Global Currency Crisis & Gold – What’s Really Going to Happen in 2011 – 2012

Following on from the first 2 parts in this series: Whats really going to happen in 2010 Whats going to happen in 2010/2011 – part II Another great writer and analyst makes it into our categories section, Bob Chapman of Global research with a seminal must read piece outlining the road ahead towards a new [...]

Just How High is Silver Going to Go Now?

by admin on 23/09/2010

Silver

As we previously noted, we think Gold and Silver are currently at hugely important inflection points and are now primarily fulfilling their historic roles of warning (imminent trouble) and protecting (the wealth of those who heed the warnings)

If you haven’t read “Gold & Silver Away..” you should probably do that first.

As predicted a couple of weeks ago, we think there’s an upside explosion coming in Silver any time now, and we’re in good company with those thoughts, King World News are today reporting Goldmoney’s James Turk as saying:

Gold is at $1,280 in European trading and silver is attempting a move once again towards $21.  In an interview with King World News from Spain, James Turk stated, “If the commercials get blown out at $21, then the locals (pit traders) are going to have to start trading this thing on the long side as well.”  The following are his thoughts on where we are…

James Turk:

“You might see a little backing and filling here, but we’re only days away from taking out $21.  This is when you’ll see the upside explosion that we’ve been waiting for as the shorts scramble for cover.  But you know Eric, when you have these types of markets you could be up 14, 15 days in a row and that’s the 1970’s type of market, and that’s what we have again here today.

In our last piece Eric you wrote about the how the locals have been absorbing losses attempting to trade with the commercials on the short side.  These are markets we haven’t seen for more than 30 years, and a lot of these locals simply have not participated in this kind of market before.

They (locals) were making a lot of money trading with the bullion banks on the short side.  If the commercials get blown out at $21, then the locals are going to have to start trading this thing on the long side as well.

When asked what individuals who are trying to accumulate gold and silver should do in this environment Turk responded, “For those looking to purchase metals, if it is the time of the month where you are scheduled to make your monthly purchase on gold and silver, simply make them, do not try and outguess the market.”

Many individuals who accumulate physical gold and silver for delivery have been waiting for a pullback to buy.  This is why sometimes in bull markets the pullback does not happen.  As Turk said, if you are scheduled to make your monthly purchase, do it.  Don’t try to get cute and outsmart the market, it will almost always humble you if you do.

Then here’s a very  interesting article that looks at things the way we do, by Lorimer Wilson from www.FinancialArticleSummariesToday.com

$2,500 Gold Could Easily Result in $178.50 Silver – Here’s Why!

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.

Complete list of the 55 economists, academics, market analysts and financial commentators who maintain that gold will go parabolic to $2,500 -$15,000 in the near future here.

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 66.9 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.

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