Look for the Silver Lining

02/26/2008 12:00 am EST

Focus: COMMODITIES

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Bull Market Alert, says silver has been left behind while gold surged—but it may catch up as the commodities bull market continues.

Like the late Rodney Dangerfield in the comedy world, silver is the metal that “gets no respect.” It trades at a fraction of its distant cousin gold. It lacks the ornamental cachet of platinum. Widely used in photography, technology, defense, and electronic industries, this "poor man's gold" seems more "industrial" than "precious." It was even outshined by gold in investment returns during 2007, as gold finished up 28% while silver added only 18%.

Yet, on the supply side, silver seems like it's a one-way bet. According to research consultancy CPM, there were 12 billion ounces of silver on the planet in 1900. Today, this number has fallen to 300 million ounces—a drop of 97.5%. As a result of low silver prices, mine production of new silver rose only 4% from 1990–1999, while demand increased by 22% during the same period.

Silver did not shoot through the roof because of a drawdown of accumulated stockpiles, which flooded the market with the metal. Now that this selling has dried up, argue the silver bulls, silver's price can head only in one direction. Above-ground silver supply is projected to shrink to a critically low level by 2010.

On the demand side, improved technology has reduced demand for silver in both jewelry and photography. But new industrial uses for silver are consistently being developed, including uses as divergent as a catalyst in fuel cells for electric motor cars, high-temperature superconductor wires, and an antimicrobial agent.

But aside from being a solid, long-term bet, silver also is a terrific short-term trading play. In times of troubles, commodities such as silver (and gold) gain a shine they don't have when times are good. As banking woes mount, real estate deflates, and inflation in commodities and energy remains at record levels, silver is regaining its status among investors as an inflation-proof currency that has never lost its value in 3,500 years.

Trading at barely 30% of its previous [peak] of $49.50, silver also is one of the very few commodities that has yet to trade at record levels. It is relatively cheap compared with its more high-profile cousin gold. The current price of gold is roughly 52x that of silver. If silver returns to the historic average of 15x [gold], you will have made about 3.5x your money. And that assumes that the gold price stays at its current level—an unlikely proposition.

Some silver bulls predict the metal will rise ten times from its current levels between now and the end of the commodities supercycle around 2015. So buy iShares Silver Trust (AMEX: SLV), an ETF whose share price is equal to ten ounces of silver, at market. (It closed at around $180 Monday—Editor.) Place your stop at $142.50.

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