold Price Explosion Just Around the Corner?). If the futures long traders would just demand physical delivery instead of cash settlements and contract rollovers, we'd see this short squeeze happen a lot sooner than later. This is one of the primary reasons everyone should buy physical silver and gold instead of paper claims. These commercial bullion banks are offering a lot of paper contracts that are impossible to deliver on. A silver short squeeze hasn't been seen in more than 20 years -- since the Hunt brothers demanded physical delivery of their silver -- which shows that massive short selling to manage the price of silver and gold works until it doesn't. If you haven't seen this yet, check out New York Post: Trader Blows Whistle on Gold, Silver Price Manipulation.

7. Silver Leasing

According to Silver Leasing or Silver Fleecing, there are/were about 150 million ounces of gold and about 1 billion ounces of silver that have been leased out. What doe this mean? It means that some gold and silver producers at one time or another didn't have enough gold or silver to sell to their customers, so they leased (borrowed) the metals from others (like central banks) that had ample supplies at the time. The producers then would sell these metals to their customers.

The leasing created a phantom supply of gold and especially silver. The problem here is that all of this leased gold and silver has to eventually be produced or paid back. It's the equivalent of borrowing money and living off of it with the plan of paying it back at some point in the future. However, when payback comes you have to come up with the borrowed money and you still have to come up with additional money to continue to live off of. So the 1 billion ounces of silver has to be produced/repaid at some point, all the while silver demand continues to increase along with yearly silver deficits. According to Guide to Investing in Gold and Silver, it would take a 100% mining devotion for two years to repay all the gold and silver leases outstanding.

Summary

Silver is perhaps one of the greatest investments one can make at this point in time. Investors looking for a safe and very profitable investment should definitely have silver as a part of their investment portfolio.
No positions in stocks mentioned.
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