Finding the Silver Lining in a Tough Economic Environment

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Author: Jim Nelson

Many of the major media outlets are reporting every day about the demise of the dollar. And so many of them are also simultaneously reporting about economic stimuli and potential tax increases coming out of Washington. What most of these outlets fail to do is report on how all of these events are connected. What else they fail to do (and much sadder, although not surprising) is their lack of reporting when it comes to what investors should do to cut their losses and make some gains. Well, since the 2008 economic downturn, many financial reporters and “experts” have jumped on the bandwagon to tell investors to buy gold…even though smart investors have been doing so for several years now. But now, government officials are at it again, with their talk of more stimuli and government bailouts. These could affect any profits one makes from gold, so it’s time to look at a backup plan: Silver. I’ll show you what I mean… How You Can Win with Silver Leaving your money under your mattress isn’t exactly the safest bet. It doesn’t take a mathematician to figure out that government stimulus plans, bank bailouts, and lower interest rates all add up to inflation. If more money is circulating due to new spending measures, the value of each dollar â€" including the money under your mattress â€" goes down. That’s why the greatest inflation fighter in the world is under stress. Of course, we’re talking about gold. Gold is â€" and always has been â€" the safest place to put your cash. It has been traded as currency, stockpiled to backup paper money (think Fort Knox), and hedge spend-happy governments. Today, its hedging attribute is important. Over the past few months, it’s become more and more difficult to buy physical gold. Even if you do locate it, what you actually pay is quite a bit more than its spot price. In many cases, these buyers were willing to spend up to 25% more for gold than its value. That’s like your broker taking a quarter for every $1 share you buy. So, if gold is too expensive, where can investors turn? Well, there’s always gold’s little brother… Silver is not commonly thought of as an inflationary hedging tool. That is, until times get tough. And I don’t think you can find too many times tougher than right now. Silver is often referred to as “the poor man’s gold.” We call it opportunity. You see, during the 1978-1980 precious metals rally, silver showed up late. Almost all of the large gains in silver came in the last few months. We see the same events unfolding this time around. As we pointed out in the past, gold has always traded for about 16 times as much as silver, until the past few decades. Currently, the ratio sits around 71. When this number falls, silver booms. Macroeconomics and ratios aside, there is one final reason we expect an enormous silver rally… About three out of every five ounces of silver come from base metal mines. Roughly 28% of all silver comes from copper mines and another 32% comes from lead/zinc mines. Both of these sources are decreasing â€" and in some cases, completely shutting down â€" production due to the overall commodity market. Only 10% of all silver comes from gold mines, which leaves just 30% of the total market to pure silver plays like Coeur d’Alene Mines Corp., Hecla Mining, and Pan American Silver. These serious cuts in production, gives us pure silver investors the inside track to cornering the silver market. We are seeing a perfect storm brewing in the silver market. If you get in now, you might just beat the rush… Of course, the trick to beating the rush is to invest in something before the mass media and/or general public are aware of it. Smart investors, who got into gold at the beginning of the decade (before the talking heads at Bloomberg and MSNBC said so), could be sitting on huge gains right now. While it may too late to make anything big from our favorite yellow metal, the traditional second-place metal could give savvy investors first place in the profits race. Finding Option-Sized Gains from $25 Silver The global economy is in a lull right now. Some expect a recovery sooner, rather than later. (Some people are already saying we’re in a recovery now.) Others, like us, think that we could see a second downturn. Either way, silver is definitely the one investment you need to own right now. Silver is the most flexible metal on Earth. We’re not talking about its malleability. We’re talking about how it is used. Let’s take the point of view of those expecting a quick, painless recovery. In that case, silver is a great investment. It has many industrial uses other precious metals don’t. As the global economy kicks back into gear, we’ll see more demand from electronics manufacturers, battery makers and solar cell producers â€" all of which use silver in their products. There are thousands of uses for silver in industry. It is used in water purification, medical machinery and, of course, jewelry. All of these industries will begin to pump out products again, which will put a strain on our limited aboveground silver reserves. Now take a look at the world through the eyes of those thinking we are going to see a second collapse. The best place to store wealth is in precious metals. Of course, gold is the most common place to store cash, but silver is no slouch. From 2006 until now, the physical holdings of silver funds have jumped 11-fold. That’s because more people than ever are interested in holding silver â€" or at least a fund that holds silver. Silver is both a way to safely store your wealth and to spend it. Over the past several centuries, silver has been used as currency. In fact, our own U.S. dollar was once backed by silver. For those expecting the worst, silver is a must-own. These ETF holdings don’t even take into account how many people are stocking up on personal physical holdings. There’s no shortage of demand. Everything is in place for another massive run-up. Gold already broke the $1,000 per ounce threshold last month. And it busted through its 2006 highs this week. Even so, silver is still lagging around $16.50. David Morgan from Silver-Investor.com notes that when gold breaks through $1,000 and stays there for a length of time, silver will shoot up. He even went as far as to say silver will break through last year’s $21 high and hit $25 per ounce sometime in 2010. Are we suggesting you buy silver? Well, yes. But we have a much better way for you to make money off this rise… Buying shares of a major primary silver miner like Silver Wheaton (NYSE: SLW) would do the trick. It’ll certainly leverage its massive reserves and production against silver’s rise and return larger profits to shareholders than simply buying silver will. But even these gains will be miniscule compared with what you could see with small-caps. We have an opportunity to get option-sized gains on silver’s rally without the downside or expiration hassles of actually buying options. By buying shares in a junior silver miner, like Hecla Mining (NYSE: HL) or Mag Silver (AMEX: MVG), we can take advantage of huge price swings without worrying about it expiring worthless, as options often do. In just a few weeks between the first of October and the second week of November, Hecla went up 33%, and Mag is up another 3%. As I write, these stocks are continually pushing into new 2009 highs ever day. When the silver boom gets traction in the market, expect small players like these to rocket as a result. And when that happens, those investors wise enough to find the right silver-based stocks will be way ahead of the talking heads still unable to make connection between government economic stimulus plans and a downsized dollar. Sincerely, Jim Nelson

Jim Nelson is the managing editor of the Penny Sleuth, which offers unbiased commentary from expert analysts and authors about penny stocks .