A Silver Lining for Nervous Investors

A Silver Lining for Nervous Investors

The subprime mess is widespread, and it seems to be getting worse. It's certainly worse if you're about to lose your home.

The stock market is schizoid -- up one day and down the next. If you're a day trader, this volatility is pure heaven; if you're getting ready to retire, it's likely to give you a heart attack.

Big Deal

As for commercial real estate, it's a great market. I just bought a 350-unit apartment house in Tulsa with an assumable loan at a 4.9 percent interest rate. Rents are low, the oil business is creating jobs, and demand for apartments is high.

As with any market, the real estate business is terrible for some people and couldn't be better for others (like me).

But as much as I love real estate, I believe the biggest opportunity today is in silver. I think this precious metal is about to become the most spectacular investment in recent history -- bigger than oil, even bigger than Google.

All That Glitters

Let me give you some reasons why:

• Silver is a consumable industrial commodity.

It's used in computers, cells phones, and electrical relays. This means that as countries like China, India, and Vietnam, and regions like Eastern Europe, become more modernized, the demand for silver will increase.

Silver is also applied in medicine. One little-known use is as a bactericide, a role silver has filled throughout history. Today, medical devices such as catheters and stethoscopes use silver, and every hospital in the western world uses silver sulfadiazine to prevent infections.

• Silver is scarcer than gold.

Gold is hoarded. It's estimated that 95 percent of all gold ever mined is still around. The exact opposite is true of silver: An estimated 95 percent of all silver ever mined has been consumed.

Forty-five percent of all silver mined is burned up in industrial uses. Jewelry accounts for 28 percent, and 20 percent has been consumed in photography. Only 5 percent is in coins.

• Silver supplies are down.

In 1900, it was estimated that the world had 12 billion ounces of silver. By 1990 it had dropped to 2.2 billion ounces. By 2007, the supply was down to 300 million ounces.

Some of the more pessimistic forecasts estimate that the world will be out of silver in about 10 years. This could be catastrophic to the world economy. In 10 years, silver might have as much of an impact on the world economy as $200-a-barrel oil.

A Safe Haven?

As a precious metal, silver is also money. And as the U.S. dollar drops, gold and silver are seen as a hedge against a loss of value. As more and more people wake up to the reality that their cash is trash, real estate is a gamble, and the stock market is too volatile, silver may be a great safe haven.

As I write, silver is approximately $13 an ounce. If industrial consumption continues and monetary panic sets in, who knows how high the price will go? Between 1979 and 1980, silver went to $48 an ounce. In today's dollars, that would be the same as $80 an ounce.

And recently, exchange traded funds in silver have been added as a way for investors to hold silver. The reason I find the silver ETF so intriguing is because an ETF represents real money -- not fake money like the U.S. dollar.

The ETF Solution

Prior to 1963, a U.S. dollar was real money that could conceivably be exchanged for silver. After 1963, it became a Federal Reserve note that was no longer backed by silver. A silver ETF is similar to old-time money, then, and as the U.S. dollar continues to drop in purchasing power these new ETFs may become the "new old money."

The significance of the new silver ETF is that it makes owning silver simple and convenient for the general public. Owning silver ETFs is easier than owning physical silver, which is heavy and requires security such as a safe. And owning silver ETFs is safer than buying a silver mining stock, which can be risky.

Silver ETFs are also pretty straightforward: If silver is $13 an ounce, you buy so many ounces at that price. If the price of silver goes up, you make money; if the price goes down, you lose money. The risk is minimized because you're buying physical silver -- you aren't buying a share of a silver company, which can go bust. As long as the ETF is honorable and protects your silver, your investment is secure. (A caveat: Silver ETFs haven't proven reliable yet, so use caution if you take this route.)

A Rich Find for Investors

My prediction is that the industrial demand for silver will continue to go up as the wider world becomes more modernized. At the same time, as the dollar drops in purchasing power, the average investor will wake up to the convenience of owning silver ETFs and start to buy them.

Consequently, the ETF side will dry up the silver supply for the industrial side. Someday in the near future, then -- maybe in two to five years from now -- these two forces will collide and the price of silver will go up faster than anything on the market today.

The Birth of a Silver Bug

I personally became interested in silver in 1957 as a 10-year-old boy, when I began collecting coins. I became a true silver bug when, in 1965, the federal government took silver coins out of circulation and reduced the silver content of a silver dollar from 90 percent to 40 percent. I immediately began getting bags of coins from my local bank and scratching through them looking for real silver coins.

Little did I know that I was simply behaving according to Gresham's Law, which states that good money goes into hiding when bad money enters the system. Today, I still have the silver coins I socked away as a kid.

While it's true that I could've profited more by putting my money into investments other than coins, my love of silver caused me to watch and understand the silver market. After five decades of doing so, I'm quite certain that silver will soon emerge as not just a good investment, but a spectacular one -- maybe even a once-in-a-lifetime investment. Of course, I've been saying that for 50 years now, so take my advice with a shot of tequila.

Buying In

Anyway, there are three ways to play silver:

• Buy coins from a coin dealer

• Buy shares in silver mining companies

• Cautiously buy silver ETFs through your stockbroker

The web sites for Kitco and Gold & Silver Inc. provide more detailed information.