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

Follow us on Twitter!