-- Posted 24 November, 2009 | | Discuss This Article - Comments:

As the stock market recovers due to inflationary actions by world governments and banks, silver has taken a ride on the coattails, moving higher each day stocks head higher.  However, with calamity in the stock market all but forgotten, silver will undoubtedly outpace any recovery in the stock markets.

Sidelined Capital

As the fourth quarter comes to an end, much of what was removed from the stock markets during 2008 is still sitting on the sidelines for the perfect opportunity.  As much as $10 trillion was moved from equity investments to “safer” money market accounts and bond funds until a better investment came to light.  Although capital has no mind of its own, the investors that moved their assets from equities to safe havens have not forgotten the credit crunch, and they will be more prudent when the time for reinvestment comes.

Silver Has Proven Itself

Although gold and silver were previously shunned as an investment, investing minds and managers are now advocating that as much as 10% of a retirement portfolio be invested in physical metals.  Gold and silver are seen as a hedge against inflation, as well as a hedge against another financial crisis.   During the latest inflationary bubble in oil in 2007, gold and silver lagged the market as investor sentiment favored the bubbling energy plays.  However, with gold and silver pushing record nominal highs, in the next inflationary environment, these precious metals will be at the forefront of the recovery.

Industrial Activity

In the midst of a recession, producers cut back on their production to let inventories of their products fall.  This is done for two reasons: to keep prices high, as well as to protect themselves from any extra costs to store their goods should the economy remain weak. 

However, as the economy appears to be poised for an inflationary recovery, producers will again increase their manufacturing and their purchases of gold and silver as base metals to sell their products to happy consumers.  Demand stemming from the industrial sector will be “icing on the cake” on top of investor demand, further driving the price for precious metals higher. 

A Perfect Storm

It may appear that a correlation between the stock market and silver is forming, as the two instruments move together in price.  Although both are clearly driven by inflation, the fundamentals that exist are stronger with silver (inflation) than they are for stocks (an increase in economic activity).

Buying Before the Boom

With sidelined cash finding its way back into riskier investments and millions of new investors jumping on the precious metals bandwagon each day, there is no better time to buy.  Investors should show discretion, however, and opt only to buy physical gold and silver that they can hold in their hand.  As is often said in the precious metals industry, “If you can't hold it, you don't own it.”

Dr. Jeffrey Lewis

www.silver-coin-investor.com