What a 77-year-old German gold certificate – made worthless by Nazis – reveals about the safest precious metals investment of 2011

By Dr. Alex Cowie
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I’ll never know the real story behind my 1934 German gold certificate.

But I can be sure that the only reason it ended up as a ‘collectable’, is that the original holder’s gold became… uncollectable.

The holder deposited a huge amount of gold with a respectable German bank, just a few years before the Second World War… never to see it again.

The certificate is a cautionary tale of ‘counterparty risk’: the risk of relying on another party to deliver what they promise. Unless you take charge of ownership yourself, you will always have this risk.

This is an extreme example of counterparty risk of course. We are not at war. And it’s hard – but not impossible – to imagine any government confiscating your gold in coming years.

All the same, there is no shortage of ‘counterparty risk’ out there. The global banking system is still a shambles, and it is the big banks that hold the metal behind the ‘paper gold’.

For reasons I’ll outline below, you should own precious metals if you don’t already. And you might be surprised how easy it is to buy gold and silver, then arrange safe storage yourself. This is the more expensive route than ETFs, sure. But done right, the additional cost of purchase and storage is a relatively small extra fee to remove this counterparty risk.

I’d like to do four things for you today:
1.    First I’ll show you why now is a good time to buy gold and silver
2.    Second, I’ll illustrate why I think silver is more attractive than gold at the moment. I’ve been urging my readers to get into silver all year. Some of them may have even taken a recent hit from the pullback. If that’s you, don’t fret. Silver is about to take off again in a very big way.
3.    Then I’ll show you the best ways to buy gold and silver in Australia, and then take actual physical delivery of the metal. That way you’re not exposed to the ‘counterparty’ risk I just mentioned.
4.    Finally, I’ll show you two leveraged ways to play silver for the rest of this year.
By this I mean that as silver goes up… and, for reasons I’ll outline, I think it must… the price of a good silver stock should rise even faster. For example, if the silver price rises from $15 to $20, you’ve made 33%. But if you are a silver producer with a production cost of $10 an ounce – your profit margins have just shot up 100%.

The margins quickly become spectacular at triple-figure silver prices.

But triple-figures?

Silver is trading at $35 an ounce right now. Could you really see it top $100 sometime in the near-future? Keep in mind silver doubled in the first three months in 2011, so it’s nowhere near beyond the realms of possibility. Regardless, I did NOT make a substantial personal investment is silver this year because I thought I would turn a quick profit three months down the track.

I made it because the financial crises in Europe and America will lead inevitably to massive inflation in precious metals prices.

I made it because silver is “sound money”, as my colleague Greg Canavan labels it.

Far sounder money than the banknotes in my wallet. Here’s why I say this…
The Snowballing Case for “Hard Money”

I don’t know about you, but I’m following Europe’s credit crises or America’s debt ceiling issues, and it looks a lot to me like the financial system is heading for a brickwall.

When the banks were bailed out in 2008, huge debts were moved from private to government balance sheets. They never went away. They just switched places.

Now we’re in the next phase: sovereign debt defaults. This alone is incredibly bullish for precious metals. To understand why, you need to go back to 1971…

A world-wide floating exchange rate system was introduced in 1971. As a result the most powerful and reliable tool in the history of economics was consigned to the dustbin: the gold bond.

No one really complained at the time. They should have.

Until 1971 the gold bond was the credit benchmark that ALL other debt instruments were measured against. It was the ultimate standard of debt. The subprime mortgages crisis would have been impossible if gold bonds were still in place.

On August 15, 1971 gold bonds, in a few pen strokes, were abolished. The yellow metal was cast out of the international monetary system.

Since then, you’ve lived in a world where central banks have run amok. They’ve printed unprecedented amounts of money. Their actions have distorted currency values and stock prices.

The taps for unlimited debt were turned on full. And the soundness of this debt could no longer be judged against the soundest money of all, gold and silver.

That’s how we find ourselves here today.

The madness continues. Central banks chip away the value of real money by printing more. Each crisis you read about in the finance pages has its root cause in that ill-thought decision in 1971. And there will be more Greece and Ireland-style defaults to come. Italy could be next. Or Spain. And eventually…inevitably…America.

In the absence of radical, worldwide monetary overhaul – the return of the gold bond – the approaching catastrophe is almost too devastating to comprehend.
So What Should You Do?

Simple: own gold and silver.

And if you want to leverage investment gains as the global financial system continues to crumble, take out a position in the two speculative silver producers I’ll introduce you to shortly.

The first is a virtually unknown 29 cent miner that’s still two years off first silver production. A lot needs to be ticked off in that two years. But if the market valuation of this up-and-comer’s peers is anything to go by… this share price could be about to rocket.

My second find is even more exciting. It’s an even smaller company, but it’s much closer to production. In fact if my research is correct, it could be the FIRST EVER pure Aussie silver miner to pour silver bars.

If you have the risk tolerance, these are two powerful stocks to add to your portfolio if you think silver is going to have a barnstorming 24 months. And I really do think that…

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.
You Could See Silver $500 in 2 Years

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.

I’ve got some tips on the best ways to buy physical silver from Australia.

And, as I said, I’ve researched what I think are the two of the very best small silver mining stocks on the market right now.

At just 13 cents and 29 cents, these stocks are strictly for investors who ‘like a flutter’. But as the silver price moves higher – and these miners move towards production – you could see share price rises in many multiples over the next two years.

You’ll find my full research on these stocks – and tips on how to buy physical silver economically and safely in my newsletter, Diggers and Drillers. Right now you can take a 30-day risk free trial subscription backed by a full, money back guarantee.

You won’t be locked into anything. You can read all of my live tips and then cancel if you’re so inclined. But hopefully the quality of research – and my track record – will compel you to stick around.

To start your 30-day trial and get my full research on what I believe are the two best silver mining stocks around right now, click here.

Dr. Alex Cowie
Editor
Diggers and Drillers