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Silver's discount to gold.....

This article talks about $25 silver by the end of 2009 or Q1 2010.

I pulled a few paragraphs from the article to provide a quick overview:

Silver is abnormally cheap in relation to gold. Gold is trading at more than 70 times silver.

Investors are concerned about the fall in industrial demand and silver's more volatile nature.

History shows that the gold-to-silver ratio had been around 15 to 1 since 600 B.C. up until about the late 19th century when it climbed, according to Mark O'Byrne, director at Gold and Silver Investments Ltd.

He explains that geologically there are 15 parts of silver to every one part of gold in the earth's crust so the ratio makes logical sense. The ratio reverted back to 15 to 1 as recently as 1980, he said.

Gold climbed 5.5% in 2008, while silver dropped 24%.

Silver may soon get the catalyst it needs.

After all, "since 80% of silver that is mined annually is as a by-product of base-metal mining, the potential supply for silver this year will be dramatically down," said Paul Mladjenovic, author of Precious Metals Investing for Dummies.

"Base-metals mining is being cancelled or curtailed due to the deteriorating world economy," he said. "With many mines closing down, that means that much less silver will come into the market [and] since investor demand for silver is still very strong, that bodes very well for silver."

And when the U.S. and world economy shows signs of "meaningful recovery, recovery sufficient to prompt a pick up in silver fabrication demand, that's when silver will outshine gold once again and the gold/silver ratio will trend down," said Nichols. Hopefully that recovery will happen in 2010 or 2011, he said.

"In short, I'm looking for gold to outperform in the short term and silver to outperform later on," he said.

Mladjenovic said silver has the "realistic potential" to achieve an intermediate high of about $25 by year-end and within the 2 to 3 years, "current fundamentals, from both industrial and investment demand, coupled with much lower supply, will drive the price of silver to $50." That's silver's nominal record level from 1980.

Karnani sees "an immediate-term target of $16 for silver -- $23 to $25 in the longer term, such as the end of 2009 or first quarter of 2010."

"Silver has the most sound fundamentals and will significantly outperform the precious metals and the base metals in the coming years," said O'Byrne. "It is both a safe haven and financial insurance, but also has potential for significant returns perhaps more than any commodity, currency or asset class in the world today."

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http://www.marketwatch.com/news/story/silvers-discount-gold-sticks-out/story.aspx?guid=%7BC0A2E965%2D
87CE%2D4676%2D8A55%2DE0B3BF3DBD3E%7D&dist=TNMostRead

By Myra P. Saefong, MarketWatch

Last update: 7:00 a.m. EDT March 13, 2009Comments: 159TOKYO (MarketWatch) -- Silver's trading at an eye-catching discount to gold these days, and some analysts have been debating whether the white metal is severely undervalued given its many industrial uses and its ability to double as a precious metal.

Those are handy characteristics to have, especially in an economic environment where cash and investment options are short. And at about $13 per ounce, silver is cheap -- trading more than 70 times less than gold at $900 an ounce.

Still, the reference to "cheap" silver has been made before and investors, for the most part, have been staying away from silver because of concern about the fall in industrial demand and the more volatile nature of trading involved with the metal.

Those are red flags for the near term, analysts said. For the longer term, it could be a whole different story.

Although silver is a precious metal with a monetary history, it is much more an industrial metal than gold so it's "perceived as having more risk and greater price volatility," said Jeffrey Nichols, managing director at American Precious Metals Advisors and NicholsOnGold.com.

"The primary motivation in choosing or preferring gold over silver is risk avoidance," he said. "That's what safe-haven demand is all about."

And lately, gold has been showing signs of being an "alternate currency, which has resulted in silver investors switching to gold," said Chintan Karnani, an analyst at Insignia Consultants in New Delhi. In late February, gold prices climbed above $1,000 an ounce for the first time in nearly a year.

But "silver, we all know, will never act as a currency," said Karnani.

Adding to silver's downside is the "collapse of industrial demand" for silver, Nichols said. And that's "likely to get worse before it gets better."

Silver's plight

In the bigger picture of the whole global economic downward spiral, silver has been a not-so-obvious victim.

"Silver is the North American ... poor-man's gold and quickly disposed of in this credit crunch," said Julian Phillips, a South Africa-based editor at SilverForecaster.com. "Its heavier fall is really 'investor meltdown,' not a poor market for silver as such."

History shows that the gold-to-silver ratio had been around 15 to 1 since 600 B.C. up until about the late 19th century when it climbed, according to Mark O'Byrne, director at Gold and Silver Investments Ltd.

He explains that geologically there are 15 parts of silver to every one part of gold in the earth's crust so the ratio makes logical sense. The ratio reverted back to 15 to 1 as recently as 1980, he said.

But now that ratio is more like 70 to 1.

"The discount of silver is the highest the market has seen of late," said Phillips. "I like to call it the 'long shadow' of gold for it rises further and falls further than gold all the time."

Gold climbed 5.5% in 2008, while silver dropped 24%. See full story.

"As long as the world economy remains depressed and as long as inflation has not yet reappeared as a serious problem, gold is likely to outperform and the gold/silver ratio may move higher," said Nichols.

At the same time, the fear of a crash and 2008 losses are "preventing even hard core silver investors from investing in silver," said Karnani. And until investment demand rises, "silver will not make big northward moves."

Changing times

Still, some analysts are already seeing a return to investment demand.

Silver sales are up by 150% year on year, according to Nigel Moffatt, treasurer at The Pert Mint, which is owned by the government of Western Australia.

The higher sales are largely due to "world economic issues with more people realizing that most currencies in the world are paper based, with no intrinsic value," he said. "People are looking for more tangible assets and the stock markets aren't looking very attractive so at this stage, they seem to be flocking towards precious metals."

"Precious metals clearly have had a strong place as an investment medium for the past 5,000 years and probably no more so than today as people look for ways to preserve their savings," he said.

Investment demand in the silver market is strong, especially in the exchange-traded funds, said Chintan Parikh, a commodity analyst at CPM Group in New York. And "physical demand in the form of bullion coins and bars also remains strong."

SLV 13.04, +0.25, +1.9%) peaked at nearly 8,200 tonnes by late February before pulling back to 7,900 recently -- a year ago it was under 5,400 tonnes.

In the last three years, institutions have realized that they can invest in exchange-traded fund shares, which are directly related to the metal price, affecting the metal price directly, whereas mining company share purchases don't affect metals prices, explained Phillips.

"This has led to a diversion of funds for the silver market from mining shares to silver ETF shares," he said.
That, along with a slowdown in production of base metals -- in which silver is a by-product -- "has simply delayed a tremendous future for silver, not changed it," said Phillips.

Patience, please

Silver may soon get the catalyst it needs.

After all, "since 80% of silver that is mined annually is as a by-product of base-metal mining, the potential supply for silver this year will be dramatically down," said Paul Mladjenovic, author of Precious Metals Investing for Dummies.

"Base-metals mining is being cancelled or curtailed due to the deteriorating world economy," he said. "With many mines closing down, that means that much less silver will come into the market [and] since investor demand for silver is still very strong, that bodes very well for silver."

And when the U.S. and world economy shows signs of "meaningful recovery, recovery sufficient to prompt a pick up in silver fabrication demand, that's when silver will outshine gold once again and the gold/silver ratio will trend down," said Nichols. Hopefully that recovery will happen in 2010 or 2011, he said.

"In short, I'm looking for gold to outperform in the short term and silver to outperform later on," he said.

Mladjenovic said silver has the "realistic potential" to achieve an intermediate high of about $25 by year-end and within the 2 to 3 years, "current fundamentals, from both industrial and investment demand, coupled with much lower supply, will drive the price of silver to $50." That's silver's nominal record level from 1980.

Karnani sees "an immediate-term target of $16 for silver -- $23 to $25 in the longer term, such as the end of 2009 or first quarter of 2010."

"Silver has the most sound fundamentals and will significantly outperform the precious metals and the base metals in the coming years," said O'Byrne. "It is both a safe haven and financial insurance, but also has potential for significant returns perhaps more than any commodity, currency or asset class in the world today."

Myra P. Saefong is MarketWatch's assistant global markets editor, based in Tokyo.