Why Silver Could Take-Off From Current Levels

Paul Tracy
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Posted: Dec 24, 2011 12:01 AM

Last week, I told you about the scramble among investors for American Silver Eagles. These coins, minted by the U.S. government, contain exactly one troy ounce of 99.9% pure silver.

Twice between 2008 and 2009 the U.S. mint had to suspend sales... and demand has almost doubled since then. All-in-all, in the past five years, demand for Silver Eagles has grown 31% annually. Roughly 40 million of these coins will be snapped up this year alone.

Meanwhile, silver has been in one of the biggest bull markets of the decade. During a roller coaster period for the broader market, silver has seen gains in eight of the past 10 calendar years.

So how high will silver go?

To be honest, trying to nail down a specific target number is tough to do. In this case, I think it's best to simply look at what could happen... and why.

That's where things get interesting. In 1980, silver spiked to about $143 per ounce in today's dollars -- roughly $110 dollars, or 393% higher, than today's price.


 
But things were different then. Back when silver peaked in 1980, it was primarily due to a few investors snapping up as much silver as they could.

Thirty years later, the silver story has changed. That's because silver is needed in just about every electronic device modern society runs on -- from TVs to computers to cameras to MP3 players to iPads... and that's on top of millions of investors snapping up silver as a hedge against uncertainty.

Meanwhile, silver consumption keeps climbing. About 70% of the world's annual silver output is gobbled up by industry. This percentage is rising every year, and once that silver is used, it's rarely recovered.

Since 1999, consumption in electronics has increased 120%. And many new products contain such small amounts of silver that they're not worth recapturing. More than half of all silver in TVs and computers ends up in landfills.

And it's not just U.S. consumers that need more silver. Developing countries such as China and India are using it by the truckload. After all, it takes a lot of silver to equip 2.5 billion people with cell phones.

That's why China's silver imports increased four-fold last year. In fact, in 2005, the Chinese exported 100 million ounces of silver. But by 2010, they were importing 120 million ounces.

The basic problem is that we simply use more silver than we mine.

Every day, the world takes roughly 1.75 million ounces of silver from the earth. But we consume more than 2 million ounces. This kind of consumption is quickly drying up our dwindling silver reserves.

In 1900, there were 12 billion ounces of above-ground silver on the planet. By 1990, we were down to 2.2 billion ounces. Today, we're down to about a billion ounces.

That's a drop of 92%. A vital material, prized by man since the time of the Pharaohs, is literally disappearing before our eyes... used up in industrial products. It has taken 65 years to obliterate the silver inventory that it took the world 5,000 years to accumulate.

It's a different story for gold though. Since 1950, the amount of gold above ground has surged from 1 billion to 7 billion ounces.

Action to Take -->Yet despite these dynamics, silver remains dirt cheap relative to gold. Assuming you use recent prices ($29 per ounce for silver and $1,575 per ounce for gold), you can buy 54 ounces of silver for every one ounce of gold. Seeing as silver is only 17 times more abundant on Earth than gold, these numbers seem highly disproportional.

No wonder investors seem to be snapping up all the silver coins the government can mint.

Disclosure: Neither P. Tracy nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared at www.streetauthority.com.