Investing in Silver: Three Ways to Profit From the Projected Breakout

[Editor's Note: Retired hedge-fund manager Jack Barnes is predicting a major price breakout for silver in U.S. dollar terms. Here's how to reap the potential 150% gain he believes is attainable by the 2012 election.]

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It's the last major commodity to enjoy a true price breakout, and it's already doing so in a foreign currency.

This commodity has yet to break out in U.S. dollar terms, although its breakout in India is a signal that it's time for U.S. investors to make their move.

I'm talking, of course, about silver.

Silver is trading at just under $20 an ounce right now. I think it could hit $50 an ounce by the 2012 presidential election, which would represent a 150% move from here.

Clearly, the "white metal" can be a major profit center for your portfolio during these uncertain times. Let's look at the strategy that I've put together for you to reap that gain.


Ode to the 'White Metal'

Silver has been used as a store of monetary value and as currency for more than 4,000 years. The Lydia civilization made it into a coin currency in 600 B.C. In 1980, the white metal hit its all-time high during the Hunt Brothers' futile attempt to corner the silver market. That event caused silver to spike briefly to more than $47 an ounce, a price level that will be hard to reach and breach in the foreseeable future. Even so, as commodities go, silver makes for an alluring investment at the present time.

When investors think of silver, they tend to view it as a cheaper version of gold. That's a mistake. On one hand, silver is like gold in that it is an investment-worth precious metal. However, there is also a strong industrial demand – when companies such as chip giant Intel Corp. (Nasdaq: INTC) think of silver, they do so for its industrial uses.

And the industrial uses of this white, lustrous metal only figure to increase. Silver has the highest electrical conductivity of any element and the highest thermal conductivity of any metal. That conductivity makes silver the perfect metal for solar-cell production, meaning the metal figures to be a critical component in the developing alternative energy sector.

Glittering Prospects

The Silver Bull's Early Warning Signal

A historic breakout in silver appears to be under way – in India. In other words, silver prices are starting to make a run in terms of the Indian rupee – but not in U.S. dollar terms. Silver is the last major commodity to break out, and the fact that it's doing so in a foreign currency is tantamount to an early-warning signal that U.S. investors should place their silver bets in U.S. dollar terms.

The move in prices in India is what I call a "stealth price-discovery movement." The increase in prices in rupee terms provides U.S. investors with a view of what investors in other markets are thinking – and a look at the moves they are making as a result of that thinking.

In this case, Indian investors see inflation as a cause for concern. And they see silver as the solution.

Historically, silver has shown itself to be a hedge against inflation in other asset prices. It serves as a store of value. Indeed, in today's world of debt-backed currencies with sovereign-bond risk, silver is poised to return to its precious-metal/store-of-value roots, joining gold as a "currency" with no debt-default risk.
As fears of inflation sweep through India's economy, that country's silver market keeps establishing new higher highs. At the same time, the price of silver in the U.S. market also has shown early signs of waking up.

Silver is currently cheap, when priced in gold. This has happened because gold has already been setting new nominal high prices this year – though silver has failed to follow suit. This price divergence between gold and silver has attracted some relative value traders, who might try to place a trade that is based on the ratio between gold and silver as quoted in silver ounces.

In this type of trade, the potential exists to make money as silver goes up or as gold goes down in price. Silver has traded at an average ratio of 61 ounces of silver to one ounce of gold. Currently, the trading ratio is roughly 65. This lets us know that silver is cheap compared to gold at current prices.

During the Hunt brothers pricing bubble, silver reached an all-time low ratio of 17 ounces to one ounce of gold.

(The extreme nature of the 1980 price moved caused by the Hunt Brothers is probably why silver has yet to have a price breakout – at least not in U.S. dollar terms. As measured in rupees, silver is currently trading at all-time highs.)

Poised for a Breakout?

A quick review of the following checklist reveals why silver appears to be poised for a breakout:

  • Silver has not yet set a new "nominal" record price in U.S. dollars.
  • Silver has established a new nominal record price in other currencies – such as in the Indian rupee.
  • Gold, a leading indicator for silver prices, has established a new nominal high price of late.
  • The ratio between gold and silver is high, meaning that silver is cheap as compared to gold.
  • Silver has traded as low as 17-to-1 during its last bull market.

While silver is currently cheap in comparison to gold, the white metal also is currently moving more quickly than gold. A week ago, for instance, silver was up 6.6% in a 30-hour window. During the same time frame, gold moved about 1%.

"Silver is looking cheap and we're seeing strong investment demand for small ingots, as well as good industrial demand from solar-panel makers," Dick Poon, Hong Kong-based manager of precious metals trading at Heraeus Ltd., told Bloomberg News recently.

The solar industry will consume up to 1,500 metric tons (48 million ounces) this year, Poon estimates.

"Even if investors are expecting another downturn, there will always be demand for alternative sources of energy," Heraeus' Poon says. "We could see prices back up above $20 very soon."

Silver last traded at more than $20 an ounce back in March 2008.

Two-Pronged Demand

Time to Make Your Move

As sovereign debt risks have risen, so has the demand for silver as an investment class. This demand shows up in the market through investors investing in exchange-traded funds (ETFs), like the ones I suggest in the "Actions to Take" section at the end of this article.

Silver is rarely produced as a primary product in a mine. This is due to the fact that most silver is produced as a byproduct of something else. This means that very few companies have silver-specific mines.

Clearly, it's time to factor silver into your long-term investment strategy. Demand is growing for silver in emerging markets, as inflation fears hit export nations such as China and India. Meanwhile, in developed nations like the United States and Europe, silver is shining again due to deflationary fears. Make it a core component of your portfolio.

Action to Take: The fact that silver is setting new nominal high prices in foreign currencies is an indication that it's time to factor silver into your investment plans.
I suggest considering investing in silver on the next market pullback. It will subsequently break out and establish new record highs in U.S. dollar terms.

If you were going to make silver 10% of your portfolio, you could break that into holdings like this:

  • Physical Acquisition and Accumulation: 3%.
  • Exchange-Traded Funds and Stocks: 5%.
  • Options on Futures: 2%.

Here are three strategies that you could use to invest in silver:

1. Physical Acquisition and Accumulation: Physical silver can be held either by yourself, or at a bonded silver warehouse. If you go the route of having it held by someone else, make sure to have it allocated. You want to be able to prove that your holdings were not co-mingled with the silver of other investors. Physical bullion sales are available from these sites. In the case of Bullion Direct (which I have used), you can choose to have the company hold it, or they will provide discrete shipping to your front door via UPS/FEDEX. Other firms that handle physical bullion sales include:

2. Exchange-Traded Funds and Stocks: The following ETFs will give you exposure to silver prices via futures, or physical silver held in ETFs, or in the case of the Ultra Silver Proshares, you will have a 2x leverage move (meaning your gain, or loss, will be double the market move in silver prices).

  • iShares Silver Trust (NYSE: SLV)
  • ETFS Silver Trust (NYSE: SIVR)
  • PowerShares DB Silver (NYSE: DBS)
  • E-TRACS UBS Bloomberg CMCI Silver ETN (NYSE: USV)
  • Ultra Silver ProShares (NYSE: AGQ)

There are equity-based investments that focus on silver bullion production. Here is a list of a few that trades on major exchanges.

  • Silver Wheaton Corp. (NYSE: SLW)
  • Coeur d'Alene Mines Corp. (NYSE: CDE)
  • Pan American Silver Corp. (NASDAQ: PAAS)
  • Silver Standard Resources Inc. (NASDAQ: SSRI)
  • Hecla Mining Co. (NYSE: HL)

3. Options on Futures: Finally, there is the futures market, where you can purchase contracts of 5,000 oz. each. Please note, however, that these contracts open you up to unlimited risk, and should not be traded without doing your due diligence, and making sure you have a sound strategy to manage the risk. They do, however, provide a direct leveraged bet on silver prices.

[Editor's Note: Jack Barnes started his career at Franklin Templeton in 1997, working in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries. He launched his own RIA shop in 2003 just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008. Last summer, Barnes retired to the beach - which is where he writes from now.]

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Join the conversation. Click here to jump to comments…

  1. Jim Doyle | September 8, 2010

    Can you advise the best way to invest in silver here in Ireland. It looks like a good investment possibility after all the bad news that we have encountered this side of the planet !!

  2. Steve Durfee | September 8, 2010

    I'm all in. Lots of physical silver. Leveraged BIG Time with Hecla Mining options. BUT… I fear JP Morgan et al will continue to short MANIPULATE this market. What is to keep them from dropping silver $2 per ounce???? How do they get away with their HUGE short positions???

  3. fallingman | September 8, 2010

    Good article. A couple of points if I may.

    Just like last week's article, you do a disservice by not mentioning bags of "junk" silver…circulated pre-'65 dimes and quarters. It's the best way to own physical, by far.

    SLV? Guess who runs it? JPMorgan. That's right. But I'm sure there's no reason for the chickens to be concerned just because the fox is in charge of the coop.

    Morgan is scum, but Morgan is not some sort of omnipotent entity. They are in up to their eyeballs on this suppression scheme. I figure they'll wriggle out of any serious losses. Their sponsors in the forcibly United States Government and their protectors at the CFTC will make sure they don't get hurt, but the idea that they can take silver down to $9 again, much less $2 gives them waaaay to much credit.

    I also like Endeavour…EXK…for what that's worth. Smaller, but comin' on.

    Plus, if you buy any of these stocks or physical now, you're betting that a breakout is coming and is imminent. it may very well be, but all the indicators are flashing overbought. that won't mean much if a breakout occurs, but if it doesn't …

    • Theo | September 9, 2010

      Excellent points about the junk silver and SLV. pre-1965 dimes, quarters and halves are widley recognized and have an established silver content (.715 ounce per $1 face). Some also have nuimismatic value, especially the older mercury dimes and walking liberty halves.

      I simply don't trust SLV and the other such investments. The SLV prospectus in particular is very vague. Also, if you can't request the physical bullion then you don't own the metal.

  4. Karen Kerr | September 8, 2010

    What happened to the pending lawsuit related to the puported Chase price manipulation of silver? I thought this was going to be litigated. I personally doubt if you will ever see silver below $8.00 an/oz. again. The cost of permits and mining rights will increase as more attempts are made to dominate world resources. (this includes water). Silver is the future. More traders will eventually view this as a long bull commodity run and start buying silver long, J.P. will have to sell their short holdings. They can't control the world.

  5. B.HOWARD | September 8, 2010

    Thanks for info…pls put me on your email list…B

  6. Hank Konkel | September 8, 2010

    Jim,

    My advice to you is to acquire some physical silver first; such as coins or silver bullion.
    Then I would invest in those 5 silver stocks mentioned above, (I particularlly like Silver Wheaton). When you invest in the stocks, you actually have a "leveraged" position.
    The mining stocks should make 4 to 5 times as much as the physcial metal will make.
    Make sure you diversify your silver stock portfolio.

  7. Hank Konkel | September 8, 2010

    Steve,

    You are so right about JP Morgan's manipulation of the silver market. As Ted Butler has said "it is a crime in progress". The manipulation is so obvious in many ways. 1st, no other commodity has been shorted in the COMEX like silver is shorted. 2nd, its one single large "shorter" who is manipulating the market. The gold to silver ratio for 100 years was 16-1. Now it is 63-1 !!! Doesn't that look a little suspicious?!
    However, JPM's time is limited and will be up soon. Once the majority of industrial users and investors realize what a significant shortage we have in physical silver, THE PRICE WILL EXPLODE. THE COMEX WILL CLOSE BECAUSE OF THE BIG SCANDAL THAT WILL BREAK ON THE MANIPULATION. Just be patient a little longer.
    PLEASE BE CAREFUL WITH THOSE OPTIONS!

  8. Dean Tucker | September 8, 2010

    When you say at the next market pullback, how far do you anticipate it pulling back? Thanks!

  9. sushil kumar agarwal | September 8, 2010

    silver will touch 50 dollar is unbelieveable, kindly elaborate. I am new investor in INDIA in gold & silver.

  10. John Stephens | September 8, 2010

    Sounds good.

  11. Joachim Troilius | September 8, 2010

    I agree that silver, as gold, is a good investment, as it is, when buying physical metal, no one else's liability.

    But how can you say, in the one and same article, that gold and silver are being progressively viewed as currencies that without risk of debt-default, which makes them attractive, as investment assets, and then go on to recommend the not-so-educated silver investors-to-be, to invest in ETFs???!!!

    Wheren't we talking of investing in assets, representing non-existing debt-default risks?
    An ETF is a company, and when the non-suspecting silver investor invests in an ETF, he or she does not buy real physical silver, but only a claim, representing silver, which is held by the fund company. This amounts to no less than counter-party risk, and that the buyer is hoping that the fund really has the silver they say they have, which is usually hard to establish, as true, professional third-party audits are seldom or never performed, under the regime and reglements, of many PM ETFs.

    For investors, wanting to buy physical silver, because of its' nature of being, like gold, no one else's liability, buying silver ETFs, with their adherent company counter-party risk, might prove to be like jumping out of the frying-pan, into the fire.

    I consider needed, for you to mention the accompanying counter-party risk, when buying non-regularly audited silver ETFs, as opposed to buying real, physical silver.

    I think you should mention that risk, as truth is, we do not know the extent, of that risk. If there is one, it could turn out to be known to the holders of the ETF, at the worst possible time, the time, with the emergency, for which the investor maybe was holding, and expecting, his silver to be there, within the fund, but that it turns out to not being there, having, instead, been leased to other, third parties, in parity with the fraudulent way of accounting, that the central banks use, regarding the handling of their gold holdings.

    Only private holding of physical silver, or, in a silver fund, allocated, named and numbered silver, is a silver investment containing no counter-party risk.

    And You should say it.

    Not saying it will expose unexperienced silver investors to risk.

  12. Richard Whisler | September 9, 2010

    Joachim makes a valid point! However, short term buying or selling ETF"s is something I will be doing! Only experienced traders should engage in it, and then, only for brief periods! As long as Jaime Dimon, of J.P. Morgan, and the other " less than 8," bullion banks hold "naked shorts" totalling almost 300 million ozs. Rapid price movements will always remain a possibility! The possibility of earning thousands on a short term breakout, will always be tempting! Really? When?

  13. megha | September 10, 2010

    All matters are worthless ,meaningless,it wont reach $50 ,may reach $30.dont fool the people.

  14. Rick | September 10, 2010

    Great cited info.. Will share article with my you tubers..

    Thanks SilveBuzz

  15. JAGDISH SARDA | September 12, 2010

    dear sir,
    i would like to know as to the bottom silver would touch before giving a break up.
    pl do add my email id,.charts are showing that nymex silver may test 22.74 by oct end, is it showing the ssame on your charts, pl reply

  16. Graham | September 13, 2010

    Buy physical

    Avoid ETFs

    Do it now!

    Jp are failing, silver will revert back to it's historic value compared to gold And overshoot along the way…gold is also going up…$50 very soon, $600 later.

  17. Mandellas Lightbourne | October 8, 2010

    Thank you for this insight on precious metals.

  18. tuck | October 16, 2010

    Thanks for info in silver investment
    what is the range of pull back in siver price before going in to buy

  19. akash agravat | December 11, 2010

    i hope silver futur 31 oct 2011 in india RS 70000/kg & 31 dec 2012 RS 100000/kg about

  20. john lechleiter | January 11, 2011

    I have been a coin collector for more than 40 years and a silver and gold investor for 30 I was buying gold at $295 in the early 80's and my 1st 1000 oz's of silver at $3.85. I am a ferm beleaver in holding hard assets but you must also protect your holdings. I recomend a safety deposit box as cheep ins,and average your price with just steady buying don' try to time the market

  21. rahul | January 14, 2011

    Bought 33 ounces of silver and have ordered for another 50 ounces an overall target of 200 ounces by march end at what ever the market price………………

  22. Brandi Horstman | January 24, 2011

    Mr. Barnes could you help me find silver mining investment. My life savings of $5,000.

  23. rahul | February 20, 2011

    bought overall 333 ounces – 10 kilo as of today at avg price of 30$ ounce

  24. barefootpoet | February 26, 2011

    Where does one sell the silver bullion they've accumulated?

  25. Greg | February 27, 2011

    I bought 51 oz of silver at $33.38 an ounce, and plan on buying as much as possible over the next year at whatever price. I think it is only going to go up!

  26. Parry Benton | March 15, 2011

    I am interest in how to buy silver and the Rich trick

  27. Timothy Martin | March 20, 2011

    As of this post, the silver to gold ratio is 40:1, so the gap is narrowing.

    I see silver far surpassing the $50 mark by the end of the year (IMO), since more and more retail investors are starting to see the true value of silver and are investing in the pm miners and taking possesion of the physical silver.

    When people go to buy pm securities or bullion, they should take note of the dollar index. Last Friday, 3/18/11, the dollar hit a new six month low, since November. Thus we are seeing lower lows, which is not good.

  28. http://www.bullionbarscoins.com | April 1, 2011

    If you want to know more about the different forms you can invest in consider how to buy at close to spot as possible whatever form that may be.

  29. Anon | April 3, 2011

    "There is a growing market awareness that the banks have sold short over $200 billion to $400 billion in silver, while all the world's silver mines only produce about $30 billion of silver annually. Market participants are now taking on the cornered banks, putting them into an epic short squeeze of having to deliver silver that does not exist in quantity even remotely compared to the amount of money that exists that can buy silver.
    With bonds and futures both about to be fully discredited, they will not likely to be able to be used to trick market participants back into paper this next time around. With silver having gone up 100% in the last year, how high does the interest rate for bond need to go in order to convince holders of silver to give it up for paper? And even if they could, how could they possibly induce the tiny $3 billion silver investor market (investors only buy about 10% of the world's silver market today) to dump silver, to prop up the $50,000 billion bond market? Clearly, the smaller market, if sold, is not nearly big enough to prop up the larger market.

    The banks are the deceivers, but they have become the deceived. There are no longer any people in the banking industry, or government, who practice the long lost art of fundamental analysis, basic math, and rational thinking. They flat out do not know what they are doing, or why. They are fighting a losing battle with tools that no longer work, and cannot work in the long run"

  30. Herbert | April 17, 2011

    $43.05 AN OUNCE now. Started buying Silver American Eagles and Kennedys[90%] Franklins [90%]4 TO 5 YEARS AGO and and Lots of single ounce bars[Parktown. Ready to buy the FU-DOG from China. Be cool and HOLD IT EVEN IF IT DROPS SUBSTANTIALLY.l. it's going to go to $250 and ounce. Maybe not quickly but HOLD what you got and You will not regrett it.

  31. Clyde | April 19, 2011

    There's no shortage of opportunities to buy silver and gold as the prices climb and the wisdom of doing so in undisputed. I'm really new to this so please excuse my ignorance. The question I have is how compelled are these metals brokers going to be to buy your metals once the price has peaked and starts declining? If I'm sitting on 200 lbs I bought at $40/oz, the price peaks at $250 and I want out, how compelled are all these brokers going to be to buy my metal once the price starts dropping? If the answer is they're not then what have I gained?

  32. zack estess | April 25, 2011

    I am spreading the word!! Invest in physical Silver for as little as $25 a week or $50 a month!!
    check this site out
    https://silversaver.com/share/WCCA3/
    This site allows everyone to invest in physical silver!!

  33. Jw Albritton | April 29, 2011

    Thanks for this site Silver is my only investment these days Thanks Jw

  34. sharon Thomas | May 2, 2011

    Hi
    I need your advice, what is the best possible way to buy silver my silver investment, bullion? coins? what? i have a sum of money in mind and have decided to invest in silver.

    Thank you
    Sharon

  35. Brett Malone | July 28, 2011

    Fantastic article. Once Jp Morgan is called on its Silver shorting, the price will skyrocket. Everyone should be buying physical silver though, I wouldn't buy ETFS . If you want to join a good affiliate program, and earn some silver just for referring others check out http://www.silverbaraffiliateprogram.com They will be going live sometime in August!

  36. Mark Anderson | June 24, 2012

    I bought silver Canadian .9999 Liberty Dollars at 32 bucks. Since then they are falling but I truely
    believe if I hold them long enough at the rate silver is being used it has no choice but to go up in value. It might take a year or two but it will go up.
    God takes care of those who take care of themselves,
    Thanks,
    Mark

  37. Mark Anderson | June 24, 2012

    Silver is a good buy if you are patient, I believe.
    Thanks,
    Mark

  38. Gold Investment | July 22, 2013

    I think silver wont reach $50 at all..,,however, i still think its a good option to invest upon,,.

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