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Silver: The New Gold
New York: December 20, 2010
By John Stephenson

While gold is garnering all of the headlines recently, silver—gold\\\\\\\'s slightly shy sister has been on quite a tear. Gold is up nearly 25% this year, but silver, the new gold is up almost 70% this year. And there appears to be no end in sight for silver\\\\\\\'s dramatic rise. Unlike gold, which is trading more than 65% above its all-time high of $850 per ounce, silver is still more than 40% below its all-time high of just over $50 per ounce.

Silver and gold are moving sharply higher because they are money. And as the U.S. and Europe warm up the printing presses to help monetize the staggering debts they\\\\\\\'ve rung up over the last 25 years, investors have flocked to these traditional save havens. Silver\\\\\\\'s track record as a former currency has been a long one. Most notably it\\\\\\\\\\\\\\\'s been used by the United Kingdom , whose pound (£) originally represented the value of one troy pound of sterling silver. In France , the very word for money is argent, or silver. Up until the 1800s, the United States and Great Britain were on a silver standard before they switched to a gold standard and then, later, to paper-based monetary system.

When investors fret over the value of paper money, gold and silver start to shine since they are real things, whose value can not be inflated away. Adding fuel to silver\\\\\\\'s surge is an American dollar that\\\\\\\'s sagging under the weight of personal and government debt, which are in nosebleed territory, and investors\\\\\\\' fear that the Federal Reserve (the Fed) will be forced to crank up the printing press to pay down the nation\\\\\\\'s debt.

With Ben Bernanke taking to national television to talk up the benefits of Quantitative Easing Two (QE2), and a recent deal to extend Bush era tax cuts, America seems unwilling to slay the debt beast. With a price tag of between $700 billion and $900 billion for the tax package the nation\\\\\\\'s already considerable deficit will surely swell. If lawmakers take the bold step of extending the tax cuts beyond 2012 and make them permanent—the result could be a markedly higher deficit and debt burden over the next decade. And that has investors taking notice and flocking to silver in droves.

Not only are investors concerned about the state of the U.S. economy and dollar, but so too are rating agencies. Just last week, Moody\\\\\\\'s Investor Service Inc. warned that the proposed U.S. tax package will worsen the country\\\\\\\'s already stretched finances. That deterioration increases the likelihood that the rating agency will change its outlook on the U.S. rating to “negative” over the next two years, it said, a signal that a downgrade of U.S. debt lies ahead.

A downgrading of the U.S. debt would have serious implications for dollar-denominated assets. Currently the U.S. and fifteen other countries ranging from Switzerland to Australia stand alone with a triple-A credit rating, which identifies them to lenders as reliable and creditworthy borrowers. If America\\\\\\\'s debts continue to spiral upward and Moody\\\\\\\'s or S&P take the bold move of downgrading U.S. debt, its borrowing costs would rise and spooked investors would abandon the dollar.

While both gold and silver will do well in an environment where the value of the U.S. dollar is falling, silver unlike gold, is used in a wide variety of industrial applications. Silver has the highest conductivity of all the metals and is used in electrical contacts and conductors, and is finding new uses in LCD and plasma screens as well as in silver-zinc batteries. It also serves as a catalyst for chemical reactions and as an industrial coating on mirrors and solar panels.

During the inflationary 1970s, the ratio between gold and silver prices was exactly 16:1—mirroring the proportions in which the two metals occur in nature. As I pointed out recently on CNBC\\\\\\\'s Fast Money, if we end up trading at the same ratio of gold to silver as in the 1970s, silver would be worth at least $88 per ounce—a more than threefold jump in the price of the metal from today. And at one-tenth the size of the gold market and better investment fundamentals, silver is sure to head higher over the next several years as the problem-plagued West continues to chock on its debts.

Finding a silver pure play is no easy task, so one thing that savvy investors can consider is an investment in the iShares Silver Trust (SLV—NYSE), the U.S. listed silver exchange traded fund (ETF). Exchange traded funds such as SLV or the gold equivalent (GLD), which are backed by warehouses full of silver or gold, tend to perform extremely well, giving investors what they want—exposure to the price of the metal in the here and now. With silver firing on all cylinders, shouldn\\\\\\\'t your investment future have a silver lining?

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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