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My Victory Lap on Silver

May 03, 2011 4:23 PM ET
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“If you don’t rush out and buy silver right now at $13.70 an ounce, I’m going to pick you up and shake you by the lapels of your coat until your false teeth pop out and fall clattering to the ground.” This is exactly how I led my newsletter on May 9, 2009 (click here for the link). I reaffirmed that recommendation in my 2011 Global Forecast last January when silver was still trading only at $31 (click here for that link) . Today the white metal traded just a few pennies short of my long term target of $50 an ounce, having taken two years to get there.

My logic at the time seems positively Delphic in retrospect. The historic silver/gold ratio was 12 to 70, and with gold then trading at 65 times the price of silver, the latter seemed like a screaming buy. Today, silver is trading at a somewhat less compelling 31 times the price of gold. To reach the top end of the 100 year range it needs to rise to $124 an ounce. In the meantime, silver producers, like my favorite, Silver Wheaton (SLW), have started to flatten out.

Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon’s mine, to Nazi gold bars in Swiss bank vaults, and would fill two and a half Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps around the world.

Silver did take a multiyear hit when the world shifted from silver based films to digital photography during the nineties. Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That set up the classic supply demand squeeze that I predicted so long ago, back when I was still wearing a “5” handle.

Now that the $50 target is a done deal, targets from latecomers that go as high as $100 an ounce abound. Tomorrow, no one would be surprised to see silver $10 higher….or $10 lower. Nelson Bunker Hunt and his co-conspirator brother William Herbert Hunt, who together sparked the speculative frenzy that first drove silver to $50 some 32 years ago and were later driven into a chapter 11 filing, are probably kicking themselves today.

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