How to play the silver price rally (SLV) (PSLV)

Silver is rallying sharply this month, up about 14% in the last three weeks and blowing out of its old range. After it closed yesterday at $21.85, I’m confident we’ll see silver test $27 or even $30 by the end of this year.

And that will make a huge difference for undervalued silver producers.

There are three reasons silver is going higher, and some ways you can make money as it rallies.

1. Mom and Pop Are Loading Up

Silver bullion coin sales rose to a record high in 2013. Here’s a yearly chart of U.S. Silver Eagle sales…

The U.S. Mint sold 42.675 million American Eagle silver bullion coins in 2013. That is 26% more than 2012, and it’s a new single-year record for the most purchased since the U.S. Mint began producing the one-ounce silver coin in 1986.

And it’s not just the U.S. Mint that sold a lot of silver coins. Mints in Australia, Austria and Canada have seen booms in silver coin sales of 41% or more.

And the buying continues. Sales of American Eagles are on pace for another record year.

2. Silver ETFs Are Buying, Too

Selling of gold by ETFs was a huge weight on gold prices last year. But silver didn’t see a rush of selling by ETFs. The amount of ounces they held stayed flat.

And now the ETFs are adding to their holdings.

Through February 14 of this year, the major silver-backed ETF products held 631 million ounces. That’s up 100.9% from their holdings at the end 2008.

3. Industrial Demand Is Set to Soar

Industrial demand accounts for more than half of total demand for silver. Smartphones, flat-panel TVs, solar panels, chemical reagents – they all use silver.

My sources say industrial demand for silver could rise 6% in 2014 to a record 511 million ounces. And that’s not including demand for jewelry and other uses.

No Surge in Supply

All this, and yet output from the world’s largest silver producer, Mexico, should remain nearly unchanged this year. China is the world’s No. 2 silver producer, and it’s the same story there. Worldwide, production is only expected to rise slightly in 2014.

In fact, most of the new silver that comes on line isn’t from primary silver producers. Instead, it is as a byproduct of mining for other metals. That puts a lid on production, no matter what the demand.

Individual miners offer a potentially very profitable way to play a rally in precious metals. But be careful; miners can be volatile.

There’s one in particular that I’m very high on right now, and since recommending it to subscribers of Oxford Resource Explorer – the premier newsletter for investors in metals, miners and energy – this miner has picked up almost 15%.

In fact, investors who took my advice and bought just 15 shares of this miner have already paid for their subscription. We’re about to send the next issue out shortly. To learn how to receive it, click here.