Silver: The Next "Greatest Trade Ever?"

In the final days of 2009, I told Money Morning readers that gold would become the "Greatest Trade Ever." I even laid out the case for John A. Paulson - of Paulson & Co. hedge fund fame - eventually topping the Forbes list of the world's richest billionaires ... thanks to his plans for massive gold investments.

It was a timely call. Gold was trading at about $1,090 an ounce at the time - meaning it has surged 40% since then.

I haven't changed my mind about gold - even though it has surged 40% since I made that call. And neither has Paulson. Gold will continue to be an outstanding trade for investors - it's highly prized, it commands a high value per ounce, and there's a lot of it around to invest in.

But I also think that silver will out-gain gold as the current secular bull market in precious metals and commodities continues to evolve. In fact, in February of last year I forecast that silver prices could eventually even reach $250 an ounce before this bull tops out.

If you compared the performances of gold and silver from the start of this secular bull about a decade ago - but ended that period of comparison on Aug. 31 of last year - then gold has been the clear winner. For the 10-year stretch that ended Aug. 31, the "yellow metal" rose from $255 an ounce to $1,250 per ounce, for a gain of 390%.

During that same period, silver moved from $4 an ounce to $18, for a return of 350%.

If we stopped right there, gold would appear to have been the better investment play.

But here's where the comparison gets interesting.

You see, when the summer doldrums ended, silver's bull-market surge shifted into overdrive. In just eight short months, silver zoomed from $18 to the current $48 and change. Gold moved from $1,250 to its current record level of about $1,525.

Now, if you recalculate gold and silver's bull-to-date gains - including the past eight months - a dramatically different picture emerges.

At its current price of $1,525, gold so far has gained an impressive 498% during this decade-long bull-market surge. But silver - having soared from a low of $4 all the way to $48 - has zoomed 1,100%, making it the clear winner, with more than double gold's returns.

And what's more, the three catalysts that I've identified will serve to propel silver much, much higher over the coming months and years, despite the stellar performance it's already delivered.
Those three factors consist of:

• A regulatory crackdown.
• Escalating demand.
• And a normalization of the "gold/silver ratio."

Let's look at each one in greater detail.

The Future of Silver Futures

The U.S. Commodity Futures Trading Commission (CFTC) is about to help spur the "Second-Greatest Trade Ever".

The implications of recent events in the silver-futures market are so explosive that we could see massive gains in silver in the next 12 months alone.

Back on Oct. 26, CFTC Commissioner Bart Chilton publicly stated that "there have been fraudulent efforts to persuade and deviously control that [silver] price." Chilton even said that that he believed there had been violations to the Commodity Exchange Act (CEA) in the silver market, and that these ought to be prosecuted.

The targeted perpetrators are no less than JPMorgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE ADR: HBC), currently facing four lawsuits that are vying for class-action status. They're accused of collusion in order to manipulate silver-futures pricing going back to early 2008, and of building immense short positions with an ultimate goal of forcing prices down for their profit.

According to the lawsuits, there were two "collapses" orchestrated by these two banks - the first in early 2008, and another in early 2010 - from which they gained massive profits.

This has attracted lots of attention and contributed to a volume surge in the trading of silver contracts - with the COMEX market on Nov. 10 reporting a new all-time record that was a full 57% above the previous one set way back in 1976. This rise in silver trading volumes - as well as in actual silver prices - has prompted futures-market operator CME Group Inc. (Nasdaq: CME) to raise silver-futures margins twice in the same week to help preserve order.

Conspiracy theories notwithstanding, it's likely that these allegations fueled the thesis that the price of silver was being suppressed, and that such downward price pressure could well ease up going forward.

Since November, massive levels of money have flowed into silver-focused exchange-traded funds (ETFs). And meanwhile, new all-time-record coin sales are being reported by the U.S. Mint, with near-record sales being reported by the Austrian Mint, Royal Canadian Mint, and Perth Mint.

So as silver-coin and ETF purchases set new records, the next question may well be: "Will there be enough silver to meet ongoing demand?"

That question leads us directly to my second silver-price catalyst - silver demand.

Silver Demand: The "Missing" 225 Million Ounces

When analysts needed to assess the global demand for silver, they have traditionally turned to GFMS Ltd., and The Silver Institute, the two organizations that are generally regarded as the most-relied-upon sources for that type of information. Together, GFMS and

The Institute make use of a category they have labeled as "implied net investment" - a catch-all grouping that's supposed to indicate institutional and retail demand for physical silver.

But noted natural-resources investor Eric Sprott (of Sprott Asset Management LP, with $8.5 billion under management) made an interesting discovery: There's very likely more - actually, a lot more - to silver demand than market observers have been led to believe.

Yet by their own admission, GFMS and The Silver Institute acknowledge that their reported data for "implied net investment" is not an observed figure, and doesn't include some of the demand coming from hedge funds or "physically backed" exchange-traded funds - a portion of the fast-growing ETF sector that's enjoying even more explosive growth. As a result, Sprott found that more than 225 million ounces of silver demand was "missing" from figures for the decade-long stretch that ended in December 2009.

And that figure doesn't include the demand from 2010, an explosive year for silver (and a year in which silver - the "other precious metal" - rallied 138% during the last eight months).

The Quickly Closing Gold/Silver Ratio Gap

In the years leading up to the 2008 stock-market panic, the gold/silver ratio averaged about 55, meaning it took 55 ounces of silver to buy one ounce of gold. Keep in mind that, perhaps counter-intuitively, a declining ratio is bullish for silver, since it means fewer silver ounces are required to buy one of gold.

Actually, that's what was already happening since this precious-metals bull market was spawned a decade ago.

But then that late-2008 stock-market panic caused this ratio to shoot up until it actually exceeded 75. That was an extreme that couldn't be sustained over an extended period. And I said so in my September article "Silver is Emerging From Under Gold's Shadow."

At the time, silver was still trading at about $21 per ounce. I told readers that we'd likely see silver at prices of $25 an ounce to $27 an ounce before fall was over, writing that " ... silver could well be poised to explode to the $25 to $27 levels as we enter the strongest time of the year for precious metals."

As I write this, we're just north of $48. With gold at $1,525, we've already sailed past the pre-2008 gold/silver ratio of 55, and currently sit below 32.

That may signal silver as being somewhat overbought at this point, but as the ratio was stretched to such an extreme of 75, we could well see it continue to march lower, albeit after a well-deserved rest. I would not be surprised to watch the gold/silver ratio reach a level of 30 which, should gold regain and hold the $1,500 level, would imply a price near $50 for silver, above its all-time nominal high from 1980.

As we work our way through this bull, I expect the gold/silver ratio could even drop below 20. If gold eventually reaches the $5,000 level, as I expect, a ratio of 20 would imply a silver price of $250.

Silver Prices: Still Below All-Time Highs

Gold tends to grab most of the headlines, a status it's likely to uphold as its allure remains unparalleled. Seeing it trade at nearly 80% above its previous all-time highs sure has scores of observers excited.

On the other hand, it's contrarians who tend to earn the best returns over time. And with silver prices still 5% below the all-time high of $50.35 reached in 1980, the odds - over time - seem to favor silver over gold, as far as generating the biggest gains.

It's true that silver was the best-performing major commodity of last year, bettering all of the 18 other commodities comprising the CRB Commodity Price Index. It's also true that, on a technical basis, the silver price has gotten ahead of itself, having stretched way above its 200-day moving average.

But silver benefits from a more advantageous fundamental supply/demand profile than does gold.

The physical silver market is only a fraction of its yellow-metal counterpart.

Numbers Game

Of all the silver ever mined (about 46 billion ounces), experts estimate that about 1 billion ounces are left above ground in bullion form. That's because the rest has been consumed, and is also because silver isn't something that is typically economically feasible to "recover." By comparison, of the 5 billion ounces of gold ever mined, about 2 billion are available above ground in bullion form.

In 2009, worldwide silver production totaled some 700 million ounces. At the average 2009 price of $14.70, that represents a total value of about $10.3 billion. In that same year, however, about 75 million ounces of gold were produced. At the average 2009 price of $975 an ounce, that represents a value of about $73 billion, or about seven times the silver market on a market value basis.

A wave of demand will influence more heavily the much smaller silver market when compared to gold. Small investors clamoring for a piece of the precious-metals pie could well push silver much higher, as they buy the metal that's much more affordable on a per-ounce basis. That means the potential returns on silver could be astronomical for those willing to commit.

At this point, there's still time to make silver an important part of your portfolio - perhaps making it your "Greatest Trade Ever."

News and Related Story Links:

• The Global Resource Alert:
  Official Website.
• Money Morning Special Report:
  Silver Investing Strategies: The Outlook for the "Other" Precious Metal.
• Money Morning:
  Special Report: How to Buy Silver
• Money Morning:
  Special Report: Though it's Called "Junk Silver," the Profits Aren't Trash
• Sprott Physical Silver Trust:
  Official Website.
• Newsweek:
  The Greatest Trade Ever.
• Bloomberg News:
  Silver Subject to Price Manipulation, Chilton Says
• Wikipedia:
  Commodity Exchange Act.
• Sprott Asset Management LP:
  Official Website.