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More than 95 respected economists, academics, analysts and market
commentators are of the firm opinion that gold will go to $2,500 and beyond
before the parabolic peak is reached. In fact, the majority (55) think a
price of $5,000 or more - even as high as $15,000 – is actually more
likely! As such, just imagine what is in store for silver given its
historical price relationship with gold!
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 the
last 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
Gold went up 24% in 2009 and is up 16% YTD 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
closing price on Jan. 1, 1979 to a closing price of $843 per ounce 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% increase in the price of gold from $1275 would
put gold at $4,960. (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. (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 in the near future
please see: http://www.munknee.com/2010/09/5000-gold-bandwagon-now-includes-these-55-analysts-got-gold/
Silver
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 23% YTD)
attests to that in spades. During the last parabolic phase for silver in
1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45
in early January, 1980 which represented an increase of 732.5% in just over
one year. Such a percentage increase from the current price of almost $21
would represent a future parabolic top price of $175. (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.
Gold:Silver Ratio
The current gold:silver ratio has been range-bound between 70:1 and 60:1 for
quite some time which is way out of whack with the historical relationship
between the two precious metals. It begs the question: “Is now the
perfect time to buy silver instead of the much more expensive gold metal?”
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
which is called the gold:silver 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.
Let’s look at the gold:silver ratio
from several different perspectives:
- Over the past 125 years the mean gold:silver ratio (i.e. 50% above and 50%
below) has been 45.69 ounces of silver to 1 ounce of gold.
- In the last 25 years (since 1985) the mean gold:silver
ratio has increased to 45.69:1
- The present gold:silver ratio has been range-bound between 60:1 and 70:1
(61.3:1 as of September 17/10).
- Interestingly, during the build-up to the parabolic blow-off in 1979/80
silver outpaced gold going up 732.5% vs. gold’s 289.3% causing the
ratio to drop from 38:1 in January 1979 to 13.99:1 at the parabolic peak for
both metals in January,1980.
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 Sept. 17, 2010 price of $1276.50 for gold
and apply the various gold:silver ratios mentioned
above and see what they do for the potential % increase in, and price of,
silver.
Gold @ $1276.50 using the current 61.3:1 gold:silver
ratio puts silver at $20.82 (Sept. 17/10)
Gold @ $1276.50 using the above 45.69:1 gold:silver ratio puts silver at
$27.94 (i.e. +34.2%)
Gold @ $1276.50 using the above 13.99:1 gold:silver
ratio puts silver at $91.24 (i.e. +338.2%)
Now let’s apply the projected potential parabolic peaks of
$2,500, $5,000 and $10,000 to the various gold:silver
ratios and see what they suggest is the parabolic top for silver.
@ $2,500 Gold
Gold @ $2,500 using the gold:silver ratio of 61:1 puts silver at $41
Gold @ $2,500 using the gold:silver ratio of 45:1 puts silver at $55.50
Gold @ $2,500 using the gold:silver ratio of 14:1 puts silver at $178.50
Before we go any further 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 on January 2nd, 1979 to a
close of $49.45 in early January, 1980 which represented an increase of
732.5% in just over one year.” Such a percentage increase from the
current price of almost $21 would represent a future parabolic top price of
$175.
It is interesting to note that the above $175 is almost identical to
the $178.50 that would result from a reversion to the mean in the gold:silver ratio with gold at $2,500. For the gold bugs who
believe that gold is going to go even higher it can only mean a very much
higher price for silver as the analyses below suggest.
@ $5,000 Gold
Gold @ $5,000 using the gold:silver ratio of 61.1 puts silver at $82
Gold @ $5,000 using the gold:silver ratio of 45:1 puts silver at $111
Gold @ $5,000 using the gold:silver ratio of 14:1 puts silver at $357
@ $10,000 Gold
Gold @ $10,000 using the gold:silver ratio of 61:1 puts silver at $164
Gold @ $10,000 using the gold:silver ratio of 45:1 puts silver at $222
Gold @ $10,000 using the gold:silver ratio of 14:1 puts silver at $714!!
From the above it seems 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.
Summary
History will look back at the artificially high gold:silver
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 gold:silver 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 to maximize their returns.
Indeed, while gold’s meteoric rise still has room to run,
silver’s run is yet to get started. As such, it certainly appears
evident that now is the time to buy all things silver.
Lorimer Wilson
MunKnee.com
Lorimer Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an
economic analyst and financial writer. He is also a frequent contributor to
this site and can be reached at editor@munknee.com.
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