How To Predict The High For Silver

Q: How high can silver really go? It seems that a lot of people are predicting $300 or $500, even $1,000? Is this even reasonable?

A: This is a great question, there a lot of predictions as to how high silver, gold, bitcoin can go, but not many people have looked to the past to determine how high the price action was from the bottom of previous cycles. You will read wildly outrageous predictions for just about anything, but especially relating to commodities. Eventually commodity prices will hit those prices, but the question is, in which business cycle will it hit those targets? Investors, and consumers in general; are willing to pay up to a max price of a product, and then substitute away.

UNDERSTANDING THE CYCLE

Yes, fundamentals are important, but they ebb and flow throughout the cycle.

For every cycle its starts with little to no interest in the sector, investors from past cycles start to reappear again, supply has been cut, and companies emerge from bankruptcy. The conclusion of the cycle has excess supply, top investors exiting the industry, and sky-high predictions for silver. History tells us the maximum thresholds investors are willing to pay from the low to the high.

When you understand the dynamics of the cycle, you can spend less time worrying and reading about the doom and gloom, and just focus on identifying the top companies to invest in. Investing in the leaders within a sector is how money is made.

BOOM #1 - September 17, 1974 to January 24, 1980

There are a few people that were able to experience this boom, and it was an interesting time. Sky-high inflation, nosebleed interest rates, oil embargoes, or what some like to call the stagflation period.

But what about silver, what did it end up doing?

From the bottom in 1974, to 1980, silver bottomed at an intra-day low of $3.77/oz. in 1974 and went to an intra-day high of $42.29/oz. in January 1980. This is where people get all excited, because the price went up more than 11 times, and it took 1,341 trading days to occur. But, look how long it took from the bottom.

BOOM #2 - January 3, 2000 to March 3, 2008

A demand driven boom really accelerated this wave. The silver price bottomed on January 3, 2000 at intra-day low $4.04/oz. This was after Warren Buffett had made a purchase in silver because "bullion inventories have fallen very materially, because of an excess of user-demand over mine production and reclamation. Therefore, last summer Mr. Buffett and Mr. Munger, Vice Chairman of Berkshire, concluded that equilibrium between supply and demand was only likely to be established by a somewhat higher price. The company owns 129,710,000 ounces of silver. Its first purchase was made on July 25, 1997 and its most recent purchase was made on January 12, 1998."[1]

This was very much a demand driven boom as the consumption for silver accelerated from the manufacturing areas in Asia. For the next 8 years, the price of silver went up 5.28 times, reach an intra-high of $21.35/oz. in March 2008. This boom lasted much longer at 2,044 days from the intra-day low to the intra-day high.

THE BRIEF CRASH IN 2008

In less than a year, the price fell more than 61%, which should be viewed as a bear market from a price perspective, but it was so brief and short, that it didn't take long to get going again. Some would argue that this didn't stop on the way up, but if you would apply a 60% fall in prices to any other investment, you would say it is in a bear market. This scenario isn't any difference.

BOOM #3 - October 28, 2008 to April 25, 2011

It is interesting to note that silver bottomed in October 2008 at $8.42/oz., more than 4 months before the stock market. We saw investors turn the cash into silver. Institutional investors were focusing on owning bonds, and individual investors focused on owning silver and/or gold. The silver market is too small for the majority of large institutional investors to make allocations, and they will invest in gold before silver. From the bottom in October 2008, the price went up 5.9X to an intra-day high of $49.86/oz. in 643 trading days.

BOOM 2&3 - January 03, 2000 to April 25, 2011

For those wondering how long the silver lasted from 2000 to 2011, it lasted for 2,850 trading days. The price went up for more than 12.3 times in price, from $4.04/oz. to $49.80/oz.

BOOM 4 - December 15, 2015 to Present

We are still early into this boom, as the silver price is only up 1.54 times, and we have only been in the cycle for about 500 days. Past cycles have ranged from 5X to 12.3X, from the low to the high. This would put silver in a price of ~$70 to a ~$170. The $170 had 2,850 trading days, and last for more than 11 years but that was due to the strength of emerging markets having a very strong growth and a global financial crisis that took time to recover.

LEVERAGE

Many investors and traders using financial leverage can get really hurt, because a 20-30% drop can wipe them out. Particularly when silver took a vicious fall in 2008, before heading to higher prices. It is important to look at the fundamentals to ensure a lot of new supply isn't coming online or the economy is heading into a recession. A recession reduces demand therefore expect lower prices.

PORTFOLIO MANAGEMENT APPROACH

Portfolio managers know their predictions will be wrong. So they want to scenarios, as to what be the best case outcome. But they also want to see an average outcome and worst case outcome. It takes world to build these scenarios, but this is how you can reduce loses in a worst case outcome

SUMMARY – SO HOW HIGH CAN SILVER GO?

If we look at the max factor silver appreciated by during a cycle, we get 12.33X and the minimum factor price appreciated by, we arrive at 5.28X. The trading activity has gone from 647 trading days to 2,850 trading days. We are still early in the current cycle.

By looking to the past, it allows us to better understand the future.

What have you learned about investing in the last cycle or why are you excited about this cycle?

Paul Farrugia email: paul@firstmacrocapital.com

Paul Farrugia (BCom.) is the President & CEO of First Macro Capital. He helps his readers identify mining stocks you can hold for the long-term. He provides a checklist of how to find winning mining producer stocks.

[1] Berkshire Hathaway

[2] Price Data Stooq