With Gold at $10,000, Silver Could Reach $714!
Silver escalated in price by 156.7% in the 12 months ending April 31st, 2011 compared to gold’s 32.6%. As such, the silver:gold ratio fell from 63.2: 1 to 32.7: 1 over that period and, with the current correction in precious metals prices, has gone back up to above 40:1. This is still way out of whack with the long-term historical relationship between the two precious metals and begs the question: “Is now the perfect time to buy silver instead of the much more expensive gold metal?”
Precious metal bull markets have 3 distinct demand-driven stages and we are now quickly approaching or perhaps even in the very early part of stage which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. go parabolic) in price.
Gold Going to $5,530.79 – or Maybe $6,085.54 per ozt.?
Gold went up 24% in 2009 and 30% in 2010 and, as such, there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year from a $216.55 per troy ounce (ozt.) closing price on Jan. 1, 1979 to a closing price of $843 per ozt. (for an article detailing how a troy ounce differs from a regular ounce measurement read this article) barely a year later on Jan. 21, 1980 and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks!
A 289.3% increase in the price of gold from the December 31st, 2010 closing price of $1420.70 per ozt. would put gold at $5,530.79 per ozt. – and a 289.3% increase from the April 30th closing price of $1,563.20 per ozt. would equate to a future price of $6,085.54 per ozt.! (More on what that might mean for the future price of silver is analyzed below.) That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched. (Go here for a complete list of the economists, academics, market analysts and financial commentators who maintain that gold will go parabolic to $2,500 -$15,000 per ozt. in the near future.)
Silver Going to $256.74 – or Maybe $398.52 per ozt.?
Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle along with gold. The 49% increase in silver in 2009, and 83% in 2010 attests to that in spades. During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 per ozt. on January 2nd, 1979 to a close of $49.45 per ozt. in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the Dec.31, 2010 price of $30.84 per ozt. would represent a future parabolic top price of $256.74 per ozt. - and from the April 3oth, 2011 price of $47.87 per ozt. would equate to a price of $398.52 per ozt.! (For what that might mean for the future price of gold see the analysis below.) Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.
How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time, the silver:gold ratio. Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attest. Indeed, the move from 78: 1 at the end of 2008 to 65:1 at the end of 2009 to 45:1 at the end of 2010 to 41:1 today attests to the fact that silver is on the move towards the average long-term historical relationship with gold of 16:1.
Let’s look at the silver:gold ratio from several different perspectives:
- In the last 25 years (since 1985) the mean silver:gold ratio has been 45.7:1 and is currently approx. 40.7:1
- During the build-up to the parabolic blow-off in 1979/80 the ratio dropped from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January, 1980.
- Were the % increases in gold and silver during the 1970s parabolic phase (289.3% and 732.5% respectively) applied to the 2010 year-end prices of gold and silver ( $1,420.70 per ozt. and $30.84 per ozt. respectively) the resultant prices for gold and silver of $5,530.79 per ozt. and $256.74 per ozt. respectively would equate to a 21.5:1 silver to gold ratio.
- Were the same % increases applied to the April 30th 2011 closing prices of gold and silver ($1,563.20 per ozt. and $47.87 per ozt. respectively) the resultant prices for gold and silver of $6,085.54 per ozt. and $398.52 per ozt. respectively would equate to a 15.3:1 silver to gold ratio.
Let’s now look at the various price levels for gold and the various silver:gold ratios mentioned above one by one and see what conclusions we can draw.
First let’s use the current ball-park price of $1,500 for gold and apply the various silver:gold ratios mentioned above in approximate terms and see what they do for the potential % increase in, and price of, silver.
- Gold @ $1,500 using the year-end 47:1 silver:gold ratio puts silver at $31.91
- Gold @ $1,500 using the above mentioned 21.5:1 silver:gold ratio puts silver at $69.77
- Gold @ $1,500 using the above 13.99:1 silver:gold ratio puts silver at $107.22
Now let’s apply the projected potential parabolic peaks of $3,000, $5,000 and $10,000 to the various silver:gold ratios and see what they suggest is the parabolic top for silver.
Silver’s price range with gold at $3,000:
- a) Gold @ $3,000 using the silver:gold ratio of 47:1 puts silver at $63.83
- b) Gold @ $3,000 using the silver:gold ratio of 22:1 puts silver at $136.36
- c) Gold @ $3,000 using the silver:gold ratio of 14:1 puts silver at $214.29
The above analyses bears closer scrutiny. In paragraph four above it was noted that “During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 per ozt. on January 2nd, 1979 to a close of $49.45 per ozt. in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the Dec.31, 2010 price of $30.84 per ozt. would represent a future parabolic top price of $256.74 per ozt. which is only slightly higher than the price of $214.29 per ozt. that would result from a 14:1 silver:gold ratio with gold at $3,000 per ozt.; the $227.27 that would result from a lesser 22:1 silver:gold ratio with gold at $5,000 per ozt.; and the $212.77 that would result with gold at $10,000 per ozt. even with the silver:gold ratio remaining the same as it was at the end of 2010 as the analyses below suggest.
Silver’s price range with gold at $5,000:
- a) Gold @ $5,000 using the silver:gold ratio of 47.1 puts silver at $106.38
- b) Gold @ $5,000 using the silver:gold ratio of 22:1 puts silver at $227.27
- c) Gold @ $5,000 using the silver:gold ratio of 14:1 puts silver at $357.14
Silver’s Price Range With Gold at $10,000:
- a) Gold @ $10,000 using the silver:gold ratio of 47:1 puts silver at $212.77
- b) Gold @ $10,000 using the silver:gold ratio of 22:1 puts silver at $454.55
- c) Gold @ $10,000 using the silver:gold ratio of 14:1 puts silver at $714.29
It would appear that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate substantially greater returns than investing in gold bullion.
Silver:Gold Ratio Conclusion
History will look back at the artificially high silver:gold ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they are all an illusion. This fiat currency experiment will end badly in a currency crisis and when that happens, as it surely will, gold will go parabolic and silver along with it but even more so as the silver:gold ratio adjusts itself to a more historical correlation.
The wealthiest people in the future will be those who put 10% to 15% (or perhaps more – much more!) of their portfolio dollars into physical silver today and were smart enough to research and pick the best silver mining/royalty stocks and warrants (see article here) to leverage/maximize their returns.
Indeed, while gold’s meteoric rise still has room to run, silver’s run is only getting started. Certainly, if the historical gold:silver ratios are any indication, it appears evident that now is the time to buy all things silver.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.