Were you cursing at your computer screen when silver nearly tripled during the short 9 months from September 2010 to May 2011? Silver at $20 seemed like an insurmountable threshold for quite some time. This caused many silver investors to give up, completely missing the ensuing ride. I believe silver is about to offer a similar ride. While it is unlikely to match the 180% advance mentioned above, look for silver to make new highs in the coming months, with the potential to double to $65 by year end.
Following the record gains in silver during late 2010 and early 2011, the metal has since crashed towards $25 and sentiment has crashed along with it. The threat of euro nations defaulting, banks announcing they are, well, bankrupt, and a series of other factors have scared away many of the Johnny-come-lately silver bulls. I think too many investors are underestimating the power of the central banks. While I agree they are running out of options, it seems that their ability to kick the can down the road has yet to expire. Given that the United States is heading into election season and President Obama is in full campaign mode, I expect the administration to pull out all stops in order to continue the illusion of economic prosperity a while longer. Every economic fire of consequence is being extinguished with fresh liquidity, more funny money or new legislation. In case you missed it, QE3 has been in full force for quite some time, albeit executed is a somewhat stealth manner.
The implications for silver (and gold to a lesser degree) are going to be incredibly bullish. Absent a deflationary sovereign default that spirals out of control and takes down major banks with it, stocks will continue to creep higher in volatile trade throughout the year. Once fear begins to subside, look for precious metals to come roaring back to new highs by mid-year. Whenever the next financial crisis finally hits, we are likely to witness a new injection of quantitative easing that is many magnitudes stronger than that of 2008.
Will a major debt default pull down gold, silver and mining stocks with it? Absolutely.
Will it last? Not likely.
Investors are a predictable bunch. They always overshoot on emotions in one direction or another. A rush for liquidity and the perceived “safety” of government bonds or U.S. dollars will be incredibly short-lived and viewed in retrospect as immensely short-sighted. Everyone that rushed for the door by dumping real assets will soon regret their folly. When the fear subsides and some semblance of rational thought returns, the realization of the worthlessness of government paper will be widespread and cause a mass exodus of fiat money.
So while it is prudent to hold a decent amount of cash in the short term, hoping to buy the irrational dip, the medium to long-term investor might consider buying silver aggressively at this juncture. In my view, commodity prices are either going to continue grinding higher throughout the remainder of the year, or there will be a short and steep dip, following by a resumption to new highs. Either way, the silver price has a long way to go before reaching previous inlfation-adjusted higher. It would need to climb to $150 to reach its 1980 high using officially-suppressed inflation statistics and closer to $300 using honest inflation statistics. Seeing as you can buy silver at $32 today, the upside potential remains absolutely huge. Let’s take a look at the long-term chart to determine price targets for 2012 and 2013.
Charting back to the start of the silver bull market, we can see that silver remains firmly in its multi-year uptrend. Contrary to negative sentiment expressed by some analysts, there has been no significant chart damage or other action to suggest that the bull market has run its course. It recently bounced off the bottom line of its trend channel, which also corresponds roughly with the 100-day moving average. This line has provided support during the vast majority of silver’s corrections over the past decade, with exception to the 2008 financial crisis.
While we could see one more dip below $30, I think any talk of a decline below $25 is now comfortably off the table. Silver is currently facing resistance at the critical level of $35. If it breaks to the upside through this level, I see silver reaching a high between $55 and $65 by year end. To the downside, I think the lowest silver will close out the year is around $31, in the event that short-term deflationary forces take hold. But as mentioned earlier, I think the central banks stand ready to go ‘all in’ in order to prevent this from happening.
These projections are relatively conservative and based on the long-term trend trajectory. Any number of events could send silver parabolic in the blink of an eye. The silver market is tiny in relationship to the paper money market and if even a small percentage of those dollars decide to buy silver, demand will overwhelm supply and send prices into triple digits. I ultimately believe silver could reach $500, but the more important consideration is the value/purchasing power increase of silver. One thousand ounces of silver used to be able to buy a median-priced home in the United State and I believe one thousand ounces will once again achieve this same feat in the near future.
Some view silver as an inflation hedge or way to preserve purchasing power. I see it as a way to vastly increase purchasing power over the next several years, with the worse case scenario being wealth preservation. I’ll take that risk/reward scenario any day.
The Obama administration just put forth a budget that will result in another annual deficit of over $1 trillion, despite promising to cut the deficit to $650 billion. The ECB is bathing euro banks in liquidity, the US Fed has literally guaranteed an inflationary environment until late 2014 and Silver Eagle sales are skyrocketing. There is also less above-ground investment-grade silver available than gold and this quantity is rapidly declining. This supply/demand situation can not persist at such depressed prices. Lastly, silver is money and the best form to own in the event of a collapse of the fiat monetary system. It is insurance that can provide significant returns and help you increase your purchasing power, all at the same time.
So don’t miss the train again this time around. While silver is currently in consolidation mode, this is not likely to last long. When the silver price finally takes off once again, you will not want to miss the fireworks. You need only have the courage to take the path less chosen. Buy when others aren’t interested and sell in the future when there is a shortage and everyone is clamoring to buy silver at any premium.