Can You Crush an Investment Bank by Buying this Metal?

Silver is frequently referred to as poor man's gold, and historically it's taken a back seat to its yellow cousin. But silver has taken center stage in recent months as the price per ounce soared to $30.

That's because like gold, silver is hitting multi-decade record prices. Typically the two metals trade in tandem, and with some analysts expecting gold to trend closer to $2,000 an ounce the precious metal rally looks like it may still have legs.  

For years now investors have sought safe haven from the ravages of inflation by buying precious metals. Gold grabs the headlines, but I believe that the past months have shown that it's time to seriously consider silver as the new glamour metal.

***Five years ago, you could buy silver for $7 an ounce. Since then, the price has quadrupled. More recently, over the past three and a half months, silver has skyrocketed from $18 an ounce to a Dec. 7 high of $30.50. That's an impressive 70 percent increase over an extremely short period of time.

Silver demand is rising, both for industrial purposes (solar cells use a lot of silver) and for investment purposes. Silver is a great multi-tasking metal. Although the demand from photography has dropped in the digital age, other industrial uses have taken its place, not to mention the need in making coins, jewelry and art.

But predictions are that production won't match rising demand. And the regulatory winds of change are blowing, with the Commodities Futures Trading Commission stepping up its influence over traders.

Precious metals trading can be frightening at times, with significant ups and downs in the spot market. For those who don't have the stomach for silver bullion's roller coaster market, there is a better way to play the trend - silver mining companies.

***Peter Barnes, CEO of Silver Wheaton SLW, one of the larger silver miners, recently said in this Reuters story that the metal could hit $50 in the next three to four years. From the Dec. 7 high of $30.50, that represents a potential 62 percent increase.
Mining companies typically see their stocks rise more than the price of silver because as the price of the metal increases, their margins rise even more. That's because costs are usually fixed, although they do increase production to meet demand. That can cause a rise in costs, but even with a moderate bump these companies tend to book huge profits in bull markets for precious metals. And shareholders book huge gains.

One of the interesting stories surrounding silver right now is putting pressure on the huge investment bank JPMorgan Chase JPM.

Rumors are swirling that JPMorgan is feeling the pressure of its short position in silver. In fact, an investment columnist in the British newspaper, The Guardian, claimed on December  2 that Morgan is sitting on a 3.3-billion-ounce short position. The columnist went on to say there's an Internet movement to get people to buy silver coins, spike up demand, and in turn crash JPMorgan.

A CFTC report showed that as of November 30, the four largest traders shorting silver held 37.9 percent of the contracts. That's a pretty significant short interest, and if silver trends higher these shorts will likely have to cover part of their positions or risk even greater losses. That could propel the 'poor man's gold' even higher.  

I recommend that investors consider silver mining stocks rather than bullion. What I like about mining stocks is that as the price of silver goes up, their cost structures remain the same, increasing their profitability. Since mid-July, one silver mining stock in the Small Cap Investor PRO portfolio has posted an impressive 100 percent gain.

While the shares of big companies like Silver Wheaton and Pan American Silver Corp. PAAS certainly offer upside potential, I prefer the small cap space for even bigger gains.

Further Reading: I recently put together a Special Report: Sierra Madre Silver Profits  that features three silver mining companies, all in different stages of development. With silver rising above $27 an ounce, these stocks are great buys right now. Get your copy of this special opportunity silver report here.