Top 5 reasons to invest in silver bullion

New industrial uses for silver including use in solar panels and iPads has grown by 18 percent in the last year.

With commentators predicting the demise of fiat currencies in favor of asset-backed regional currencies, here are 5 reasons to invest in silver bullion over gold:

1) The current silver to gold price ratio doesn’t align with historical trends. “Throughout human monetary history the Silver to Gold ratio hovered in the 10-1 range until the invention of futures and options trading in metals,” writes silver bull Bix Weir at RoadtoRoota.com. “After the massive manipulation maneuvers by the Banking Cabal the silver-gold ratio now stands at over 62-1.”

2) Thanks to its relatively cheap price point compared to gold, silver’s much more accessible to everyday investors. Lower priced assets are typically subject to more volatility than higher priced assets. A mania in precious metals would likely press silver up higher and faster than gold.

3) Unlike gold, a large percentage of the silver that’s mined is used in unrecoverable industrial products, which prevents the worldwide silver bullion supply from continually accumulating. Industrial demand for silver has expanded in recent years from flat screen TVs to iPads and solar panels. “We’ve seen in the last year the growth in that type of use increase about 18%,” Phillips Baker, CEO of Hecla Mining, tells TheStreet.com.

4) Silver, gold and other precious metals will serve as hedges against inflation if investor confidence in the Dollar or Euro erodes further. Other geo-political problems can also push investors toward safety trades in gold or silver as evidenced by a surge in prices during the Egyptian riots.

5) In dollar amounts, the relatively small size of the silver bullion market makes its price sensitive to institutional investments. If hedge funds and mutual funds begin taking long positions in the silver bullion market, prices would spike significantly.

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When should I sell my gold?

Ultimately, the question of when to sell your gold comes down to whether or not you believe the existing fiat currencies can survive the looming inflation.

If you’re holding gold as an investment or a way to protect your capital from inflation, you still need an exit plan. Ultimately, the question of when to sell comes down to whether or not you believe the existing fiat currencies can survive the looming inflation – or perhaps even hyperinflation – that many analysts see on the horizon.

A call-in commentator on Jim Puplava’s Financial Sense Newshour recently asked the host when he should plan to sell his gold.

“It’s going to be when the currencies collapse, and it’s going to be when governments come up with a new currency order,” Puplava says.

“Maybe they’re going to monetize it. They’ll monetize gold. They’ll have to have some kind of gold backing because we know the fiat system is in its end game route right now. All fiat currencies are depreciating. And it may be that they come up with regional currencies.”

Puplava envisions an Asian Block, a European Block and a North American Block of currencies all backed by some sort of tangible asset.

“By the time you have a currency collapse,” he says, “people no longer trust the paper. So, if they’re going to come up with any kind of solution, they’re going to have to come up with a solution that’s going to give the currency … some kind of credibility, and I think it will probably be the re-monetization of gold. At that point, you’re going to have your exit strategy.”

I’m not entirely convinced that the Euro, the Dollar and the Yuan are doomed. It’s almost too difficult to fathom. But it’s clear that we’re in extraordinary times. Countries around the world are in a race to de-value their currencies as they try to lessen their debt burdens. If one of those countries defaults or spirals into hyperinflation, the problem could spread globally, and the implications might be worse than we’d like to admit.

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Three signs gold is in a bubble in 2011?

First, let me say I think gold prices will end 2011 higher than they’ve started the year. We seem to be buried deep in a bearish January snowdrift. The same thing happened to gold prices in 2010. Bullion popped through Jan. 12, then shed nearly $100 an ounce before bottoming out on Feb. 5.

Every year, though, the January calls for “bubble” seem to frighten away skittish investors. Unless, the Fed announces some unexpected interest rate hike, I can’t see much disrupting gold’s upward climb after we dig our way out of this sell-off. Apparently, I’m one of the few out there who feel the same, though.

Here are three signs that I might be wrong and we really might be in the midst of a bursting gold bubble in 2011:

1) “Capitulation and panic.” Those are strong words, but apparently, that’s how a Hong Kong dealer described the gold market on Tuesday, according to Adrian Ash of BullionVault. Gold investors truly feel scared, and they’ve pushed the price of bullion down 5.9 percent since the start of 2011. That’s gold’s worst start to a year since 1997’s 6.3 percent drop in January.

2) The “experts” say we’re in a bubble. Bloomberg’s quarterly data and news-feed terminal users poll found that more than half of the investors who use their product believe “gold is in a bubble.” “Nearly twice-as-many respondents say they will cut gold positions by July as say they will increase them,” Ash writes.

3) Hedge funds are trimming gold futures positions. Over the past week, “Small Speculators” have been accumulating bullish options in gold. Long futures’ positions held by “Large Speculators” (i.e. hedge funds) on the other hand have dropped at their fastest rate since July 2009, per the VM Group’s latest Precious Metal Investment Weekly. The large spec futures’ position tumbled by 1.24 million ounces on the Comex last week.

The only bright spot? Those same Large Speculators appear to be bullish on silver. Perhaps they don’t dislike gold so much as they expect silver to shine more brightly in 2011.

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China silver demand in 2011 expected to spike

China’s silver demand in 2011 could spike as the country is uniquely positioned to grow inflation while simultaneously allowing their currency to rise against the dollar.

China silver demandThe recent pullback in silver prices could be an excellent buying opportunity for investors, as China silver demand could spike in 2011 according to analysts. Dr. Jeffrey Lewis of Silver-coin-investor.com argues that China is setting the stage for “vacuuming” up the world’s silver supply. His logic boils down to two factors:

1) Domestic demand for precious metals in China surged last year – particularly for gold. China shifted from being a net exporter of gold in 2009 to being a net importer. Indeed, Dr. Lewis writes, China’s gold imports grew by some 500 percent during the first 10 months of 2010. China was still exporting silver last year, but the export rate plunged 60 percent during the first three quarters of 2010. Silver mines were finding domestic buyers for silver where they couldn’t in the past, and that indicates that demand for hard assets and commodities are in the midst of a bull rally in China. As China’s middle class starts to expand, the demand for silver as an investment could outpace gold thanks to its lower cost of entry.

2) In general, gold and silver are looked at as alternatives to currency when investors suspect inflation will rise. China’s attempts to curb inflation through monetary tightening seem to indicate fears of inflation will abate there, but it’s easy to forget that China’s goal isn’t to eliminate inflation. They’re allowing their currency to appreciate very slowly and methodically against the dollar.

China is targeting a 5 percent increase in the value of the yuan against the dollar in 2011, according to Dr. Lewis. That’s more than 2010’s rise of 3.6 percent. As the yuan rises, though, purchasing power for commodities also increases. “Each 5 percent uptick in the Renminbi is the inverse decrease of 4.77% in actual commodity prices,” Dr. Lewis writes.

With a rising yuan, silver prices will be relatively cheaper for Chinese buyers than they will for dollar-based silver buyers. Chinese investors will get more bang for their buck with every ounce of silver they buy, and that will push up silver prices for U.S.-based buyers. Both factors (and China’s enormous trade surplus) could drive a spike in silver prices in 2011, particularly since China is one of the few countries in the world that are positioned to grow inflation while simultaneously allowing their currency to rise against the dollar.

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How much silver is there in the world?

The supply of silver as a bullion-grade investment can be more easily calculated than the total worldwide supply of silver.

How much silver is there in the world

Quantifying the total worldwide silver supply is difficult as silver has been used throughout history for coinage, silverware, jewelry and in industrial applications. That said, the supply of silver as a bullion-grade investment can more easily be calculated. Market estimates from ArabianMoney.net suggest the total worldwide supply of investor-grade silver bullion is roughly 1 billion ounces. That’s less than half the supply of investment-grade gold bullion, as gold is more frequently saved as a hedge against currency devaluation.

Based on today’s prices, the total supply of investment-grade gold bullion is worth $4.3 trillion. The total supply of investment-grade silver bullion is worth $28.8 billion. During inflationary periods, owners of scrap precious metals such as jewelry will likely sell their gold scrap, not their silver scrap, as gold commands higher prices. This fact can lead to investment-grade silver demand out-pacing the demand for investment-grade gold bullion.

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Projected silver price for 2011? $50+ per ounce

Based on silver’s returns over the past decade, a price target of $50 per ounce in 2011 doesn’t seem out of the question. The recent dip in prices might be a great buying opportunity if you haven’t added the metal to your portfolio yet.

Silver returns 2001-2010All told, silver prices shot up more than 80 percent in 2010. Who knows where silver prices will go in 2011, but taking a look at the precious metal’s returns over the past decade could give us a rough idea. Based on analysis from Jeff Clark at CaseyResearch.com, silver forecasts of $50 per ounce in 2011 don’t seem unreasonable.

First, take a look at the past decade’s returns for silver (see Clark’s chart to the left). Excluding the decline in silver prices in 2001 before the start of the bull run in metals, the past decade averaged a silver return of 27.5 percent. If silver returns that average in 2011, expect the metal to rise to $39.41 per ounce.

With the threat of ongoing currency devaluation around the world, though, it’s not unrealistic to expect silver to match or come close to 2010’s returns. If silver matches 2010’s returns in 2011, look for the metal to rise to $56.22 this year.

If you really want to jump into the deep end of the pool, let’s look at where silver might go if it matched the all-time record gains the metal set in 1979. Silver price manipulation and the threat of rampant inflation pushed prices up more than 267 percent that year. If silver did the same in 2011, we’d be looking at prices of more than $113 per ounce by the end of the year.

If the Fed can manage to keep the dollar from crashing this year, gains will be subdued. If inflation sets in (as many investors have been calling for since 2008), expect returns to be substantial. Either way, silver at $50 per ounce in 2011 doesn’t seem out of the question, and the recent dip in prices might be a great buying opportunity if you haven’t added the metal to your portfolio yet.

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How to stomach volatility in gold and silver markets

It doesn’t matter what gold and silver prices do in the short-run. It’s the end result (inflation) that everyone knows is coming that’s important.

One of the trickiest parts of investing is refusing to get caught up in the day-to-day whims and volatility of the markets. I learned this the hard way in 2008. I was just getting started in stocks, and I thought banks were getting unfairly punished by the markets. I bought at precisely the wrong time, and watched some 60 percent or more of my portfolio evaporate. I was eventually forced out of my positions courtesy of a margin call. If I hadn’t been trading on margin, I would have been in the green by now, but alas, I didn’t have enough of a cushion to absorb the panic that struck the markets just a few short years ago.

It was a valuable lesson, and it’s one that I keep thinking about as I watch the volatility in the gold and silver markets. Over the past 30 days, writes analyst James West, the price of gold has swung between $1,340 and ounce, and $1,420 an ounce, giving it a volatility ratio of 5.6%. Silver, in the same period traded between $25.38 and 30.50, which gives it a 16% volatility ratio. Oil’s volatility range over thirty days lies between $80.28 and $90.87, or 11.65%.

Unlucky timing in your silver investment means you could be down double-digits on your precious metals investment in just four short weeks. That’s not a good feeling. During such times, though, it’s particularly important that you look at why exactly you’re investing in gold and silver in the first place.

For me, it’s not so much certainty that the price of metals is going to keep rising; it’s rather a certainty that the value of the dollar is going to keep falling. QEII is nothing more than a fancy name for borrowing cash. The U.S. government is pulling out its debit card in an attempt to spur banks into lending, small businesses into hiring and big fish investors into scrambling out of bonds and into riskier, more lucrative investments such as stocks.

When money’s cheap, it makes no sense to leave it stashed in a money-market account. Even my “high-yield” Virtual Wallet savings account with PNC is pulling in just 1 percent a year. That’s pitiful compared to the nearly 20 percent returns I could get from a well-picked REIT. We’re in an environment where borrowing pays, and that’s precisely the sort of environment that breeds bubbles. And the writing on the wall says that the bubble is going to be in commodities. Demand for things like gold, silver, copper, coal, oil and natural gas – even wheat, cotton and sugar – is going to keep rising, even as the value of the dollar and other currencies falls. That will push up commodity prices over time.

It doesn’t matter what prices do in the short-run. It’s the end result that everyone knows is coming that’s important. Keep that in mind while your silver stocks bounce around like a buoy in a storm, and you’ll be a lot better off than you would if you keep checking the charts every 20 minutes. I learned that the hard way, and I expect a lot of people are doing the same thing right now. Don’t be one of them, and you stand to come out ahead of the inflation that’s just starting to peek over the horizon.

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Shares in Silvercorp Metals Inc. (SVM) get hammered

One of my favorite silver mining stocks, Silvercorp Metals, Inc. (NYSE: SVM), got hammered yesterday on a double-whammy of bad news. The China-based silver miner was downgraded from ‘outperform’ to ‘market perform’ by BMO Capital Markets and they announced a sale of $100 million in stock.

One of my favorite silver mining stocks, Silvercorp Metals, Inc. (NYSE: SVM), got hammered yesterday on a double-whammy of bad news. The China-based silver miner was downgraded from “outperform” to “market perform” by BMO Capital Markets, according to AmericanBankingNews.

Silvercorp also announced it was selling 8 million common shares at $12.70 per share in a bought deal worth $101 million. The dilution will have to be absorbed by the market, as evidenced by yesterday’s stock decline. Silvercorp’s 3.3 percent tumble came even as silver rallied over $30 per ounce in late-night trading yesterday.

Trading volume was abnormally high in SVM yesterday with more than 7.4 million shares changing hands. On a typical day, the stock trades just under 3 million shares a day. Even with the stock’s fall factored in, Silvercorp’s trading at a price-to-earnings ratio of 44.68. That’s slightly higher than Pan American Silver Company’s P/E (NASDAQ:PAAS) of 44.02, but I’d still be willing to bet on SVM. They’re half the size of PAAS, and they produce silver for cheaper. I don’t see Silvercorp falling for long.

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Top five small-cap silver mining stocks

Here’s a short list of my favorite junior silver mining stocks that trade on major U.S. stock exchanges.

A recent poll on one of my favorite finance sites, www.financialsense.com, asked readers how high they see silver going in the next two years. The options?

  • Between $30 and $50 per oz.
  • Between $50 and $100 per oz.
  • Not sure – it depends on many factors
  • If we get deflation- silver prices may go lower
  • If the Fed keeps printing- well north of $100 per oz.

Readers there overwhelmingly voted for “between $50 and $100 per oz.” or “If the Fed keeps printing – well north of $100 per oz.”

If that’s really the case, the biggest beneficiaries will be small-cap silver mining stocks. Since, it’s a tough space to find stocks in without venturing onto expensive exchanges outside of the U.S., I thought I’d provide five silver stocks you can investigate further – all of which trade on major U.S. exchanges:

  1. Silvercorp Metals Inc. (NYSE:SVM), up 92 percent YTD; Market Cap: $2.1 billion
  2. Mag Silver Corp (AMEX:MVG), up 91 percent YTD; Market Cap: $631 million
  3. Endeavour Silver Corp. (AMEX:EXK), up 75 percent YTD; Market Cap: $449 million
  4. Alexco Resource Corp. (AMEX:AXU), up 104 percent YTD; Market Cap: $415 million
  5. Mines Management, Inc. (AMEX:MGN), up 11 percent YTD; Market Cap: $72 million

Analysts call for $50 silver in next “two to three years”

The average gold-silver ratio over the past 100 years has been somewhere around 45:1, but that its fallen as low as 15:1 during extreme price movements. Given the high cost of gold, I expect silver to look more attractive to both institutional investors and individual investors who want to hedge against inflation.

The high gold-silver ratio that peaked in November of 2008 has been gradually eroding over the past two years. That’s been a big boon for silver bulls, and many expect the trend to remain intact throughout 2011. At least one analyst is calling for $30 silver next year, and $50 silver in the next 2-3 years.

“Silver is in effect playing catch up with gold,” writes the International Business Times. “It remains undervalued versus gold on a historical basis. The gold/silver ratio remains favourable to silver at 50.25 ($1,367/oz divided by $27.20/oz) and the ratio is falling.”

The article points out that the average gold-silver ratio over the past 100 years has been somewhere around 45:1, but that its fallen as low as 15:1 during extreme price movements. Given the high cost of gold, I expect silver to look more attractive to both institutional investors and individual investors who want to hedge against inflation without going all in with gold.

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