Silver had a dramatic run during the first few months of last year, surging almost $20 per ounce to briefly surpass its prior all-time high of $49.45.
Now, after seven months of playing second fiddle to gold, backing and filling price-wise, silver could be poised for an even stronger surge in 2012.
In fact, the "other precious metal" should easily crack the $50 barrier in the coming year – and possibly move much higher.
Silver to Hit $200
Money Morning Global Investing Strategist Martin Hutchinson has been one of the most optimistic of the forecasters.
He thinks gold will almost certainly hit $2,500 per ounce – with $5,000 in the realm of possibility. And silver?
"If silver were to match its 1980 peak, adjusted for inflation," Hutchinson says, "it could climb as high as $150 an ounce."
Peter Krauth, Money Morning's Global Resources Specialist, pegs the top 2012 gold price at $2,200 per ounce – an increase of 32.2% over current levels – and predicts that "silver has even more potential" – as high as $200 an ounce in the next year.
Peter is quick to point to the gold/silver ratio – a measure of how many ounces of silver it takes to buy one ounce of gold. That ratio stood at 53.19 recently – up from 46.17 a year ago.
The higher the number, the cheaper silver is relative to gold, and the current ratio is well above the average of 47.0 for all of the 20th century – and sharply higher than the readings near 20 prior to the 1979-80 rally.
According to Peter, new facts in the silver markets are just now coming to light. And all of them are pointing in one direction. The biggest short squeeze in history could be about to hit the silver markets, causing the price to soar. This is an immediate opportunity for silver investors who want to know what to buy and when to sell. Take a look at Peter's latest report behind the scenes in the silver markets. You can find it (for free) right here.
Silver on the Rise
The overly expansive U.S. monetary policy, artificially low interest rates and unresolved Eurozone problems are all "undeniable" reasons "there will be a renewed surge in gold and silver prices," says Martin.
A falling U.S. dollar drives up precious metals prices, according to Martin. And with the Federal Reserve printing money like it's going out of style, the dollar has little chance of rebounding anytime soon. But not even the falling dollar will be able to compete with the disaster in the European markets.
In fact, the situation in Europe may be the strongest factor pushing silver prices higher this year.
Don't expect immediate results, though. The European pressure on silver prices will start out slow.
The Eurozone has close to $8 trillion in debt it must roll over by November. In a few months, no one will be willing to buy the continent's bad debt. But as of right now, a third of Europe's banking funds still comes from dollar-denominated deals and U.S. money market funds. That's going to impact the dollar in coming months – potentially creating a liquidity problem that will drag down the precious metals markets.
Once dollars are freed up from the European disaster, in the third and fourth quarters, be set for silver prices to rise considerably.
New Ways to Play Silver
The fundamental factors driving up silver prices later this year will be aided by relatively new investing vehicles and trading arenas. These will give more investors around the world access to the silver markets – pushing silver prices even higher.
The introduction of silver-backed exchanged-traded funds (ETFs) in 2006 has already added thousands of new investors – especially those who wanted to reap the rewards of the silver run up without the worry of owning physical silver.
The holdings of the various funds have climbed swiftly, hitting a peak of 621 million ounces in April. Thomson Reuters GFSM reported liquidations reduced that total to 577 million ounces late last year, but any surge in safe-haven investments would force new buying in the ETFs, pushing prices higher – and, most likely, creating still more demand.
But the real moonshot for new silver investments is going to come from the emerging markets in China and other parts of Asia.
Keith Fitz-Gerald, Money Morning Chief Investment Strategist, says the new Asian metals markets are already having an impact on demand, with growth in China's metal ownership alone topping 67% from 2008 through 2010 (as compared to just 17% worldwide).
The introduction of yuan-denominated spot metals contracts on Hong Kong's Chinese Gold & Silver Exchange last year gives Asian investors even greater access, as will the scheduled opening of the Pan Asian Gold Exchange (PAGE) this summer. The latter will offer both physical metals purchases and trading in derivative products.
"As the U.S. dollar weakens further – and as China's financial power grows – you can bet that country and its individual investors will escalate their purchases of hard assets," Fitz-Gerald wrote recently. "There's little doubt this escalating demand will translate into higher prices for silver.
What to Buy – ETFs
In the meantime, the recent silver price pullback represents a strong buying opportunity, says Hutchinson.
If you are a serious silver investor – or want the best safe-haven hedge against turmoil or renewed inflation – you have to hold the physical metal in silver bars or coins.
You can also buy shares in one of the silver ETFs, which either hold the physical metal and thus track the cash price of silver itself or are structured to track an index that mirrors silver's performance by using a combination of silver and various derivatives. Two of the most popular silver ETFs are:
iShares Silver Trust (NYSEArca: SLV) – The largest of the silver funds, with a market cap of $9.4 billion, SLV is a grantor trust that buys and holds the actual metal, selling shares in the trust to investors. A passive fund, the trust buys and sells silver only in response to shareholder purchases and redemptions. As such, it fairly closely tracks the spot price of silver bullion, minus expenses of 0.50%.
ETFS Silver Trust (NYSEArca: SIVR) – SIVR is structured in similar fashion to SLV, but is an investment trust rather than a grantor trust. It also holds silver bullion and attempts to track the spot silver price, but is much smaller, with a market cap of just $619 million. The fund has a below-average expense ratio of just 0.30%.
The third way to play the coming silver rally in 2012 is through the purchase of mining stocks, which make up the most undervalued metals sector. These stocks will make a major run in the year ahead, though timing is key. The stocks will likely continue to lag the actual metals for some time.
What to Buy – Stocks
As prices rise, every investor with money left will turn to precious metals. But when they consider their options, buying silver and gold in physical form or ETFs will look extremely expensive. And all of those investors will flood into the cheapest silver mining stocks they can find. Don't be one of those foolish "fad" investors. Look for miners that are actually undervalued, not just cheap.
Two silver mining stocks that fit that requirement are:
Silver Wheaton Corp. (NYSE: SLW) – SLW is among the biggest players in silver, operating nine major mines in North, South and Central America, with 14 other long-term silver purchase agreements. The company also has interests in some gold-mining operations. SLW earned 78 cents a share in fiscal 2010 on revenues of $423.3 million, and is on track to bring in $723 million this year, which would translate to earnings of $1.66. Analysts project a one-year price target of $48.87. With a beta of 1.53, the stock is fairly volatile, closely following silver's price movements.
First Majestic Silver Corp. (NYSEArca: AG) – With a market cap of $1.43 billion, Vancouver-based First Majestic is about one-tenth the size of Silver Wheaton, but it has a dominant position in Mexican silver, with three producing mines and two more in development. The company earned 91 cents a share over the past 12 months, with $1.14 projected for the current fiscal year and $1.84 forecast for next year. The shares also trade on the Toronto Stock Exchange and the projected one-year price target is $22.49.
Money Morning Global Resources Specialist Peter Krauth has found two more silver miners with incredible potential for investors. An unprecedented short squeeze about to take place in the silver markets could send silver prices to $200 or higher. And his two picks are positioned to make a double or better. Peter's silver report is free to new Money Morning subscribers. Take a look right here.