Silver Is Set to Soar

Silver Is Set to Soar

Gold just shot up to over $1,330 and ounce, a level it hadn't seen for a month. After dropping to $1,180 at the end of June -- a 38% decline from its peak and the first time in almost three years it has gone that low -- it went parabolic yesterday.

While analysts say it was likely a short squeeze that sent gold soaring, suggesting that recent gains probably won't last particularly long (despite the Fed giving assurances to the market about its monetary policy), count me among those who aren't looking at the yellow metal for the real profits, but rather its gray cousin, silver.

Silver has also recovered from its recent lows, having almost hit $18 an ounce but rising to above $20 per ounce yesterday. It's not quite as dramatic a move as gold's, but the decline was far more significant and suggests that when the bounce comes, it will be massive.

Because silver is tied more intrinsically to the economy than is gold, Fed Chairman Ben Bernanke's accommodative policies have the power to drive growth that will drag silver along with it, though some analysts think prices will stagnate for a long while yet before making any appreciable gains. Canaccord Genuity just cut its outlook for silver for the next 12 months from $32.50 to $23 per ounce (and gold, too, for that matter, from $1,750 to $1,350 per ounce).

Yet silver miners are producing record amounts of the metal. Coeur Mining said that silver production jumped 21% in the second quarter to 4.6 million ounces, with full-year production still anticipated to hit 18 million-19.5 million ounces, while Endeavor Silver hit new records as production surged 48% to 1.5 million ounces.

Even with silver's crash we haven't heard about significant cutbacks like those its gold mining counterparts have undertaken. Hecla Mining ended up cutting its dividend because it was tied to the price of silver. Also, just as we've seen with Newmont Mining and Australia's Newcrest Mining, which suspended its dividend altogether, we haven't seen capex budgets slashed anywhere near to what's occurring at Barrick Gold , though that's not necessarily of its own accord.

Now that silver's price has bounced back, miners ought to be able to stave off making cuts, and with demand for physical bullion still rising unabated, the price can return to its historical levels. There's been a long-term relationship between gold prices and silver prices of about 20 to one; though, in more recent periods, it's been around 50 to one.

In either case, silver remains significantly undervalued when compared to gold. A reversion to the mean would suggest that the gray metal has plenty of upside potential in front of it. Your best friend may still be your bullion dealer.

As much as I like silver, I still think gold has some serious upside as well. Gold has outshined the stock market with strong returns since 2000, but more recently has given way to big declines. The Motley Fool's new free report, "The Best Way to Play Gold Right Now", dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!

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