On a global level your wealth and prosperity is in the hands of central bankers. The obvious course of action is to take some of that power back from the central banks by owning "hard money".

When choosing what type of hard money to own right now, I would choose silver over gold. There are four reasons for this...

1. THE COT SAYS BUY SILVER. The Commitment of Traders (COT) report is a good gauge for predicting lows and highs in the silver market. It shows the commitments of futures traders on the Chicago Futures Exchange. It's a bit complicated, but to simplify: the fewer open positions (open interest) on silver there are, the more bullish the set-up. That's because there are loads of potential buyers out there who haven't entered the market.
   
   In a strong uptrend the open interest will grow. There are more buyers than sellers. If the price is rising but open interest is FALLING, that's a sign the market is being moved by short sellers exiting positions rather than buyers establishing new positions. That's a sign an up-move is losing steam.
   
   There hasn't been lower open interest in silver since silver traded below $10 in 2008. That to me says buyer demand can only increase in the coming months.
   
   
2. THE GOLD-TO-SILVER RATIO IS PLUMETTING. Gold is roughly 15 times rarer than silver in nature, so for thousands of years one gold coin was worth about 15 silver coins. But last century it started rising as we started our doomed experiment with fiat money. As recently as two years ago it was still sitting at 80. So you needed as many as 80 ounces of silver to buy one ounce of gold. This then started changing drastically last year. Now you need less than 40 ounces of silver to buy one ounce of gold. The ratio is heading back to where it belongs, driven by an epic shortage of silver bullion.
   
   The ratio could even close in on its long-term mean of 15. Even if it reverted to last century's average you could see doubling in value against gold.
   
   
3. NO MORE SILVER TO SPARE. Nearly all the gold ever mined is still in storage and readily available in the form of jewelry, bars and coins. But silver has more in common with crude oil than gold – in that it has many industrial uses that actually diminish it. We used to have far more silver in storage. But it was cheap for decades and we discovered hundreds of industrial applications for it; electronics, solar panels, ID tags, medical uses, wood preservatives. The list keeps getting longer. That's left us with just over 1 billion ounces of silver bullion.
   
   Consumption affects silver and it doesn't affect gold. Silver is also a bi-product of other mining operations. It's rarely dug up exclusively. That means the primary silver supply is not a responsive as gold to changes in price.
   
   So with so little silver available, it won't take much demand to swamp the silver market and drive prices into the hundreds.
   
   
4. INVESTMENT DEMAND FOR SILVER IS SOARING. Investors are piling into silver – and will continue to do so – because it is HARD MONEY. It provides protection from the ravages of inflation and brazen currency devaluation. The saying goes that 'Gold is the currency of kings, while silver is the currency of the common man'. Well the common man in China is getting very nervous about the steady rise in inflation. In China, silver is being purchased as rapidly as it can be imported. China has now rapidly swung from supplying 10% of the silver market to IMPORTING 10% of the world's silver.

There isn't even enough silver bullion in the world to supply one ounce per Chinese citizen! It doesn't take much imagination to see where this is heading.

The next biggest consumer of silver, India, already has inflation of 9%. Annual silver imports DOUBLED in 2010 hitting 97 million ounces, taking another 10% of annual production. The Bombay Bullion Association expects demand to keep rising fast.

The US Mint, Royal Mint and Perth Mint keep setting record sales. The US Mint has even suspended sales of some of its lines. In my own experience, I've found that Australian bullion dealers are rationing sales.

Everything is pointing very clearly in one direction.

Up.

When you consider that one of the stocks I'm going to introduce you to shortly will STILL make a $20-per-ounce margin even if silver drops to $33.50 an ounce... you get an idea of how a leveraged silver play can pan out if the silver price really explodes.

If course, you shouldn't expect such an explosion to follow a straight line!

Bull markets like this don't work that way.

Commentators in the media will keep saying that each pullback on silver's way up is the end – we heard that recently.

Don't forget that most of them know less about silver than your neighbour's cat!

And ask yourself how many of them were calling silver to go up before the rally?

The shortage of bullion will be the driving force of the rally this year. But in the next few years, the supply will be the important factor. In total, one billion ounces of silver each year is produced. But investors don't get their hands on much of it – industry gobbles up almost two-thirds of it.

This leaves just 340 million new ounces of silver each year coming into the market for investors.

If you compare this to the 125 million new ounces of gold available each year to investors, it suggests that until production levels change, newly supplied gold will be 2.7 times rarer than silver.

Or in other words the gold-to-silver ratio in the medium-term should trend towards 2.7:1. So at a gold price of just $1,350 for example, then silver should be trending towards... $500.

Silver is BY NO MEANS risk free. But then, neither is cash-in-the-bank in these strange times. Buying silver to protect yourself from inflation and profit from gross monetary policy mismanagement is more appealing by the day.

Best regards,


Dr. Alex Cowie
Editor
Diggers and Drillers