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 ofsilver, 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. 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
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 hasestablished 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.
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).
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.