As we move forward in 2010 our team will continue to have a constant level of exposure to precious metals in our portfolio - even more so than in 2009 if you can believe that. The Fed has changed the way we must invest and if you don't adjust accordingly, you risk the potential of severe capital depreciation.
Cash has become a risky asset with all the stimulus programs forcing countries to print excessive amounts of money. Ask yourself: What am I doing to hedge myself against a potentially rapid depreciating dollar?
Over the next 12 months we believe silver and the miners and explorers within this sector will provide the greatest hedge against a weakening US dollar. Although we believe in gold as a solid hedge against inflation, do not be blinded by its glitter. There are too many investors out there who look like they've been hypnotized by gold - following it up and down like zombies.
In mid 2009, Jim Rogers, who is considered the greatest commodity investor of all time, said he believes he will make more on silver as opposed to gold in the future. Many top analysts and forecasters believe the same, but have chosen to speak more about gold because it is what the herd is chasing. Sometimes the popular choice is not always the best choice and a contrarian strategy can be extremely lucrative...
Silver is currently undervalued compared to its historical gold/silver price ratio of 55 to 1. During the 44 months leading up to the Great Market Panic of 2008, silver averaged 1/55th the price of gold. Silver has fallen below its average of 1/55th and has some serious catching up to do as it is not reflecting its historical store of value.
Silver has seasonal trends in its price that make it an even more interesting investment opportunity this winter. The technical's surrounding silver and its trading patterns are very clear, but have strangely gone unnoticed by many investors. Our team has spent considerable amounts of time reviewing yearly charts for silver. This is what we discovered when it comes to the trends of the valuable metal:
Silver has traditionally made its move in the winter and spring months. From the period of November to the end of May, silver has provided an average return of 21.4% in 9 of the past 10 years. This is an astounding fact and something to think about for the start of the New Year.
The potential for another 21.4% return for silver over the next 5 to 6 months is there, especially with the US dollar expected to continue its free fall at any moment.On top of that, many analysts are predicting industrial demand for silver will fuel record highs in 2010.
"As precious metals, silver benefits from many of the same market drivers as gold," said analysts at Castlestone Management. "While not typically a major reserve of central banks, investment demand has been increasing for many of the same reasons as for gold. But as a metal with greater industrial usage, it is more highly leveraged to the improving economy."
According to Angel Commodities, silver will "witness a bullish phase as new avenues of demand open up amid the existing traditional applications of the metal" and prices will trade in the range of $14.00 - $24.35. Those price levels are extremely profitable for the majority of silver miners, thus increasing the value of near term production resources or potential buyout projects (remember that).
We are entering a new era in the market where precious metals will continue to see demand increase and become one of the few hedges available to investors.
SILVER: SUPPLY AND DEMAND
In 2008, Silver saw its demand decrease by 0.9% to 832.6 million ounces (2009 report not yet issued). The only year that saw more demand was 2007. This is a trend as the price and demand for silver has been going up dramatically over the past 10 years. Despite 2008's minor decrease in demand (no surprise given the melt down), silver demand is outpacing supply year after year and when that happens, an upward trend is formed just like the one we have seen over the past ten years.
This is a perfect storm scenario with the potential for an, across the board, increase in demand and a significant rally in silver equities as our economies slowly recover and the US dollar collapses.
In 2008 the world's top 20 silver producing countries produced roughly 657 million ounces. They were short of demand by a whopping 180 million ounces. All other silver production is limited. In fact, the world relied heavily on Silver recycling efforts from photographs to try and meet demand. Unfortunately for silver supply, but fortunate for silver investors, photograph recycling programs are a dying breed thanks to digital technology. And despite the already short supply of silver, new technologies are putting even more of a strain on supply. According to Angel Commodities, an example of one "new avenue of demand" comes from the electronics industry and the use of silver in photovoltaic applications for solar energy panels, which has the backing of several government programs that encourage development of renewable energy sources.
With new industrial uses for silver increasing quickly, manufacturers are becoming very concerned with potential dramatic price increases for the precious metal. This is resulting in an industrial demand increase for large purchase orders in order to secure at least some supply at these levels. On the other side of the fence you have the silver producers, who are de-hedging themselves in order to ride the potential price hike over the coming years.
David Wilson, Societe Generale metals analyst, anticipates gold prices helping "to keep silver buoyant" along with "the proliferation of new industrial uses [helping] to tighten the market's fundamental balance." Wilson says Societe Generale expects silver to average nearly $22 an ounce in 2010 - an extremely lucrative price for silver producers and explorers.
Please review this chart to become more acquainted with Silver's rising demand:
Be sure to note Silver's price increase over the past 10 years to where it currently sits at $18.44 an ounce.
SILVER'S INDUSTRIAL USES
The beautiful thing about silver and why we favour it over gold is simple: Silver has key industrial uses outlined in the graph above that will always create and sustain a reasonable level of demand. This consistent demand limits the downside tremendously when compared to gold.
This next sentence might be the most important one in this entire report. In the past 60 years, more silver has been consumed by industry demand than has been produced.
Simple economics tells the silver story for what it is - a commodity with more demand than supply.
SHORT TERM FACTORS LEADING TO A POTENTIAL RISE IN PRICE
As our western economies expand and silver demand remains strong in the developing nations, 2010 could see record demand levels.
There is an increase in demand for industrial purposes stemming from the improvement of the world economy and global stimulus measures. Also, the increase in silver demand for investment purposes is getting viral - not quite on gold's level, but it doesn't have to be in order for us to see a huge spike in price given the lack of supply.
Eventually investors will stop buying gold and start buying silver. How many investors do you know will buy gold at $1200? $1500? $2000?
At certain price levels the risk/reward for investing in gold isn't good enough and investors will move to the next asset to hedge against inflation.
As silver and gold prices soar, majors are going to focus on increasing their reserves and will buy out top tier junior deposits. It happens every bull cycle. Companies in favourable locations, with savvy management and proven ounces in the ground will reap the benefits.
Have a great week,
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- From InvestmentU
"Silver thrives amidst world chaos. When silver exploded from $11.11 to $20.66 per ounce in 1980, oil prices were skyrocketing, U.S. racked up an extraordinary debt, and Washington D.C. was clouded with political uncertainty. And let's not forget that precious metals gained value during the Great Depression."
Sound familiar? History certainly has a way of repeating itself.
Disclosure: long silver wheaton