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The Most Compelling Argument for Owning Silver I've Ever Heard

By Sean Goldsmith
Saturday, February 26, 2011

The talk of the investment industry is a video making its way around the internet right now...

And no... it's not the popular "End of America" video I'm sure you've seen.
 
The video is footage of expert resource investor Eric Sprott of Sprott Resources discussing precious metals at Casey Research's excellent Gold & Resource Summit late last year. If you're interested at all in precious metals, Casey's work is a "must-read," and this video is a must-watch (click here to see it on YouTube).
 
Eric Sprott is one of the world's best investors... probably the best investor you've never heard of. He specializes in natural resources, and he's a big precious metals bull. He holds 70%-80% of his fund in gold and silver (he says silver is his largest holding). In the video, Sprott makes the most compelling argument to buy silver I've ever heard...

In short, the world is out of silver. Sprott says aggregate investment demand for silver between 2000 and 2009 was 293.8 million ounces (according to the GFMS, the world's foremost precious metals consultancy).
 
Using his own numbers, Sprott compiled the silver holdings for seven large investors, including himself, iShares Silver Trust, ZKB, GoldMoney, and so on. Just those seven entities own 519.6 million ounces of silver... That's 225.8 million missing ounces. And again... that's only seven investors. It doesn't include central banks, individuals, hedge funds, etc.

It's obvious, as Sprott notes, silver data has been "very, very misstated." Sprott ends his speech saying, "There's $22 billion of silver available in the world, of which the ETFs already own half... and between you guys and us, we probably own the other half... which means there's nothing left."

Sprott's comments remind me of a conversation I had with a friend this week... My friend is one of the largest gold and silver coin dealers in the country. He said he hopes silver retreats, because the coins are going crazy. "People have no idea how small the market is," he said. "I've seen prices jump 10% in the last week."
 
Sprott's argument only takes the investment demand for silver into account. And while investors do hoard silver, more than 95% of today's demand for silver comes from industry. And when that silver is consumed, it's gone forever. Silver's current production is just enough to meet the industrial demand. In other words, there is virtually zero new silver available for investment purposes.

The U.S. Congress established its monetary system in 1792 and agreed to mint coins using both gold and silver. At the time, you needed 15 ounces of silver to buy one ounce of gold. (In other words, what we call the "silver-to-gold ratio" was 15:1.) But in the early 20th century, world governments stopped backing their currencies with gold. The ratio went haywire, cracking 71:1 during the Great Depression. Today, the silver-to-gold ratio is 43:1.

But for the first time in decades, people are viewing silver as a monetary asset again. And when silver's viewed as money, the ratio contracts. Will we return to the 18th century ratio of 15:1? Probably not. Even if silver doubled while gold went nowhere, the ratio would still only be 22:1.
 
We've been asking readers to buy gold and silver for a decade. And if you haven't already bought, it's not too late. Yes, precious metals are more popular than they were a few years ago, but we're far from a top. If you bring up your bullion holdings in conversation with a table of friends, you probably won't get the weird looks you would have years ago... But you'll still be alone in your ownership.

Don't speculate on gold and silver prices. Gold is money. Silver is money. Buy them as a form of savings, setting aside a chunk of cash each month just for bullion. Store your bullion somewhere safe (like self storage). And leave it.
 
Before you realize it, you'll have considerable wealth in precious metals. And as Eric Sprott has outlined, you'll likely see a huge increase in value when the world wakes up and realizes we're out of silver.

Good investing,

Sean Goldsmith




Further Reading:

"I'm not the kind of guy who lives in a concrete bunker," Doc Eifrig says. "I don't think the world is about to end. But I buy this stuff just like I buy car insurance." See what he's talking about here.
 
Silver is near 30-year highs. And the price of gold has doubled since 2007, reaching unprecedented heights. Don't miss Steve's essay on the safest way to buy silver today, and the gold trade that led his True Wealth readers to 995% gains here: My Best Trade Ever Is an Even Better Deal Today.

Market Notes


CHART OF THE WEEK: ALL ROADS LEAD TO ATHABASCA

This week's chart is another reminder that all roads lead to Athabasca.
 
Just days ago, a friend asked us how to invest in oil if the Middle East erupts in revolution. Our answer is one we've given for years in DailyWealth: Own a position in the Athabasca oil sand deposit, located in Alberta, Canada.
 
As Matt Badiali recently highlighted, many factors make Athabasca's tar sands attractive... and the largest source of U.S. oil imports. Our second largest source of imports is Mexico, whose production is in terrible decline. Another top-five supplier is Venezuela, which is run by a U.S.-hating lunatic. Yet another top-five supplier is Nigeria, which is one of the most corrupt countries in the world.
 
Canadian oil, on the other hand, is located in one of the least corrupt countries in the world... one happy to do business with the U.S. It's the world's second-largest known deposit... and just a pipeline ride away from your fuel tank. This oil isn't located in a dangerous offshore deposit, either. It's landlocked. We know it's there.
 
As you can see, many factors make the tar sands the ultimate "anti-Middle East" oil asset. Any bad news from that region... or Africa... or Mexico... or Venezuela... or an offshore drilling rig makes this deposit more valuable. And we can see how "all roads lead to Athabasca" by noting blue-chip oil sands play Suncor Energy (SU) has spiked 18% in the past month.

Canadian oil sands are soaring

Stat of the week

$3.28


Average price of gasoline in the United States this week... the highest since October 2008.

In The Daily Crux



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