By Mark Thomas
There are beginning to be a lot of frustrated investors right now. The turmoil in the Middle East has reintroduced volatility and uncertainty to stocks. There steady march upward on a sea of liquidity provided by the Federal Reserve is now in doubt. Energy and oil stocks began to work for a while but it seems as if the market is anticipating a pullback when tensions ease. The rise of gasoline and energy prices has put into question the record profit margins of corporate America. The normal flight to safety US Dollar has been sinking to new lows. US T bonds have done all right but that market is so distorted by Fed buying who can trust it.

With this kind of perfect storm of uncertainty and more than just potential inflation now, it is coming and it will be visible to all consumers worldwide in a matter of a few months, investors who know there history turn to the one assets class that is a store of wealth, precious metals. Gold has reached a new high but has struggled to decisively breakout. In fact it had stopped going up at the 1425 level three times before its recent breakout. However as of tonight Gold at $1429 is barely above that level and was only able to reach about 41439 or only 1% above its triple top resistance level. Then even worse if you are looking for protection from inflation gold mining stocks are a total disaster. Even with record prices their costs are going up so much and their production is stagnating or even declining and those stocks have been weak. In this kind of turmoil especially military violence in the mid-east, gold and gold miners should be one of the best places for capital.

Commodities in general also have begun to lag performance wise. They were pretty overheated to begin with and now fears of higher energy prices and higher interest rates cooling the world’s emerging markets have sent copper, grains and other commodities lower. However there is one asset class that was actually the best performing in 2010 up 84% and is up another 16.72% YTD in 2011. That is up 100% in about fourteen months and that is Silver. Silver is both a precious metal (store of value) and an industrial metal so it is acting very differently than gold which is only a precious metal, not really an industrial metal.

Silver basically had been so over supplied with so much government stock piles that in essence it was cheap for decades. In fact it was so cheap people just assume it will always be cheap. Until very recently only precious metal investors had any interest in it and they while always knew how undervalued it was, there never was a catalyst to finally bring silver back in line pricing wise historically versus gold. That was until 2006 when the first silver exchange traded fund hit the market. Like gold this made it relatively easy for an individual or institutional investor to get exposure to precious metals without worrying about storage and could access their holdings through regular brokerage accounts. Slowly but surely the investor base in gold and silver grew from just gold bugs and hard money believers to more mainstream investors.

What has happened since then is a series of events that is leading to a perfect storm for silver investors and will lead to much higher silver prices. While gold was given so much accolades for its performance from 2000-2010, Silver outperformed it by 235%. The gold to silver ratio has fallen from 48.85 to 39.5 just since Jan 20th, 2011. That was a major breakdown of a resistance level that had held for years and explains the recent outperformance of silver vs. gold. The gold to silver ratio historically for thousands of years traded about 16 to 1 and we at thesilvershortage.com think it will return to about 20 to 1. At today’s gold price of $1400, a 20 to 1 ratio would equal $70 silver or silver doubling from its current price. We predict that by the end of 2013 gold will be $2400 and silver at a 20 to 1 ratio will be $120 or 233% higher than today’s prices. No matter what you come away with from this article I want you to remember this: “We’re still early in this massive bull market in silver, don’t let its recent performance scare you away thinking you missed it”. This is going to be the best way to protect your wealth as we go through more financial chaos and the Federal Reserve’s insane policies have their full effect.

Now I’m going to go into why the fundamentals are so strong in the silver market. I’m going to be very honest with you, while the growing uses and critical nature of silver in products is important, what is driving silver prices is investment demand. The silver exchange traded funds now control over half the available above ground supplies of silver. When the demand from investors for investing in silver ends, the silver price will begin to decline, that is almost a mathematical certainty. So while that has the feel of an investment mania or bubble we at thesilvershortage.com think we are so far away from that point now, it is not a fear that should keep you from investing.

There are some simple facts about silver production you should now.

1. 70% of silver mined is not primary silver mining. It is a mining by- product along with copper, lead and zinc. Therefore most producers of silver don’t focus on it or devote large sums of capital to pursuing it.

2. It was so cheap for so long that mines closed and the cost of reining it alone made it unprofitable.

3. Just like any mining, it takes years, hundreds of millions of dollars and expertise to open a significant new primary silver mine.
4. Silver mining production can grow at 3-4% per year maximum.

5. Recycling of silver is cost prohibitive but legally mandated in more places is causing more recycling.

Bottom line new silver production can’t even meet the growth in industrial demand, much less the exponential increases in investment demand.

Silver is used in literally hundreds of devices you use every day so the demand for it grows along with world economic growth. That can be a negative such as in the crash of 2008 and was the reason gold outperformed silver that year. However it also provides a longer-term secular driver of demand with very limited supply. A supply demand imbalance that can lead to rapidly rising prices for silver investors and that has already begun.

Silver is used in almost every mobile device, smart phones, tablet, notebook and personal computers. It is used in almost every electrical switch, microwave oven, refrigerator, car and every computer keyboard. It has uses in solar power, water purification, wound care, health care, preventing bacteria growth, mirrors, film, jewelry and coins. Now just think about how many hundreds of millions of people in the next three to five years around the world that are becoming more middle class and will demand more of these products.

Now let’s look at the monetary policy situation in the US that is leading to the rise in precious metals and especially in silver:

1. The US dollar has lost 20% of its purchasing power just since 2000 and 30% since 1990. 70% of the decline in the dollar has occurred since 1978 when the mandate of the Fed was changed to a dual mandate that included full employment. Since the Federal Reserve was created in 1913, the US dollar has lost 95% of its purchasing power.

2. Right now is the first time in the history of man that all major world currencies are fiat currencies backed by nothing.

3. The total monetary supply and debt is now ten times as large as it was as recently as 1980.

4. The Federal Reserve has been more irresponsible in the last twenty eight years than in its previous seventy-two years combined.

5. The Federal Reserve after QE2 will have increased the monetary supply by 475%. When confidence returns and the velocity of money normalize, inflation will be everywhere.

Bottom line: The only way to protect your wealth from the debasement of the US dollar and the debt crisis to come is to allocate a majority or more of your assets to precious metals. They are the only asset classes that will protect and grow your purchasing power long-term in this scenario. Of the two gold and silver, silver is clearly more undervalued historically than gold.

Then you combine some factors that make this current situation in silver different from when the Hunt brothers and some middle-eastern investors cornered the silver futures market. This time the corner is thousands of investors who aren’t using the futures market where they can get screwed by rule changes. This time there are investors from all over the world seeking to protect their wealth from government destruction via excessive money printing and deficit spending! The Soviet Union, India and China were all socialist and communist in 1979-1980. Now they are semi-capitalist countries with wealthy investors who remember inflation vividly. So this time it will be investors from all over the globe, not just the west that will all be trying to get exposure to precious metals. While the gold market is large enough to accommodate them, the investable physical silver market is about $30 billion all together. The combined market cap of all the silver mining stocks probably isn’t even $40 billion and that includes a lot of companies that really. So imagine all the water behind a dam trying to go through one small open pipe and the pressure on prices from the demand will be enormous.

Courtesy: www.thesilvershortage.com