1 Simple Reason Why Silver Has 161% Upside

Higher silver prices bode well for metal companies like Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW), First Majestic Silver Corp. (TSX:FR)(NYSE:AG), and Pan American Silver Corp. (TSX:PAA)(NYSE:PAAS).

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Over the next couple of years, you could make triple-digit gains in one of the most beaten-down commodities on Earth: silver.

It won’t happen overnight. But as I’ll show you today, one time-tested indicator is flashing a massive buy signal. And before the run is over, we could see prices double or more.

Let me explain.

It’s ugly in the resource space. Over the past two years, gold prices have declined 30%. The picture is even worse on the silver side, where spot rates are off nearly 50% during the same period. At these prices, miners are struggling just to keep the lights on, let alone expand operations. The situation has left precious metal prices completely out of whack with their long-term averages. More specifically, the difference in relative performance has left silver extremely cheap, especially compared to gold.

How much silver you can buy for the price of an ounce of gold is called the silver-to-gold ratio. In April 2011, you could buy 32 ounces of silver for the price of an ounce of gold. Today, you can buy more than 66 ounces of silver, nearly a five-year high.

Historically, the price of gold is around 25 to 35 times higher than the price of silver. Based on this long-term average ratio and with the price of gold at around US$1,230/oz today, the price of silver should be around US$35/oz to US$49/oz. But on Monday, silver closed at just US$18.75/oz.

This means silver is remarkably inexpensive compared to gold. Eventually, either gold prices will fall or silver prices will rise to return the ratio back to normal. And with strong silver demand, it’s far more likely that the price of silver will rise.

The thing is, silver is useful. The metal has thousands of commercial applications. It’s a critical component in all kinds of products like smartphones, tablets, and computers. And once silver is consumed, it’s gone forever. The cost to recover the tiny bit of silver from each cell phone or computer chip is enormous. It’s simply too expensive to recycle.

The world’s smartest money managers are also betting big on the grey metal. SEC filings published last August revealed noticeable buying activity in a number of silver miners including Pan American Silver Corp. (TSX: PAA)(NYSE: PAAS), Endeavour Silver Corp. (TSX: EDR)(NYSE: EXK), and First Majestic Silver Corp. (TSX: FR)(NYSE: AG). Because their costs are mostly fixed, these companies serve as leveraged bets on higher metal prices.

Hedge funds are also accumulating positions in streaming metals giant Silver Wheaton Corp. (TSX: SLW)(NYSE: SLW). As I have written about previously, billionaire investors Jorge Paulo Lemann and George Soros have each built large positions in the company. This shouldn’t be a surprise given that the company has over 800 million ounces of silver reserves, more than any other silver company on Earth.

These Wall Street insiders are sitting in closed-door meetings where you and I will never be invited. What could have them all so excited about silver? I’d say it could mean only one thing: They see an epic rally ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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