"Silver may become the next commodity China runs up in price, just as it's done with oil, copper and uranium," exp,ains Peter Krauthis.
Here, the 20-year gold market veteran -- and newest member of The Money Map Reporter team -- looks at the outlook for silver, and the best way to invest in the metal: iShares Silver Trust (NYSE: SLV).
"After 50 years of forbidding precious metals ownership, China's government is now taking the opposite path – encouraging its citizens to invest in silver. Chinese investors can now buy silver bullion in 500 gram, 1, 2, and 5 kilo bars.
"But this is not just a supply-and-demand story. Or the crazy notions that China's investors are going to 'corner the market' on silver. Rather, it's China's rationale for buying silver and the coming consequences that investors should take heed of.
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China sees an impending drop in the value of the U.S. dollar, the currency in which much of the country's reserves are denominated. Owning silver could help the average citizen, even if the central bank is unable to diversify out of the dollar fast enough.
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Over the past 5 years, it usually took 50 to 55 ounces of silver to buy an ounce of gold. But recently the figure has hovered around 70. And that means silver has gotten cheaper when compared to gold. And now we're looking for a correction to that ratio – a leveling out to norms – which bodes well for the silver investor.
"The silver-gold ratio is pretty simple. Divide the price of gold by the price of silver. You'll see how many ounces of silver you'd need to buy an ounce of gold. And if you look back at this ratio over the past five years, you'll see that it normally takes 50 to 55 ounces of silver to buy one gold ounce.
"Sometimes though, this ratio gets stretched to an extreme, creating an opportunity. At the height of last fall's stock panic, it had shot to 84, making silver an extremely cheap metal. Today, the Silver-Gold ratio has partially corrected from 70 to the 65 level.
"But I don't expect it to end there. Rather, it's likely to work its way back to 55, and probably even farther. Like so many other sectors, precious metals prices tend to overcompensate as they 'revert to the mean.'
"Also, keep in mind that the silver price is most dependent on the gold price. When gold says jump, silver asks how high.
"And another bullish factor for gold and silver is impending inflation. Massive increases in the money supply over the past 12 months have set the stage for gold and silver to soar over the next couple of years.
"Add to this the fact that silver is a small market, and you can see why its price will get an amplified boost. That's why this fall is shaping up as a great time to add silver to your portfolio. Already since the start of the year silver is up 33%, while gold is up a more modest 8%.
"The simplest way to invest in silver is through the iShares Silver Trust. This exchange-traded fund provides an easy and cost-effective way to include silver in your portfolio, with 0.5% annual expenses.
"Each share is the equivalent of one ounce of silver. In the three years since inception, SLV has accumulated a hefty $3.91 billion in assets.
"And even during last fall's market meltdown, SLV's holdings remained nearly flat, around 220 million silver ounces. Since then, its hoard has grown a further 27% to 280 million ounces. That's a testament to investor commitment.
"My advice: SLV has already made it as easy as it gets. Buy the iShares Silver Trust and use a 25% trailing stop to protect your profits and your principal."
