Forget Gold -- This Lesser-Known Metal Could Rally 50% or More

Nathan Slaughter's picture

Friday, May 20, 2011 - 9:00am

by Nathan Slaughter

You've heard a lot of talk about gold lately -- and for good reason. Gold is loved as a hedge against economic uncertainty. And given the unsteady dollar and ripe conditions for runaway inflation, it's no surprise gold prices have ascended and held around historically high levels of $1,500 an ounce. In the past year, gold is up 22%.

But you may be surprised to know that during that same time another metal has actually surged more than 80% -- climbing about four times more than gold. Yet, gold is still 44 times more expensive than the "other" metal, a ratio well beyond long-term historical norms.

In fact, this metal about 17.5 times more abundant than gold. So all things equal, you'd expect to pay about 17.5 times more for gold. Instead, the ratio is closer to triple that number -- even after its rally.

I'm talking, of course, about the relationship between gold and silver.

From these levels, I am confident silver prices could rally another 50% or more, especially after the big sell-off earlier this month when traders sold on the momentum of a strengthening dollar. But that isn't a long-term reality, and when silver corrects I think it will be a quick ride up -- similar to what we've seen in the past few years with crude oil.

That's because silver isn't just a store of value, as most people consider gold. Along with shielding investors from inflation, silver is prized for its electrical and thermal conductivity, and other unique industrial and cosmetic properties. With commercial applications ranging from photography to medicine, industrial usage eats up about 60% of the world's supply each year.

Until recently, the industrial pool of demand has been playing tug-of-war with the inflation/dollar crowd. With economic growth back on track, these buyers will now work together to pull prices higher. Current estimates suggest there are only about 1 billion ounces of silver above ground. Sovereign wealth funds from wealthy Gulf States such as Dubai are buying up much of that.

None of this has gone unnoticed by retail investors. According to the U.S. Mint, the public scooped up a record 34.7 million American Eagle one-ounce silver coins in 2010, a sharp increase of 20% over 2009, the previous record holder. And 2011 looks like it will be another banner year for silver. January was the best single month ever and February was seventh, with the most sales for any February in history:

Top 10 Silver Eagle Monthly Sales
1 Jan. 2011 6.4 million
2 Nov. 2010 4.3 million
3 Dec. 1986 3.7 million
4 May 2010 3.6 million
5 Jan. 2010 3.6 million
6 Mar. 2010 3.4 million
7 Feb. 2011 3.2 million
8 Oct. 2010 3.1 million
9 Mar. 2009 3.1 million
10 Jun. 2010 3.0 million

In the 25-year history of the program, eight of the 10 highest monthly sales figures have occurred since the beginning of 2010. In fact, January 2011 shattered the old record by nearly 2 million coins (49%) and last month recorded the best sales for April in history. [Congress has also authorized a palladium bullion coin, which could mean even more demand for that metal too. You can get more details in this article.]

Meanwhile, the iShares Silver Trust (NYSE: SLV) now has $11.6 billion in assets and has added more than 280 tons of silver so far in 2011 as traders jumped in. There also have been rumors that Asian buyers were gobbling up shares of SLV in order to take physical delivery, which they have to do in 50,000 share lots.

"Backwardation" in the futures market, where the current price is higher than the future months, also points to a supply crunch and has been a green light for some traders that silver is headed higher. I'm in complete agreement.

The rare flip-flop means traders are willing to pay a premium to get their hands on silver today rather than a few months from now. This highly unusual situation hints at physical supply shortage fears and could be a precursor of even bigger gains.

Action to Take--> But it's not just silver. You can name just about any resource, and we're seeing rising demand... and rising prices. Gold is up 10 years in a row. Nickel, copper, cotton, even corn are seeing soaring prices too. If you haven't already seen it (thousands have already watched), take a look at the free webcast we put together explaining the details behind some of the these once-in-a-generation opportunities. Click here to watch.

P.S. -- We found an obscure mining company that tossed back 19% in dividends last year (plus another 34% in capital gains). If you think that's impressive, wait until you see this video...

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of NYSE:SLV in one or more of its “real money” portfolios.