Stepping Up to Silver

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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 specifically for Investment. And state-run Chin Central Television (CCTV) has been 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 needed to make - cell phones, Computers, batteries, flatware, 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. Analysts are now predicting silver prices can reach as high as $250. 

Allow me to outline all the reasons silver is going to continue its ride to another record and offer you a handful of ways to profit along the way.

Demoting the Silver-Gold Adage

China's impact on the 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 62-to-1. For silver to 'correct' by returning to its long-term silver/gold ratio of about 15, gold at $1,360 means silver should be priced at $90 already, far above even its 30-year high around $21, where it stands today. You'd be hard-pressed to find anyone who believes that 62-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. Investors like 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 become available... as silver supplies have dwindled... more factors began affecting the price of silver more exclusively - for better or worse.

Some of those factors are:

• Silver's Industrial Uses: For decades, silver has been far more than a collector's item. It has dozens of uses outside the storage vault. It's used to make currency, jewelry, and flatware. 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, it 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 10 years ago to more than 50% today. At least one source claims that figure is actually as high as 90%. Either way, one thing is clear: Silver is quickly gaining serious value in many highly profitable industries.

• 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 of 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 and 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 prices. Better said, 100 silver buyers purchasing the same amount of metal 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 bids to purchase silver. Now, combine that with the global return of industrial silver demand.

Silver Price Projections

Money Morning's Martin Hutchinson believes both silver and gold will continue climbing into this year and beyond. If enough investor momentum gains - and if China's push for individual silver investment intensifies - he believes silver could peak past $100 this year. 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 more than 1,150% over current prices. 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 be prepared to watch from the sidelines as silver's price explodes upward.

How often have you heard people waxing nostalgic over what prices were fifty, thirty, even just ten years ago? When you hear things like "I remember when gas was a quarter!" it's a little skewed because you have to take into account what the current incomes were at the time and a host of other factors. Sure, they were making around $6,000 a year in 1964 when gas was indeed around a quarter (Google seems to suggest around $.27/gal), but there's a lot of sites out there that can better illustrate the decline of the dollar. What I think would be more interesting is to illustrate the rise of silver relative to purchasing power. Stodgy minds in the media like Jon Nadler, Kitco's omnipresent bearish mouthpiece, love to suggest that metals ownership is only worth a small place in your portfolio to preserve wealth. Looking back through 1964, though, paints a different story. As you know, 1964 was the last time the US minted 90% silver coinage. Had you hung on to more of that face value silver back then, your wealth would have increased substantially: 

In 1964, ten dimes could often buy you 10 McDonald's hamburgers on a promotion. ($.15/e or 10/$1) 

If you kept those dimes in your drawer, they'd be able to buy you 20 hamburgers today. (Silver value: $23. Burgers: $.99/e) 

To fill up a 12 gallon tank of gas, you'd have to fork over thirteen 1964 quarters to do it. ($.27/gal) 

If you left those quarters in the back seat and found them today, you could get 20 gallons for it. (Silver value: ~ $75. Gas: $3.70/gal) 

To buy a new car in 1964 you'd need a massive stack of 3,500 old silver dollars. (avg $3,500/car) If you saved that stack, you'd only need 1,281 of them to buy a new car today. (Silver value: 86,625. New car avg: $30,700) and with the left over silver, you could fill it up 986 times even with gas rising to avg $4.50/gal. 

To purchase a new house in 1964, you'd need to lug fifteen 1,000 oz bars of silver to the bank. (avg home cost: $19,000, silver @ $1.30/oz). If you did a mortgage instead and kept those bars to buy a new home today, you'd just have to bring nine of them and get back a lot of change. (avg home cost: $263,000, silver @ $32/oz valued at $480,000, leaving $242,000 left). 

You could use the remaining silver to:
1. Send your two kids through a four year college, AND: 

2. Buy a year worth of groceries, AND:
3.Take your husband or wife to Hawaii, AND:
4. Prepay 5 years average healthcare costs for your family of 4, AND:
5. Donate 10x the national average to a charity of your choice, AND:
6. Hire a personal trainer for 6 months to get you eating right, AND:
7.  Buy 128 hamburgers to throw a party after you're sick of eating right!

1. (avg $23k/year per kid = $184,000, leaving $58,000 left). 

2. (avg $236/week for family of 4, leaving $45,728 left). 

3. (avg $5,000, leaving $40,728 left).
4. (avg $3,200/year, leaving $21,528).
5. (avg $1,100/yr donations, leaving $10,528).
6. (avg $100/hr x 4hrs/week x 26 weeks, leaving $128). 7 (avg $.99 x 129 = $126.72) 

Wouldn't you say that family that can afford to pay cash for a new home, go on vacation, pay for college, pay for groceries, pay for healthcare, make a big charitable donation, hire a personal trainer, and still have money left over for plenty of all beef patties is pretty wealthy? Absolutely. To be fair, you can't ignore that in the example above the person lugging 15 1,000 oz bars of silver to the bank to buy a house in 1964 was certainly doing well. That stable of silver was worth about 3X the average yearly income of an American, and I suspect most people did not have that kind of reserve. That said, if you look at 3X the average income of an American in 2012, you get somewhere around $150,000, which as we've demonstrated, does not even come close to buying an average home. Silver has not only bridged the gap of inflation, it covers it multiple times over. It's clear that one holding as much physical silver as possible will not only preserve their buying power, they will increase it by a substantial degree. Banks are manipulating the stock market (and silver market, too), government bonds are tenuous at best, and dumping money into savings bears only a fractional percent of interest. Those looking ahead to the next fifty years would be foolish to ignore the value and wealth-creating properties of silver. 

silverenthusiast.com / By Tim / September 21, 2012