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Silver at ($)40-year high soon?


30 Was this week the number of the week in the silver market. The price of the poor man’s gold, as silver is often called, exceeded the $30-mark, reaching, no prizes for good guesses here, a 30-year high.

One ounce of silver has shot by an incredible 70-odd percent since the last summer. Although the autumn and winter have so far been very rainy and cold in a large part of Europe, in the silver market the words sunny and hot are much more applicable indeed.

Up, up and  away

The price of silver has been pushed up my more or less the same factors than have propelled the gold price to new heights.

The fear of high inflation down the road as a consequence of the Fed’s money printing machine being ‘on’ 24/7 is one factor. That factor has been reinforced by the fear of the Fed going much further with its quantitative easing, a fear Ben Bernanke added fuel to in his recent interview in ’60 minutes’.

Apart from that, the weak dollar (obviously not in the last weeks but over the last few months) contributed as well.
Precious metals tend to become dearer when the dollar becomes weaker.

It's all about ratio's

And then there was an additional force at play in the silver market. Many investors point to the so-called gold/silver ratio. That ratio is, historically speaking, high, suggesting that silver is grossly undervalued.

Currently the gold/silver ratio has been a tad lower than 60 over the last quarters. As such it was higher than the average of recent years of between 45 and 50. For the gold/silver ratio to decline, the price of silver must increase faster than the price of gold.

That is exactly what has happened, the result being a decline in the ratio to some 48 mid December.

As a side note, some even suggest that the yardstick should be as low as 17, the average over the last centuries. That number corresponds with the ratio between gold and silver in earths crust. Geologist think there is 17 times as much silver to be found below the earths surface than gold.

Future

Fear for out-of-control inflation down the road accompanied by out-of-control state finances in the developed part of the world should provide a highly fertile ground for, among others, silver.

It need not take too long before 40 instead of 30 becomes the number of the week in silver market: silver at $40, reaching a 40-year high.

So, the future, meaning the medium to long term, for silver seems to be golden so to speak. This does not mean the short-term is without dangers.

The fact that one of the driving forces, the aforementioned ratio, is now much more in line, suggests that odds are high that silver is not as undervalued as many investors believe.
That is, assuming you are working with the 45-50 figure for the ratio in your head. If you fly on the 17-figure based on geology, then the story is quite different of course. In that case you are wondering why an ounce of silver is only setting you back some $30 dollars in stead of at least $70.

There are other factors as well, that could send the silver price much lower in the short term, but let that be the subject of the next piece (what could push the silver price down).

 




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