Silver is Emerging From Under Gold's Shadow

Gold surged to an all-time record high of $1,298 an ounce yesterday (Wednesday) after a U.S. Federal Reserve plan to jump-start the American economy triggered a slump in the U.S. dollar.

The yellow metal has now rallied for five straight trading sessions and is up about 18% for the year. Investors are waking up to the fact that the central bank's plan to use U.S. Treasury purchases as a means of injecting another $2.3 trillion into the U.S. economy is only going to further debase the greenback.

There's no doubt that the ongoing slide in the dollar is going to be bullish for gold. But investors will do a lot better to focus on silver - the "other" precious metal.

"People are finally starting to understand that quantitative easing will devalue the currency," Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York, told Bloomberg News. "That's why they're shifting into gold and silver."

Silver and Gold: The Recent One-Two Punch

Long the "poor cousin" to gold - and badly overshadowed by the "yellow metal's" big price run-up - silver is finally getting some well-deserved respect from investors. As a result, it's been on a tear of its own.

Silver for December delivery closed at $20.82 an ounce on Friday - its highest price since the Hunt brothers of Texas tried to corner the silver market in 1979. After closing at $20.64 an ounce on Tuesday, silver surged more than 2.5% to reach $21.16 an ounce late yesterday afternoon.

As readers of both Money Morning and my affiliated Global Resource Alert advisory service well know, we expected this all to happen.

In July, for instance, I predicted that "we'll see governments panic at the next sign of economic weakness. I think a next round of print-and-spend will put the U.S.' $700 billion stimulus plan to shame - it's likely to top $1 trillion."

Gold's enjoyed several strong periods in recent years - though previous surges were typically followed by sell-offs and periods of weakness. This time around, it may have been Goldman Sachs Group Inc. (NYSE: GS) that re-lit the gold bull's fuse. During a Sept. 14 conference call, Goldman U.S. Chief Economist Jan Hatzius stated that "webelieve that purchases of U.S. Treasury securities cumulating to $1 trillion or more are the most likely cornerstone of the program; that the Sept. 21 FOMC meeting is probably too early for a big announcement, but that Nov. 2-3 is a possibility."

Gold prices soared $26 an ounce - or nearly 2% - that day alone. Yesterday we saw the December gold futures hit the $1,298-an-ounce record, before ultimately closing at $1,292.30, up $17.90 an ounce. Spot gold was last quoted up $4.00 at $1,291.50.

Gold observers know that all this fiat-money debasement means only one thing: higher gold prices.

The powerful movement we've seen in gold and silver in recent days is clearly due to the Fed's promise to stimulate the economy (as well as its frank concerns that growth is below target).

Concerns about the dollar have been growing: Back in August, the central bank indicated its willingness to buy U.S. Treasury bonds with mortgage bond proceeds. Then the Obama administration unveiled an additional stimulus plan of its own - this one worth about $180 billion.

Given the bullish outlook for gold, it's no surprise there's been a sea-change among the world's central banks. Most are holding onto the gold that they have. Some are actually adding to their cache of the yellow metal. Indeed, with its purchase of more than $400 million worth of gold at the top-dollar spot market price earlier this month, Bangladesh became just the latest example of an emerging economy that's purposefully adding to its gold reserves.

Since "primary" bull markets can last a long time, it's looking increasingly likely that 2010 will become the eleventh-straight year that ends with higher gold prices.

That brings us back to silver.

Silver: Gold's Lap Dog No Longer

It's easy to see how gold's performance could be overshadowing the impressive gains also being posted by silver. But ignoring silver today in favor of gold could wind up costing you dearly.

I'm not saying to ignore gold. That would be crazy in light of the probable debasement of the U.S. dollar, which should keep gold surging to new all-time highs.

But you need to consider investments in silver because of the leverage the white metal has on gold.

It's important to remember that - in the long run - the performance of silver depends upon the performance of gold. Silver gains typically lag those of gold, but they can also strongly surpass them. And in a drawn-out bull market, a significant portion of gains will be made near the end of the run. So if you're serious about adding silver to your portfolio, make patience your friend.

Silver has yet to set any new all-time highs, but at roughly $21 an ounce, it's already just broken its 2008 bull-to-date high of $20.79. When it hit that level in 2008, gold was setting a price record, breaking the psychological barrier of $1,000/ounce for the first time ever.

And having just breached the $21-level recently, momentum traders are likely to drive new silver buying.

But silver's a funny animal, especially since it has both industrial and monetary attributes. Plus, much of the silver produced today is a byproduct of the production of such base metals as zinc and lead. So its supply isn't always a function of demand. A lot of the silver supply is used up by industry, so the price of silver can often track the broader markets.

That's why its price action of late is so intriguing - and revealing.

Silver's Recent Run

Silver maintained a respectable 10% gain in the five months that ended in late August. Since then, it has tacked on a blistering additional gain of 13%.

Until the stock panic of late 2008, the silver-to-gold ratio (the number of ounces of silver required to buy one ounce of gold) had averaged 55 over the preceding 3½ years. The financial crisis freaked investors out, pushing that ratio to an irrational 75. It has slowly worked its way back to normalcy, but late August still saw it at the 68 level.

In the past four weeks, the ratio has worked its way back to 62.

What does this mean? Well, despite new record gold prices, silver's been clawing back much faster over the past month, and has outperformed the Standard & Poor's 500 Index by 18% year-to-date, with no signs of slowing.

Now that silver has bettered its bull-to-date high of $20.79 - and could well hold the $21-an-ounce level - the white-hot/white metal should attract additional investors, including those who weren't even paying attention before.

Gold is already nearly 30% higher than it was at $1,000 back in March of 2008. Silver would need to gain another $5 an ounce just to keep pace (a 24% gain from here), and that's if gold just stands still, a scenario I'd rate as highly unlikely.

What's more, 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, since this is the time of the year during which Asian buying is ramping up for investment and cultural reasons.

That makes this an opportune time to take positions in silver.

How to Profit from the "White-Hot White Metal"

Getting direct exposure to the silver price is a good, lower-risk way to play the white metal. But as silver moves up, the exploration companies involved in extracting it from the earth will leverage its gains even higher.

These are two of my favorite ways to play it.

• ETFS Silver Trust Exchange Traded Fund (NYSE: SIVR): Because SIVR is a silver ETF, it acts as a proxy for the white metal. Each unit is about the equivalent of one ounce of silver in U.S. dollars. ETF Securities Ltd. is one of the largest ETF providers in Europe, with some $16 billion under management. Last year the firm launched the SIVR ETF, which is designed to track the spot price of silver (less fees). Those fees are reasonably low, at about 0.30% annually. As well, it seems to trade with a net asset value (NAV) that boasts almost no premium or discount. ETF Securities indicates that the physical silver that backs the units are held in a vault in London, on behalf of the custodian, which is HSBC Bank USA (NYSE ADR: HBC). The trustee is The Bank of New York Mellon Corp. (NYSE: BK). SIVR trades about 160,000 units daily, so that should be plenty of volume to buy and sell when you want or need to. I also like the fact that SIVR holds the metal outside U.S. borders.
• The Global X Silver Miners ETF (NYSE: SIL): This ETF reflects the Solactive Global Silver Miners Index, which is composed of companies around the world that are engaged in the silver mining industry, either as miners, refiners, and/or explorers. SIL was launched only five months ago, and is already ahead by 20%, helping Global X achieve its current status as the fastest-growing ETF provider in the U.S. market. As of mid-September, the fund held 27 positions with a geographical mix of Canada, Mexico, the United States, Russia, and Peru, and it features a reasonable 0.65% expense ratio.

[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy commodities and other natural-resource-related topics. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture. He even makes his home in Canada - to be closer to the action. And several of his recent predictions have generated a genuine Internet buzz.

With new highs being set in both gold and silver, subscribers have been earning outsized gains. Many of the precious metals explorers, producers, and ETFs in the portfolio

have been leveraging these gains and setting their own new all time highs, with

gains of 45%, 49%, 53%, and even 107% in less than 12 months.

To find out more about commodities, or the Global Resource Alert, please click here.]

News and Related Story Links:

• Money Morning Special Report:
  Why Gold Will be the "Greatest Trade Ever"
• Bloomberg News:
  Gold Climbs to Record as Dollar Weakens Following Fed Statement
• Money Morning Special Report:
  Special Report: How to Buy Silver
• Money Morning Investment Research:
  How China Will Drive Silver to $250
• Money Morning News Analysis:
  Will The Fed Fall Back on Treasury Purchases to Fuel Economic Growth?
  
• International Business Times:
  Bangladesh buys 10 tons of IMF gold at peak price
• The Globe and Mail:
  Silver starts to get some of the investor spotlight
• Kitco.com Metals Roundup:
  Comex Gold Ends Solidly Higher, Hits New High, as U.S. Dollar Continues Slump
• ETF Daily News:
  Silver-to-Gold Ratio Has Just Broken Out in Favor of Silver
• ETF Securities Ltd:
  Official Website
• Investopedia:
  Net Asset Value