Silver Rallies To Its Highest In Over A Year…Plays ‘Catch Up’ To Gold’s Gains

Silver prices could hit $30 in the next 18 months.

Silver is on a tear. Up 1.4% yesterday with plenty more in the tank. We had been expecting silver to awaken in a strong move higher, almost as if it was caught napping, while the world watched gold push through previous boundaries with conviction.

Silver’s rise is likely more related to speculators moving in on what seemed to be cheap prices relative value to gold. We look at relative value by examining the ratio of gold prices to silver prices historically. The Gold Silver ratio had recently reached lofty heights near 100. That is to say you could buy 100 ounces of silver for the price of 1 ounce of gold.

Looking back historically this ratio would have been in the 16 – 25:1 range. Since the 1970’s a range of 40-80:1 was the norm. Every time this ratio hit these highs it retraced as silver prices caught up with gold. Where gold led silver followed, rising twice as fast and sometimes falling even harder. Now we see history repeating itself yet again. The chart below shows the recent ratio performance, note the 200 Day Moving Average.

So where is it going? Well we don’t do speculation or predictions and we certainly don’t sell metals on the basis of profitable returns. We see both gold and silver working to stabilise diversified portfolios over the long term. See our musings on why storing gold and silver correctly matter.

A higher gold price will offset the effects that negative global economic headwinds have on your financial wealth. That being said if you don’t own gold and silver and you were planning on doing so, an idea on where the market is going in the medium term is useful. So here is one thesis…

Back of an envelope calculations: We see silver possibly hitting highs of $30 within 18 months if the following were to happen:

1) Brexit fears manifest in a UK & EU recession: chances 75%

2) Worried about stalling global growth, Central Banks unleash coordinated QE 4 and continue printing of money, driving rates even more negative globally: chances 75%

3) Gold starts attracting speculative money pushing safe have bids up even higher to possibly circa $2,500: chances 70%

4) The gold silver ratio reverts back to its 200 day moving average of 86:1. Taking silver to $30.

If we enter into a full blown crisis like we did in 2009 with “blood on the streets”, we could see the ratio found then of 20:1 taking effect.  If gold hits $2,500 that would suggest a silver price of $125 an ounce. In some estimates the inflation adjusted price of 1980 silver high is $600 an ounce.

Upside? Well you can figure that out…

(Warning this is a highly unlikely scenario and should not be part of any core investment thesis.)

Most speculators are very poor market timers and never execute optimally.

We prefer the broader long term approach. Our house view is that metals should make up no less then 10% of your investable assets (excluding your home and business) in normal times. If you believe we are not in normal times and downside risks are building or you are particularly worried about the risks in the broader market, you could increase this 10% allocation to a level you are comfortable with. As always confer with a trusted advisor before making bold moves.

In our case many of clients subscribe to the belief that the markets are underpinned by an official sector “pyramid scheme”, where money is simply printed and used to pay off old debts and pump up the broader markets, in many cases ignoring fundamental capitalist tenants like market pricing, supply demand etc. We see gold and silver as a key strategy in attaining personal sovereignty for the small investor. If you have any questions as to what is possibly coming down the tracks perhaps take a look at the the Central banks published plans to address the next banking crisis.

We see investors who naively entrust their deposits, which bear negative real interest rates, to banks (Hmmm?), as being utterly ill-prepared for what is very likely coming down the tracks. In this situation it is more than prudent to allocate at least 10% of their investable assets to safe haven assets such as gold and silver. Within this allocation we see 75% gold 25% silver as being a balanced holding, especially given silvers volatility.

Assets must be kept in allocated and segregated non-bank vaulted storage in safe jurisdictions. Do not invest in ETF’s or any digital online pooled holdings (these are more suited for speculators), where you are lumped together with other investors. Your holdings must be segregated and allocated. This preserves your legal proximity to your holding and will possibly give you a much higher price then proxy metal investments that have significant counter-party risks.

If silver hits $30 or even $125 it will be just one silver lining in a dark economic cloud effecting all of our communities. Hang on to your hats!

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