Am I being too conservative with my silver price target?

2011-APR-01

Nico Pantelis writes --

For a long time now I have been studying 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 caused by breaking through the 40 level has been done. We are thus in new territory as far as the gold/silver price ratio is concerned and the silver price direction. Since we are in a secular bull market for commodities in general, and precious metals specifically, this 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 my 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, my gold target of $5,000 was calculated back in 2005, when gold was trading around $500/ounce. I haven’t changed our target… but as the global crisis evolves further, and Bernanke & Co keep on QE’ing, maybe I should review my model.

But that’s food for thought for another time. For now, lets stick to my $5,000-dollar-gold target. This will bring us silver prices of over $300 per ounce. From current levels, I am still looking for a tenfold increase in the price of silver!

When I talked about these kinds of target prices for silver six years ago when the metal was still trading below $10 per ounce, people considered me a cowboy. Nowadays, things are looking more realistic, but still investors can’t seem to envisage a three-digit silver price. Well, I've got news for you: my target of $300 silver could turn out to be too conservative.

The latest research from Deutsche Bank shows that the gold/silver ratio averaged around 12x (hovering between 10x & 15x) in the Middle Ages. Furthermore, Newton fixed the gold/silver ratio to 15.5x from 1700 till 1873. More research on my part led to ancient Greece, where the existing gold versus silver mines varied between 10x and 13.5x.

The real price difference between both metals should be dependent on available quantities in the Earth’s crust. And that’s where things start to get tricky. Scientists and geologists have varied conclusions, with some citing silver deposits over 20 times physical gold reserves, while others claim they are as low as 7x. I 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 market giants China and 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 brings us to a silver price – still taking my target price for gold into consideration – of up to $500 per ounce and more.

I won’t go there (for now), but it makes my current target of $300 silver look less exaggerated, doesn’t it… stick to your guns, we still have a long way to go!

Tags: gold/silver ratio, gold price, silver price

Author: Nico Pantelis

Investor Alert! Beware of Companies Offering Quick Riches Selling Precious Metals and Other Commodities

The Better Business Bureau (BBB) urges consumers to use caution when approached by businesses that sell investments in precious metals and other commodities. Some unscrupulous companies advertise on radio, television or Internet Web sites, or make telephone "cold calls" to promote the purchase of precious metals such as gold, silver and platinum. Their claim is that customers can double or triple their initial investment in just two or three months, with little risk.
According to the U.S. Commodity Futures Trading Commission (CFTC), these fraudulent companies offer to purchase metal for the customer through a financing agreement. The customer is asked to pay a small percentage of the total purchase price. The company often charges customers a commission for the purchase transaction, a loan origination fee, an interest charge on the remaining balance (which accrues over time), and fees relating to storage and shipping of the metal the company pretends to purchase.
Be skeptical if the commodity sales pitch:

• Claims their ability to predict prices or the direction of the metals markets;
• Minimizes the degree of investment risk involved in metals investments;
• Fraudulently fails to disclose how much the price of metal must go up for the customer to break even (let alone profit), since hefty finance and storage fees and commissions are deducted from the customer's account before any profit accrues;
• Falsely claims to purchase and store metal, when the company does not actually do so.
• Charges phony "/storage" and "interest" fees.

If you are solicited by a company to purchase commodities, the BBB and the CFTC, suggest you:

• Avoid any company that predicts or guarantees large profits with little or no financial risk.
• Be wary of high-pressure tactics to convince you to deliver cash immediately to the firm, via overnight delivery companies, the Internet, or otherwise.
• Be skeptical about unsolicited phone calls about investments from offshore salespersons or companies with which you are unfamiliar.

Prior to purchasing, be sure to check out the company. Contact the BBB (www.bbb.org), CFTC (www.cftc.gov) or other authorities, including your state's securities commissioner (www.nasaa.org), Attorney General's consumer protection bureau (www.naag.org) and the National Futures Association (www.nfa.futures.org).
Obtain as much information as you can about the company and verify that data. Check the company's materials with someone whose financial advice you trust. If in doubt, do not invest. Without solid information about the company, the salesperson, and the investment, you should not risk your money.

Pimco's El-Erian: US Will Inflate Its Way Out of Debt

Mohamed El-Erian, CEO and co-chief investment officer of bond giant Pimco, says that the U.S. Federal Reserve will at least partially inflate its way out of the debt crisis.
“There are several ways that a country can deal with its debt issues. I suspect the U.S. will end up with a mix of some fiscal adjustment and inflating its way out,” El-Erian said.

That’s because U.S. policymakers have an innate fear of recession thanks to U.S. history, more than of inflation, which is more relevant to the financial history of Europe, El-Erian told Der Spiegel, the German newsweekly.
“This country has a huge aversion to recession, huge. And if you ask a policymaker if you're going to make a mistake, which mistake would you rather make, they would say I'd rather make an inflation mistake than make a growth mistake,” he said.
The United States has several advantages other countries don't, such as being the global reserve currency and having deep financial markets. There are few reasonable alternatives for investors, so the United States tends to benefit disproportionately, El-Erian said.
The Fed’s decision to dump another $600 billion into economy, known in the press as QE2, is “inflating the whole world,” El-Erian said, but the policy might ultimately disappoint the United States in terms of its own objective — growth at home.

“The U.S. economy cannot productively absorb all this liquidity. So when all the liquidity is injected into the system, it also goes elsewhere,” El-Erian said. “It’s like pouring water on a hard surface, it splashes everywhere. That explains the large skepticism about QE2 outside the U.S.”
El-Erian repeated Pimco’s assertion that a “new normal” of slow growth and weak job creation will reign for quite a long period.
“Growth will be viewed as unusually sluggish. Unemployment will remain unusually high, and for an unusually long period,” he said. “And we will see an accelerated realignment of the global economy.”
He also said that it’s unlikely that the Chinese currency, the yuan, could soon displace the dollar the world’s reserve currency. Such a move would require the yuan to appreciate too quickly for comfort in China itself.
The currency should be convertible and flexible. But go to China, and they will ask you what you are talking about,” El-Erian said.
“Look at per capita income, they will say. We're number 99 in the world, not number two. At number 99, our responsibility is domestic because we have lots of people that are poor. So we don't want our currency to appreciate and to be volatile. When we get closer to number two, we'll take on global responsibilities.”
Speaking to journalists recently, Federal Reserve Chairman Ben Bernanke laid the responsibility for inflation squarely on other countries, not the Fed.
"I think it's entirely unfair to attribute excess demand pressures in emerging markets to U.S. monetary policy, because emerging markets have all the tools they need to address excess demand in those countries," Bernanke said, answering a question.
"It's really up to emerging markets to find appropriate tools to balance their own growth."

EU concerns support Gold’s “safe haven”

London 17/01/2011 - Gold drifted lower on Monday morning on technical pressure after failing to maintain recent upward momentum, although lingering Eurozone concerns ahead of a key EU summit bolstered safe-haven buying.

Spot gold was last at $1,358.55/1,359.55 per ounce, down $1.34 from the previous session but hovering above the multi-day lows of the previous session.

The metal had fallen to its lowest since January 7 at $1,355.09 per ounce on Friday at the end of a volatile week, failing to maintain gains and swinging 2.7 percent from the previous day’s multi-day peaks around $1,393.

But continued concerns over the state of the Eurozone have kept safe-haven interest in bullion bubbly, limiting falls. On Friday ratings agency Fitch downgraded Greece's debt rating to junk, the latest in a string of recent reductions - Ireland, Portugal and Hungary have all had their ratings reduced over the past month.

Markets are also nervy ahead of a key summit involving ministers from across the Eurozone. Delegates are due to discuss expanding the region's bailout fund to boost market stability and avert the prospect of financial meltdown in Europe.

But despite the talks and successful Portuguese, Spanish and Italian bond auctions last week, fears persist over the euro zone’s ability to avoid sovereign debt contagion, with Portugal reportedly coming under heavy pressure in recent sessions to accept a financial bailout.

"Concerns still remain surrounding Portugal and whether the country will succumb to bailout experienced by Greece and Ireland," broker Fairfax said.

Elsewhere, on Friday the Chinese central bank announced that it would raise its reserve ratio by 50 basis points as of January 20, the seventh such rise since the start of 2009. The spectre of economic overheating and inflationary concern traditionally benefits store-of-value assets such as gold.

"Precious metals markets are increasingly sensitive to rising interest rates, as investment demand is becoming ever more important for the overall supply/demand balance," broker Credit Suisse said.

The euro snapped lower in start-of-week trade and, at 1.3290 against the dollar, was still more than a quarter of a cent lower from the previous session. Continued strength last week culminated in the single currency rising to one-month highs at 1.3454 on Friday.


Precious metals prices could continue to drift in Monday trade, with data thin on the ground - US markets are out for the annual Martin Luther King Jr. Day.

Other precious metals tracked gold lower. Silver dropped to a new low since December 10 at $28.05 per ounce before settling at $28.19/28.24, still 23 cents lower.

Silver has fallen more than five percent since the middle of last week, failing to hold onto gains and becoming susceptible to strong technical downward pressure.

Platinum was last at $1,802/1,807 per ounce, down $8.50 - it had risen to its highest since July 2008 on Thursday at $1,829.

Palladium was last at $783/788 per ounce, $11.50 lower. It had advanced to $822.50 on Thursday, a 10-year peak.