After the downgrade of the US credit rating by S&P, headline after headline has been trotting out to upgrade gold price targets. The biggest one was by no other than JP Morgan, noted large commercial silver short, expecting $2,500/oz gold by the end of 2011. This particular prediction was the first I’ve see that was substantially away from the current market.
Although silver was not mentioned alongside gold in the price forecast, a relatively conservative gold/silver ratio of 40 by year end effectively predicts silver at $62.50/oz. If silver were to revisit a more-deserved gold/silver ratio of 31 – which is where it was when silver hit the April all-time highs – we’re looking at $80.64. Current estimates have the actual ratio of physical silver to gold in existence now around 10:1 and dropping. Yes, that means in a four-square world silver would be on its way to $250.00 per ounce.
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At any of these prices, silver would obliterate those April highs, which usually spurs more buying. For many, myself included, current prices may present the very last opportunity to grab a tangible quantity of silver at a reasonable price. I don’t know about the rest of you, but I’m not lucky enough to have a floating $1,800 in discretionary income to pick up a gold eagle. I can, however, add a couple ounces of silver each month for no more than a hundred bucks. On top of that, I can expect a similar, if not better, appreciation over the long run.
Regardless of what dime-a-dozen analysts say, don’t get suckered into thinking that silver is not a ‘monetary’ metal. Money is a matter of perception. Does a $20 bill have any more ‘value’ than a $10 bill? They’re the same size, weight, and material. The only difference is the design printed on each. Yet that design has amazing power. If you put George Washington’s face on it, some people might not even pick it up if they passed it on the street. Change it to Ben Franklin’s picture, and all of a sudden you’ve got a crowd. The silver market is smarter; a one ounce round with Ben Franklin’s mug on it is worth nothing more than a one ounce round with Ben Stein’s. When you step back and think about it – our entire monetary system is absurd. Money becomes money when someone else is willing to take it in exchange for a good or service. Our entire human history has told us that silver will always be recognized as a unit of exchange for goods and services. Silver is mentioned several hundred times in the bible and was the basis of most actual exchange in the Roman empire while gold coins rarely saw circulation.
When I think of the where silver is headed, the 20-year gold to silver chart tells the story. Never in 20 years has gold retested its highs against silver – not even close. Two times, in 2003 and 2008, it topped out at a ratio of around 80 and plummeted, falling 37.5% from its high in 2003 and a whopping 61% from its 2008 highs. If you need further evidence, April’s move in silver broke the 20-year low of the ratio, an extremely good sign for holders of real, physical silver. This tells us we can cheer wholeheartedly for gold, regardless of how much we hold relative to silver. Not only does recent history suggest that the ratio is in a long-term decline that would need nothing short of an act of god to reverse, but ancient history confirms this as well.
The practical matter of silver being flat-out cheaper in dollars makes the case only stronger. We see this on eBay all the time. Fractional pieces of gold sell for massive premiums, because they allow the buyer to have gold at a more affordable cost. Sure, on a per-ounce basis they pay out the ears, but they’re willing to pay said premium as long as they can hold some gold – any gold – for a small, up front cost. Silver will only become more and more popular relative to gold for the very same reason.
Parabolic gains are still coming. For now, enjoy the lazy river of gold’s wake and accumulate where you can.
Enthusiasts