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As Good As Gold (Only Better)

Ashish Advani (June 16, 2009)

Tuesday, June 16, 2009

Why This “Underdog” Metal Looks to Leap 21% in 2009

Also In Today’s Letter…

By Ashish Advani As I told you yesterday, all roads lead to higher gold this year.

First, we have the inflation story. Let’s assume those green shoots are leading to a recovery in the global economy. Any kind of recovery will produce a greater demand for commodities, which will push up all commodities – gold included.

On top of that, should we see any kind of sustained recovery, the Fed will have to rush into the market and quickly drain the hundreds of billions in excess liquidity that they’ve been pumping into the ailing U.S. economy.

In other words, they’ll have to do the exact opposite of “quantitative easing” (call it “quantitative tightening”). If they fail, then we’ll have a textbook inflationary environment on our hands.

And investors will rush into gold as a hedge against inflation.

Scenario #2: We don’t see inflation at all…but the market expects it. Right now, there’s a sustained fear of all these excess dollars floating around in the system will lead to inflation, especially if we’re showing the first signs of recovery. Right or wrong, that sentiment alone could drive investors toward safety…and that would lead them to gold.

Scenario #3: No recovery whatsoever. Instead, we have a “do-something” government that’s desperate to pump dollars into the system as quickly as possible.

That creates excess debt, which the government must at least try to pay for. So they issue more Treasuries. But more Treasuries equal lower returns. To pump up Treasury returns and attract foreign buyers, the Fed and Treasury allow the dollar to fall.

A falling dollar would lead to higher gold, as investors rush towards gold as a safe haven.

Like I said, all roads lead to higher gold this year. We’re already starting to see this in the price of gold. Even with the recent pullback in the gold the last three weeks, gold has still climbed over 6% in the last year (plus it’s up over 5% year-to-date).

But here’s the thing: As gold rises, its sister metal – silver – should climb even farther and faster by comparison.

As you may know, historically silver closely tracks the price of gold. Granted, the price ratio between the two can vary, but generally, when gold goes up, silver goes up. When gold goes down, silver goes down. As you can see on the graph below, silver has closely followed gold’s price for the last 10 years.

However, this year, silver is grossly lagging behind…for the first time in the last 10 years. It looks to me as if the underdog metal is about to play some catch-up…

The First Serious Gold and Silver Divergence in 10 Years…

The Race to $20 Silver

I can hear you thinking: “But wait, hasn’t silver already rallied this year?” And indeed it has. Yesterday, silver was sitting at $14.02 as the markets closed, while a few months ago, silver was barely fetching $10 an ounce. Year to date, silver has already climbed over 25%.

But, even with climbing over 25% since December, silver is still down over 15% in the past year.

Yes, silver is still posting a negative gain. That’s because silver was crushed last autumn as the worldwide recession stole nearly all commodities’ value (with the notable exception of gold). That means the price of silver is way out of whack with not just gold, but the rest of the markets.

Let’s assume for just a moment that silver only does as well as gold and rallies 6% on the year. Silver would have to climb another 21% just to reach where gold is now. (And that’s without calculating in all the gains that are coming for gold later this year.)

In fact, I’d say with all things considered, silver could be headed for the stratosphere at $20 an ounce this year, as gold climbs to $1,200.

And it’s not just because silver is playing catch-up….

The Workaholic of the Metals Family

Silver has the distinction of being a much more functional metal than gold. While gold is mainly used as a store of wealth for both jewelry enthusiasts and investors, silver is used in countless industries for a wide range of different jobs.

Various industries use silver in conductors, chemical solutions (like silver nitrate), mirrors, flatware, disinfectants, batteries dentistry, photography, certain medicines, catalysts for certain chemical reactions, etc.

So why does this matter? As certain industries continue to recover this year, silver will be in even more of a demand. That will drive up the price.

On top of that, all silver has to do is simply float up to its proper trailing price behind gold, and it will rally with little correlation to the global economy this year. And, as I said above, all roads lead to higher gold…and higher silver.

Again, if silver simply matches gold’s performance this year, then silver looks to climb 21% this year. (That doesn’t even count in how much I expect gold to rally in the coming months.)

Right now is the best time to buy –$14 silver could look extremely cheap by this time next year.

Yours in FX Profits,
Ashish Advani

EDITOR’S NOTE: Over the last six years, our resident “gold-bug” Eric Roseman has also had his eye on silver. In fact, right now he has two separate silver plays in his portfolio that have climbed over 160% since he first recommended them. And this could just be the beginning. Right now, Eric is exploring a new way to buy gold and silver. You can read all about in his special report here.

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