What Is the Fundamental Upside for Silver Prices in 2011?

by: Kurtis Hemmerling

Although there are many sides to this issue, this is how I see the long-term case for silver:

  • Industrial usage has been slowly rising over time. Because industrial use makes up such a large portion of total demand, this will play a long term role in rising prices. I read on one silver mining corporation website that analysts expect industrial silver usage to climb 4x over the next 10 years.
  • Global silver supplies have dropped over the past years, although a modest increase was expected for 2010.
  • Gold is tied more closely to a monetary hedge. If the economy continues to improve, a liquidation of gold supplies could put some downward pressure on prices. While there is a link between silver and gold prices, and silver is also used as a hedge, when the economy turns up it increases the industrial demand of silver.
  • The gold/silver ratio has a vast range from 14 to 90 and currently sits in the high 40s.
  • Silver ETFs have greatly increased overall demand.

Where does that leave us? The surge in silver investing has greatly impacted supply, increased demand, and prices have popped up to nearly $31 at the beginning of the year. The long-term picture for silver looks very strong, although investors now can greatly affect prices in the short-term.

Gold and Silver Price Forecasts and Predictions for 2011
Let’s assume Goldman Sachs (NYSE:GS) is correct with the 2011 average price of $1,329 for gold. Industry is quite dependent on silver, although over time they may find cheaper alternatives if prices go through the roof. Take into consideration how the silver market was cornered in 1980 when prices spiked to almost $50. Adjusting for inflation, we have a potential to pop to $128 if that short-lived phenomenon were to happen again. Still, even with a more reasonable gold to silver ratio of 30, prices could go up to $44.

So what’s my forecast? While there are many more angles to the picture than this, I can easily see silver staying above $30 this year, with some wild spikes that could go to $40+. Of course, the biggest wildcard is how the market opened with silver ETFs, and if someone does decide to corner the market at just the right time ... well, let's just say we won’t be talking much about 1980 anymore.

Some silver stock plays are as follows:

  • Silvercorp Metals (SVM)
  • Pan American Silver (NASDAQ:PAAS)
  • Silver Wheaton (NYSE:SLW)
  • Silver Standard Resources (NASDAQ:SSRI)
  • First Majestic Silver (NYSE:AG)
  • Coeur d'Alene Mines (NYSE:CDE)
  • Endeavour Silver (NYSE:EXK)
  • Hecla Mining (NYSE:HL)
  • Mines Management (NYSEMKT:MGN)
  • Mag Silver (MVG)

A very popular silver ETF is SLV; others include USV and SIVR. Although you could also use a 2x leverage fund with AGQ, and if you think silver is a sell there is a 2x leveraged short silver fund with ZSL.

A Technical View of Silver Prices
Silver appears to be on the verge of a new trend. With the ADX well below 20, it is poised to have strong legs if prices can creep upwards over the next week or two. The last time a momentum was below 20 in an oversold position (tracked by Slow Stochastics with 39 periods) was when silver was at sub-$18 prices. The momentum has popped upwards. The 10-day moving average has been surpassed. Net buying as tracked by the On Balance Volume indicator is just about to exceed the 14-day average.

It's altogether possible that the next big silver rally is just about to begin.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .