September 16, 2011
Silver prices had an exciting run-up in the year ending in April - they almost tripled, briefly touching $50 an ounce before settling back down to the low $30s.
Now, silver prices are back above $40 an ounce. That may have you feeling the urge to sell - but don't.
Resist the temptation to sell silver because this recovery is for real, and it has much further to go.
In fact, I anticipate silver prices will peak at $150 an ounce within the next 12-18 months.
The reason is simple: With central banks around the world pushing lax monetary policies, prices for all commodities - gold and silver in particular - will invariably rise.
We've already seen this happen with gold hitting a record high $1,923.70 an ounce on Sept. 7. And when gold goes higher, silver quickly follows.
That's reflected in something called the "gold/silver ratio," which shows how many ounces of silver it takes to buy one ounce of gold. Traditionally, this ratio acts as a price barometer for the two precious metals. And if you look at it right now, it's easy to see that $150 silver isn't far in the offing.
In the 19th century and before, silver and gold prices maintained a fairly steady relationship to each other in a ratio of 16 to 1. Silver depreciated against gold in the 20th century. However, it also acquired industrial uses, which is something gold never did (the two metals are chemically very similar, but silver is much cheaper and hence more suitable for industrial uses).
The gold/silver ratio briefly approached 16 to 1 in the 1980 precious metals bubble (silver peaked at $50 per ounce, gold at $875) but then fell back beyond 50 to 1, with gold trading around $250 an ounce in the late 1990s, while silver was below $5 an ounce.
Gold was the first to take off after 2000. And by 2010, gold traded well above $1,000 an ounce while silver traded at $12-$14 an ounce - a ratio of close to 80 to 1. This was unsustainable, and it resulted in the price rise of 2010-11, which at its peak took silver to $50 an ounce and about a 30 to 1 ratio to the price of gold.
Going forward, we cannot expect the gold/silver price ratio to reach 16 to 1, as it almost did in 1980.
There are two reasons why.
First, the use of silver as an industrial metal falls off sharply when the price spikes. That frees up silver supplies while investment demand for gold soars. With a more elastic supply, you would expect silver's price peak to be dampened rather than exaggerated.
The second reason is that the 1980 silver price spike was caused by the Hunt Brothers' attempt to corner the silver market. No such attempt is visible today.
So the peak ratio of silver to gold is much more likely to reach something closer to 25 to 1.
The peak in gold is yet unknown, but for supply/demand reasons it seems likely to be above $2,500 an ounce - today's equivalent of the 1980 peak, adjusted for inflation - but less than $5,000 an ounce - the 1980 peak adjusted for growth in world gross domestic product (GDP) or money supply.
That would suggest a silver price peak between $100 and $200 per ounce, with $150 an ounce the most likely outcome.
Ultimately, the market won't turn bearish until global monetary policy tightens. In fact, it will probably be some months after policy is reversed before precious metals change course. That was the case in 1980, when peak prices for gold and silver lagged by more than three months Paul Volcker's first decisive move to tighten money supply.
With the November 2012 U.S. Presidential election looming large on the horizon, we probably have at least another year of rising prices. However, we may not have as much as two years.
So, all things considered, I'd keep any silver holdings at least until prices reached $150 an ounce.
Now, silver prices are back above $40 an ounce. That may have you feeling the urge to sell - but don't.
Resist the temptation to sell silver because this recovery is for real, and it has much further to go.
In fact, I anticipate silver prices will peak at $150 an ounce within the next 12-18 months.
The reason is simple: With central banks around the world pushing lax monetary policies, prices for all commodities - gold and silver in particular - will invariably rise.
We've already seen this happen with gold hitting a record high $1,923.70 an ounce on Sept. 7. And when gold goes higher, silver quickly follows.
That's reflected in something called the "gold/silver ratio," which shows how many ounces of silver it takes to buy one ounce of gold. Traditionally, this ratio acts as a price barometer for the two precious metals. And if you look at it right now, it's easy to see that $150 silver isn't far in the offing.
The Gold/Silver Ratio
Gold and silver prices traditionally move together because both are considered stores of value in inflationary times. And while we think of gold as the premier store of value, remembering the 19th century gold standard, other societies - notably the Spanish empire in the Americas, Imperial China and Mogul India - used the silver standard and are hence more focused on silver when inflation threatens.In the 19th century and before, silver and gold prices maintained a fairly steady relationship to each other in a ratio of 16 to 1. Silver depreciated against gold in the 20th century. However, it also acquired industrial uses, which is something gold never did (the two metals are chemically very similar, but silver is much cheaper and hence more suitable for industrial uses).
The gold/silver ratio briefly approached 16 to 1 in the 1980 precious metals bubble (silver peaked at $50 per ounce, gold at $875) but then fell back beyond 50 to 1, with gold trading around $250 an ounce in the late 1990s, while silver was below $5 an ounce.
Gold was the first to take off after 2000. And by 2010, gold traded well above $1,000 an ounce while silver traded at $12-$14 an ounce - a ratio of close to 80 to 1. This was unsustainable, and it resulted in the price rise of 2010-11, which at its peak took silver to $50 an ounce and about a 30 to 1 ratio to the price of gold.
Going forward, we cannot expect the gold/silver price ratio to reach 16 to 1, as it almost did in 1980.
There are two reasons why.
First, the use of silver as an industrial metal falls off sharply when the price spikes. That frees up silver supplies while investment demand for gold soars. With a more elastic supply, you would expect silver's price peak to be dampened rather than exaggerated.
The second reason is that the 1980 silver price spike was caused by the Hunt Brothers' attempt to corner the silver market. No such attempt is visible today.
So the peak ratio of silver to gold is much more likely to reach something closer to 25 to 1.
The peak in gold is yet unknown, but for supply/demand reasons it seems likely to be above $2,500 an ounce - today's equivalent of the 1980 peak, adjusted for inflation - but less than $5,000 an ounce - the 1980 peak adjusted for growth in world gross domestic product (GDP) or money supply.
That would suggest a silver price peak between $100 and $200 per ounce, with $150 an ounce the most likely outcome.
Ultimately, the market won't turn bearish until global monetary policy tightens. In fact, it will probably be some months after policy is reversed before precious metals change course. That was the case in 1980, when peak prices for gold and silver lagged by more than three months Paul Volcker's first decisive move to tighten money supply.
With the November 2012 U.S. Presidential election looming large on the horizon, we probably have at least another year of rising prices. However, we may not have as much as two years.
So, all things considered, I'd keep any silver holdings at least until prices reached $150 an ounce.
Actions to Take: Keep your silver holdings at least until the white metal reaches $150 an ounce. If you don't already own silver here are a few ways to get in on the action.
The simplest way to buy silver is the iShares Silver Trust (NYSE: SLV), an exchange-traded fund (ETF) that invests in bullion directly. [WE DO NOT CONCUR - ETFs ARE NOT TRANSPARENT ABOUT THEIR ACTUAL PHYSICAL HOLDINGS....CV]
Another way to play silver is through silver mining companies. These have lagged silver prices in the past year but can be expected to catch up as the earnings bonanza from higher prices manifests itself. You should look for companies that are increasing silver production and trading at a reasonable Price/Earnings (P/E) ratio.
I like Pan American Silver Corp. (NASDAQ: PAAS) with a P/E ratio of 17.25.
Hecla Mining Co. (NYSE: HL), which has a historic P/E ratio of 26 but a prospective P/E ratio of 12, is also attractive. So is Silver Standard Resources Inc. (Nasdaq: SSRI). Silver Standard has a historic P/E ratio of less than 5 and a prospective P/E ratio of 17, but that includes the profit from the sale of a mine, and rapidly expanding output as new mines open.
On the other hand, I'm not so taken with Coeur d'Alene Mines Corp. (NYSE: CDE) whose largest mine is in Bolivia, not a country I trust.
The simplest way to buy silver is the iShares Silver Trust (NYSE: SLV), an exchange-traded fund (ETF) that invests in bullion directly. [WE DO NOT CONCUR - ETFs ARE NOT TRANSPARENT ABOUT THEIR ACTUAL PHYSICAL HOLDINGS....CV]
Another way to play silver is through silver mining companies. These have lagged silver prices in the past year but can be expected to catch up as the earnings bonanza from higher prices manifests itself. You should look for companies that are increasing silver production and trading at a reasonable Price/Earnings (P/E) ratio.
I like Pan American Silver Corp. (NASDAQ: PAAS) with a P/E ratio of 17.25.
Hecla Mining Co. (NYSE: HL), which has a historic P/E ratio of 26 but a prospective P/E ratio of 12, is also attractive. So is Silver Standard Resources Inc. (Nasdaq: SSRI). Silver Standard has a historic P/E ratio of less than 5 and a prospective P/E ratio of 17, but that includes the profit from the sale of a mine, and rapidly expanding output as new mines open.
On the other hand, I'm not so taken with Coeur d'Alene Mines Corp. (NYSE: CDE) whose largest mine is in Bolivia, not a country I trust.
