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Are We Being Too Conservative With Our Price Target For Silver?

Smart Money Europe's picture




 

For many times now, we have been analyzing the relationship between gold and silver. The price ratio of gold versus silver has been dropping in the last couple of years in favor of the white precious metal.

At the moment, the gold/silver ratio is trading below the "crucial" bandwidth of 40-to-50, currently hovering around 38x.

Although the drop seems overdone and the ratio set for an upward recoil, the technical damage of the support level at 40 has been done.

Thus we are in a whole new playing field as far as the gold/silver ratio is concerned and the price direction for the white metal.

Since we are in a secular bull market for commodities in general, and precious metals specifically, the breakthrough marks the beginning of a new phase in the bull cycle. The gold/silver ratio could finally be on its way to our target of 16x, the historical bottom in the last century.

Taking into account our long term price target for gold of $5,000 per ounce, we should see a substantial upward acceleration in the silver price in the coming months and years.

By the way, our gold target of 5,000 was calculated back in 2005, when gold was trading around $500/ounce. We haven't changed our target price for gold... but as the global crisis evolves futher, and Bernanke & Co keep on QE'ing, maybe we should review our model.

But that's 'food for thought' for another time.

For now, lets stick to our 5,000-dollar-gold target. This will bring us silver prices of over $300 per ounce. From current levels, we are still looking for a tenfold increase in the price of silver!

When we talked about these kind of target prices for silver six years ago, when the metal was still trading below $10 per ounce, people would consider us cowboys. Nowadays, things are looking more realistic, but still investors can't seem to grasp a three-digit silver price.

Well, we've got news for you: our TP of $300 for silver could turn out to be too conservative!

The latest research from Deutsche Bank shows that history has even a lower gold/silver ratio in store for us. Their research shows a ratio that averaged around 12x (hovering between 10x & 15x) during the Middle Ages. Furthermore, Newton fixed the gold/silver ratio to 15.5x from 1700 till 1873.

More research on our part led us to ancient Greece, where the existing gold versus silver mines varied between 10x and 13.5x.

The real price difference between both metals should vary between the available quantities in the earth's crust. And that's where things start to get tricky.

Scientists and geologists are very mixed in their conclusions, with some citing silver deposits over 20 times physical gold reserves, while others claim they are as low as 7x.

We think the lower end of these assumptions may be more useful as far as future silver prices are concerned, since silver is processed and consumed at a rapid pace -- mainly due to the emerging markets giants China & India -- while gold is being hoarded at the same speed.

If we take all the possible gold/silver ratio's from the past, combined with the assumptions of the physical metals probably available on our planet today, then we could see the gold/silver ratio drop to 10x in the current bull cycle.

This bring us to a silver price -- still taking our target price for gold into consideration -- of up to $500 per ounce and more!

We won't go there (for now), but it makes our current TP of $300 silver look less exaggerated, doesn't it... stick to your guns, we still have a long way to go!

>>> www.smartmoney.eu

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Sun, 04/03/2011 - 05:39 | 1129449 saulysw
saulysw's picture

Perhaps I missed it -- did they put a time estimate on this price target?

If not, my price target is $1,000,000,000,000 per gram....some time in the future. Perhaps not in your lifetime, but that doesn't matter does it?

Fri, 04/01/2011 - 13:02 | 1125518 The Continental
The Continental's picture

Silver is the spice of the 21st century. Silver miners are forced to mine resources of ever decreasing quality - though rising bullion price more than offsets this. USGS estimates that silver reserves will be exhausted within ~12 years - these extimates did not account for the explosive demand for silver from China and the developing world. Within 10 years, silver is going to become quite rare. Your grandchildren will listen with amazement when you tell them how coin shops of old [now] had actual coins made of silver out in display cases for all to peruse. That's how rare and expensive silver is going to become - it is the quintessential Mathusian metal.

Fri, 04/01/2011 - 12:39 | 1125450 Ckashan
Ckashan's picture

Silver doesn't need to be monetized, it is money. The overriding cause for the prices of PMs & other goods for that matter has been the increase in the monetary base of nearly 2 trillion dollars along with the monetization of bad bank credit.

Devaulation through money supply expansion for various purposes will rule the day. This will make PMs unaffordable to most citizens of the world over the long-term.

Fri, 04/01/2011 - 12:28 | 1125416 Diogenes
Diogenes's picture

When I look at a silver chart I see a big run up and wonder how long it can go on without a reaction? When I look at a gold chart I see it running into resistance between 1430 and 1450 again and again, but taking shorter drops each time which makes it look like gold is about to break through and run up a 150 points.

Fri, 04/01/2011 - 16:16 | 1126398 RockyRacoon
RockyRacoon's picture

How did that chart look to you in 2002?   2004?  2006?  2008?

Last October?

Fri, 04/01/2011 - 16:38 | 1126488 Diogenes
Diogenes's picture

Last October silver looked like it was going noplace, just like gold now. First gold I bought was just about a year ago when it dipped to 1175.

Now I am wondering if gold is in the same basic scenario as silver last october, should I buy more gold?

Seriously, I am thinking of calling the bank on Monday and ordering another 20 oz of gold.

Fri, 04/01/2011 - 20:13 | 1127046 nmewn
nmewn's picture

"Now I am wondering if gold is in the same basic scenario as silver last October, should I buy more gold?

Seriously, I am thinking of calling the bank on Monday and ordering another 20 oz of gold."

No one can make that call but yourself as you know. As an aside, I thought Rocky showed a lot of character by not answering (I believe he's a coin dealer if I recall)...I respect that he didn't.

For myself I'm waiting on gold and still buying silver. My last gold purchase was in the 1175-1200 area.

I'm kinda of a history buff but it still took me a long time to come to the conclusion that "this" dollar will die...as it's all I've ever known as a currency. I'm sure another will take it's place, so I look at G/S as placeholders where what I pay in fiat doesn't really matter as it will die in the long run (or maybe not so long run).

What matters (to me) is the accumulation of G/S for conversion down the road into what I want or need...given what I believe is the fate of the national currency...I've always been a saver. It is also my belief that the CB has trapped itself...it has no room to raise rates because it panicked at the start of the crisis and lowered them to basically zero...and the dollar still losing purchasing power.

I also think the CB's got gold pretty much locked down in fiat price...at the end of it...I would rather trade my silver for gold at 300/3000 which is 10 to 1 instead of the current 38 to 1.

They have a lot of it...the trick has always been to relieve them of it ;-)

Sun, 04/03/2011 - 11:39 | 1129726 RockyRacoon
RockyRacoon's picture

Your assumption is correct, I am a coin dealer.  Your outlook and plan are not to be denigrated.  It's nearly impossible to do anything wrong at this stage.   I see that my question about the previous year charts went unanswered.   Also, I'd like to know the name of his bank that he can call and order gold!  I'll suppose that he is outside the U. S..

Sun, 04/03/2011 - 15:04 | 1130139 nmewn
nmewn's picture

"I see that my question about the previous year charts went unanswered."

I noticed as well ;-)

Sometimes it takes a while for people to wrap their head around the concept of risk vs. reward...paper vs. hard assets...interest-dividend payments in a steadily devaluing currency (and taxed yearly) vs. G/S...etc.

"Also, I'd like to know the name of his bank that he can call and order gold!  I'll suppose that he is outside the U. S.."

LOL...I've made it a little hobby of mine to ferret out the non-US citizens posting on ZH (just for clarity of their purposes on certain subjects)...I think Diogenes is OK even if he is a "ferner"...he'll come around to what we know to be true just as others have...it just takes time & a preponderance of the evidence.

Again...I appreciate your integrity in not advising him to buy one way or the other...it speaks volumes of you as a person.

Take care.

Fri, 04/01/2011 - 12:10 | 1125325 Stuck on Zero
Stuck on Zero's picture

It's not particularly the ratio difference in the earth's crust but the ratio difference in mined deposits.  Much of the PMs produced worldwide is a byproduct of copper mining. 

Common percentages found in the ores of open pit copper mines are (for example):

4.0% copper, 0.3% nickel, 15 parts per million (ppm) silver, 1.5 ppm gold, 2.3 ppm platinum, 3.8 ppm palladium, and traces of many other metals.

Unfortunately for silver there are dedicated silver mines that are producing increasing quantities of pure silver.  The inverse for gold.  Dedicated gold mines are becoming exhausted. So even if the crustal abundance ratios of silver/gold are perhaps 10:1 existing mining ventures (Mexico, Andes) overwhelm this number by pure silver extraction.

 

Fri, 04/01/2011 - 12:20 | 1125381 Long-John-Silver
Long-John-Silver's picture

Silver mining is about to get a lot more expensive.

3-Strike halts Bolivia silver mine, exports - union

http://www.reuters.com/article/2011/03/30/mining-bolivia-sancristobal-id...

 

This strike is about to go viral across all mines in Central and South America.

Fri, 04/01/2011 - 12:06 | 1125304 quasimodo
quasimodo's picture

It's articles like this one that leads many a fool to "throw it all in", with illusions of grandeur..a hilltop mansion, sitting by your pool in a lounging robe with two scantily clad perfect 10's on each arm awaiting your every beck and call. Gimme a break.

Fri, 04/01/2011 - 16:12 | 1126391 RockyRacoon
RockyRacoon's picture

If anyone actually did what you think then they would be a fool.  Most true accumulators aren't the fools that you think.  We balance our purchases with other hard goods as well.  It's apparent that you have missed the boat that many of us boarded years ago.  Adios!

Fri, 04/01/2011 - 12:13 | 1125354 Long-John-Silver
Long-John-Silver's picture

I went "all in" at $12 an ounce, and you call me a fool?

Fri, 04/01/2011 - 11:56 | 1125272 earnulf
earnulf's picture

Much of this is foward looking, what will happen.  If we just look at the last two years, silver has been riding a rocket given the turmoil in the world.   If you expect the turmoil to continue or worsen, it would be prudent to hedge with a physical silver bet.    I can say that of the two metal investments I made two years ago, silver is bringing the best return and beating hands down anything else I own.     The Physical Ratio will eventually come into play if the market finally admits the ponzi at which time silver will move to a point where it is comfortable and the physical holders will be too.

Fri, 04/01/2011 - 12:14 | 1125348 lawrence1
lawrence1's picture

Heraclitis, the Greek philosopher, "You never step into the same river twice." I'm sure of one thing, though, that I'm not participating in the fucking farce or any paper market. Only physical... pms, home in foregin country, no debt. Not playing the game with these motherfucking bankers and financial system,
from the lower scum of brokers to the worst, the central bankers. It was a great country but now ruined, with republican whores destroying the remains of the middle class and fearful democrats
sitting on their timid asses.

Fri, 04/01/2011 - 11:45 | 1125238 JollyRoger
JollyRoger's picture

So long as silver is traded as paper, the ratio discussion is moot.

 

http://silvercointrader.com/2010/12/the-gold-silver-price-ratio/

Fri, 04/01/2011 - 12:25 | 1125407 RockyRacoon
RockyRacoon's picture

There is always merit in the discussion.  There is no merit in the paper.

Fri, 04/01/2011 - 11:46 | 1125236 Don Smith
Don Smith's picture

Looking at that chart, it seems that the price target would be roughly in line with the Hunt Bros American-era price, which is probably in the high 40s to low 50s.  I can only envision a collapse of the dollar and basically all fiat currencies bringing it to $300+.  If that happens, your ounce of silver should still buy you 8 gallons of gas, or dinner out, as it does now. 

Fri, 04/01/2011 - 12:04 | 1125309 LoneCapitalist
LoneCapitalist's picture

Or knock $300 off your mortgage.

Fri, 04/01/2011 - 11:36 | 1125215 Geoff-UK
Geoff-UK's picture

Silver isn't monetized anymore, so this ratio discussion is silly.

I concur that silver will go up, but your argument makes it hard to take you seriously.  Silver will go up because the naked shorts have reached epic proportions.  Fuck you Jamie Dimon.

Fri, 04/01/2011 - 12:23 | 1125398 RockyRacoon
RockyRacoon's picture

Officially silver is not monetized, true.  But over time it will be.  Today I can trade a circulated 1964 quarter for more than a dozen ears of corn at the local farmer's market.  Won't take much more of that to create a solid monetization -- regardless of what those who should know better may say publicly.

Fri, 04/01/2011 - 12:21 | 1125387 candyman
candyman's picture

I've been following this discussion of the Damon put for a long time but never see the confrirming evidence. Can you provide a link somebody.

Fri, 04/01/2011 - 11:02 | 1125117 long juan silver
long juan silver's picture

Dow 260,000 Bitchez!!!!

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