Gold: The one investment that feeds off both greed and fear. This irregular property has made gold one of the best and by far the most intriguing investment throughout history. There is no parallel to gold.
During the last major gold spike, we saw prices go from $200 an ounce to almost $900 in one year, a 350% gain. That was back in 1980. Since 2009, we've see gold go from around $800 to a little above $1500 -- only an 88% move in almost double the amount of time. So by this comparison, gold hasn't even begun to go parabolic ... yet.
If gold jumps, silver will follow. As of Friday May 6, the gold/silver ratio was at 42.26. At the peak of the 1980 gold bubble, the ratio was around 14: Silver hit over $49 an ounce and gold was just over $800. Now gold is trading at $1491.20 and silver is trading at $35.28. Just look at the numbers; silver has not been a bubble, it's just been playing catch-up.
I believe the recent pullback we've had in silver is going to present an amazing buying opportunity for those looking to cash in on higher gold prices. Let's run the numbers and see just how high silver could go if we experience a 1980-like scenario.
- Gold goes up 350% in one year ... we see $6,710.4 an ounce by May 2011
- Gold/Silver ratio hits 14 like it did in at the peak of the 1980 spike.
- 6710.4/14 = $479.31 silver per ounce.
Yes, I know this seems ridiculous but going by the numbers, when gold goes parabolic, these are the kind of things that can happen. I'm not guaranteeing that we will see another 1980-type spike but, the fact is, it is possible and it has happened before.
Gold won't go parabolic by itself; there must be some sort of catalyst. Thankfully, we have one: The U.S. Dollar. The dollar has been plummeting ever since the '08 financial crisis. Foreign countries and emerging markets are trusting the U.S. government less and less with each passing day, and are now opting to buy reserves of gold instead of U.S. Treasury bonds (see India and China, the two biggest growth markets).
Because of this deferred interest in U.S. bonds, the government must raise interest rates to attract more buyers. Eventually, to pay off these bonds with higher interest rates, the government will have to issue new bonds with even higher interest rates. It's a very slippery slope, and the U.S. government is sliding down head first. That is why we have seen U.S. dollar ETFs like UUP plummet consistently throughout the past year.
Do I actually think this will lead to the U.S. government defaulting on its loans or getting into any really serious trouble? No. But this concept is definitely enough to instill vast amounts of fear into investors, which will lead to the buying of more gold.
With all the factors in play, I see a very distinct possibility of gold going just as parabolic as it did in 1980, if not a little more. SLV seems to be the way too play this move. Shares have pulled back from almost $50 to $34.48 as of Friday May 6, and now is the perfect entry. Do I think SLV will get over $400 as stated in the calculations above? Probably not. But there is no doubt that if gold catches fire, SLV could easily see $100+ in the next 12 months.
So for our sake, let's just hope this economic predicament gets a little bit scarier so that we can cash in on another parabolic gold spike.
Disclosure: I am short SLV.
Additional disclosure: I intend to close my short position in SLV and may initiate a long position in SLV within the next 72 hours.
