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Can Silver Outperform Gold?
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Can Silver Outperform Gold?

Even though gold recently sank to two-year lows in April, astute investors know there is only so long America’s massive debt, high deficits, systemic unemployment, and printing of money can continue to be ignored. Gold has outperformed most traditional investments since 2001, as the world’s appetite for the safe haven of precious metals continues to grow in these tumultuous global times. However, gold’s little brother silver, continues to be a vital precious metal and is thought by many analysts to have a far greater upside. Legendary investors such as Jim Rogers continue to push silver over gold. Prominent investor Eric Sprott has even gone so far as to build a mutual fund around silver exclusively.

There are three main reasons most in the precious metals community feel that silver will one day correct its lower valuation and spring to new highs. First, one must take a close look at the 16:1 rule. Silver’s ratio to gold is currently 60:1, far off the average of 16:1 it has exhibited throughout history. If gold were to settle at $1365 per ounce, silver should logically trade around $85 per ounce. For this to occur, one would expect gold to experience a dramatic correction, silver to rise while gold suffers a more moderate setback, or silver to finally get its respect and catapult to all time highs.

Silver also serves as a much more functional metal than gold, as it is widely used in photography, jewelry, electronics, batteries, and a host of other practical and consumer applications. The worldwide demand for silver stems from these needs, as approximately 10% of silver demand only comes from coins. During economic downturns, silver traditionally suffers far less than other precious metals, as the need for these basic uses continues whether or not economies are expanding or contracting.

Finally, when looking at silver demand over the last few decades, we see that while only 30 million ounces per year of silver coins were in demand in 1990, that number skyrocketed to 88 million in 2011. As countries such as China and India continue their aggressive growth, it is reasonable to assume the demand on silver will certainly grow along with it. Additionally, because the markets have ignored the historical 16:1 ratio mentioned earlier, investors flock to silver as a cheaper way to own precious metals and protect themselves in the event of another global economic meltdown. In early 2013, the U.S. Mint ceased selling 2013 Silver Eagles, leading many to speculate there was a shortage of silver as the 2012 Silver Eagles recently sold out. Could it be that the world’s demand on silver is outpacing supply? Precious metals experts have discussed the potential for silver to end up in manufacturing settings (not in coins), creating a scenario where silver might potentially rocket in price, as industrial needs supersede investor needs.

Either way it goes, good economy or bad, the demand on silver will continue to be strong. If the global economy goes into a tailspin, investors will look to silver and gold for safety. If it continues to pull out of its multi-year downturn, then manufacturing and industrial needs will be the catalyst. Whichever scenario takes place, investors can be assured that silver will most certainly climb higher.

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