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The case for silver is getting brighter!  There is just no question about it:  Silver is cheap today and it is going higher soon.  I will lay out  the reasons why silver is going to outperform gold going forward as we delve into the case for silver.

Every Man's Gold!

The case for silver is indisputably clear and simple at this time.  While gold and silver are trading sideways,  locked in the trading range, silver looks to have more upside potential once the next leg up starts.  There are certain conditions that will guarantee that silver outperforms gold on the next run up.  I want to make it perfectly clear here that I am not knocking gold at this point, but rather, I want to point out why silver will close the gap and bring the silver to gold ratio back to a more normal ratio. The very same conditions that are sending gold up will push silver much higher as well.  Gold and the dollar are joined at the hip with silver in the front pocket.

Government Interference Alters The Investment Landscape!

The US Government needs to sell $2.4 trillion in treasury bills and notes in 2010.  This is a huge task in and of it self, but when you consider that China and other eastern nations have come out against purchasing U.S. debt while the U.S. Government continues it’s glutinous deficit  spending binge, the task becomes even harder.   Now add to that, the U.S. Government’s stated intention of trying to  move farther out in the yield curve and we are rapidly approaching “Mission Impossible”.  The U.S. has been borrowing short and spending big time long for the past couple of years.  At some point very soon, this patern is going to come back to bite the U.S. in the butt. Will bond buyers continue to purchase long term at low yields?  I don’t think so.  Fool me once, shame on me, fool me twice, shame on you!

Will The Fed Raise Rates Soon!

No way, no how! There is  little or no chance of the Fed wanting to raise rates any time soon. The housing market is about to enter the 2nd part of the double dip, just as the commercial paper is beginning to nose dive.   The record low refinancing rates are just too important to the fragile economy to take away anytime soon.  The only question now is how long will individuals and nations continue to run to the “safety” of the dollar?  I would think that the next leg up for gold and silver will make the wall of worry a little steep for even the slowest investor. Whether it happens in the next move or the one after that, time is running out for the dollar.

One thing is for certain, in the first few months of 2010 we will learn  how much of the low rate environment is due to buying by the Fed as part of its quantitative easing program.  There is no way they can stop it now, despite all of the lap dog presses attempts to paint us a pretty picture, there can be no turn around until we see job growth, and they know it.

What about The Dollar Rally?

The much heralded dollar rally is here and not looking that great so far. Both the Euro and Yen have been gaining because those regions released  economic data that was not as bad as predicted.

The  U.S. dollar’s rally is based on one thing and one thing alone: the prediction that the Fed will be one of the first to raise rates.  The big boys in the currency pits were pretty quick to close out their long positions as soon as the dollar showed the first signs of weakness.  It seems that in the trenches there is less optimism about the dollar than on the financial pages.

GOLD

Gold’s recent pullback from all time highs to $1,080 may be the low for this consolidation.  The price has recently moved back above $1,120 and appears to be stabilizing, but only time will tell the complete story on this move.  One thing is clear, if $1,080 is revisited and fails, than $1,000 comes into play.  If this turns in to a nuclear drop, then the low $900’s would come into play.  I don’t see that happening, but you never know.

The gold stocks have pulled back and the latecomers to the gold stock market have taken off like scalded cats.  Now the gold pundits are starting to cry wolf and predicting this is the beginning of the end for gold.  Things are starting to align for gold’s next move up!

The large funds have not been sellers of late, and the best sign of all is the revision of India’s gold purchases from 200 tons to 300 to 350 tons.  What’s a 100 tons or so among friends, right?

With gold holding above $1,000 per ounce, mining companies are profitable and they can get financing to mine more metal.  What happens when you mine gold class?  Right, you get silver as a by product.  Now we are at:

The Case For Silver!

Take a look at this round table of comments on silver that took place on August 29, 2009 before we get onto the case for silver.

The current gold to silver ratio is roughly 61 to 1.  The higher the first number, the lower silver’s price is in relation to the price of gold.  If you multiply silver’s closing price Friday of $18.41 times 61,  you get $1,123, which is close enough to Friday’s gold close of $1,130 for this discussion. Silver is on the cheap side if you compare today’s  ratio to the rate at which silver actually occurs in nature.

What is the natural occurrence of silver in the earth’s crust?  Lets go to the book,  “Abundance of Elements” for the answer.  The AGI Data Sheet 57.1, states that, on average, silver occurs at 0.07 parts per million, while gold occurs at 0.004 parts per million.  This info gives us a naturally occurring ratio of 17.5 to 1.

Existing Supplies of Silver are Declining Naturally

Year after year, industry consumes silver that is not returned to the supply base. Almost all of the gold that has ever been mined is around in the world in one shape or another.  As industry consumes silver it puts downward pressure on the gold to silver ratio.

As the dollar’s meltdown resumes, silver is going to be looked at as money, or non debt, just as gold is today.  Gold is being looked at as the the true flight to quality asset, so it follows that silver will move into that roll as well.  All that is required for this scenario to play out is time, and a couple of more dollar shocks to rock the financial world.  They are coming and soon!

Gold to Silver Ratio

Let’s take a quick look at what happens to silver as the ratio drops, based on the numbers that we just ran through at 61 to 1.  In this example I will keep gold’s price constant and we shall see how the lowering ratio affects the price of silver.

Gold at $1,130 using  61:1 gold/silver ratio equals silver at $18.44
Gold at $1,130 using  58:1 gold/silver ratio equals silver at $19.48
Gold at $1,130 using  54:1 gold/silver ratio equals silver at $20.92
Gold at $1,130 using  52:1 gold/silver ratio equals silver at $21.73
Gold at $1,130 using  50:1 gold/silver ratio equals silver at $22.60
Gold at $1,130 using  47:1 gold/silver ratio equals silver at $24.04
Gold at $1,130 using  43:1 gold/silver ratio equals silver at $26.27

I think that you can see where this is going.  All of this occurs without gold moving up in price.  When you add an increasing gold price the picture becomes even more compelling. I want to add one more ratio comparison for you to ponder.  When the monetary crisis deepens, then silver will become the ones in comparison to the gold’s hundreds in the monetary value system.  At that point silver would be valued at the natural occurrence ratio of 17.5 to 1.

Gold at $1,130 using  17.5:1 gold/silver ratio equals silver at $64.57.

Keep in mind that this ratio represents where silver should be trading now with gold at $1,130!  Gold has moved to new highs while silver has lagged behind.  That is going to change very soon.

The Outlook For Silver

Silver will provide a minimum of three to four times the return on investment as gold, going forward. Now is the time to be purchasing silver coins, bullion and silver stocks, before the ratio starts coming down.  When people start seeing the coming inflation that results from the government’s policy of monetizing the debt, they will try to beat it by investing in precious metals, and it will be  easier to buy silver because it’s a lot cheaper.

Silver is about to become “Every Man’s Gold“.

At today’s prices, the average investor can buy silver where the the price of gold would be prohibitive.  You will see silver bullion coins and numismatics rise throughout 2010.  As a hedge against inflation, I think people are a lot better off in silver.  If you can afford gold, go for it on dips, but you would be wise to take advantage of the leverage that silver is currently offering.

It is imperative that you see the big picture and not lose sight of the forest for the everyday ups and downs of the trees. History tells us that silver will outperform gold, on a percentage basis, as this bull goes forward.  Big money will be made in silver over the long haul.

I prefer bullion coins as close to spot as possible.  If you are afraid of confiscation, then buy numismatics, but I don’t think that argument is valid.  If confiscation comes, there will be far more important worries to concern yourself with, besides, do you  know anyone who would comply with a confiscation law on privately held bullion whether it be silver or gold?  That’s as big an oxymoron as honest government!

On the stock side, those of you that follow me know that I love Silver Wheaton (SLW), but there are other stocks out there that should be scooped up while the price is right.  Pan American Silver (PAAS),  Silver Standard (SSRI) and Silvercorp Metals (SVM.TO) are good picks also that deserve a look.

The more you look into the case for silver, the brighter it gets!

Till next time, good luck and good trading!

Also Noteworthy:

• Silver Versus Gold
• Buy Gold And SILVER Coins On Pullbacks!
• The Politics Of Gold And Silver
• Silver Wheaton (SLW)
• Gold Predictions