Silver Targets $30 on Investment Demand – Risk of Contagion Increases

Gold

Gold is steady in dollars and pounds but has risen again in euros as the dollar has fallen in world markets. Gold is being supported by renewed concerns of contagion in eurozone debt markets and the risk that tensions in the Korean peninsula will escalate into a war. The hesitant risk appetite of recent days has dissipated again on these concerns. This is seeing falls in equity markets internationally and gold being supported – particularly in euro terms. 

Gold is currently trading at $1,361.72/oz, €1,028.80/oz and £868.11/oz.

ross Currency Table. Click on the image to view full size

Eurozone peripheral sovereign bonds are little changed, with yields near record highs since joining the euro. There are reports that Portugal is being pushed towards a Ireland style bailout package. The Portuguese government said that reports it was being strong-armed into accepting a bailout, were untrue. The Spanish prime minister warned short sellers of Madrid’s debt that they were "mistaken" and ruled out the need for any bailout. This is very reminiscent of the protestations from Dublin by the Irish Prime Minister and Finance Minister some weeks ago.

Gold (orange), Silver (yellow) and Gold/ Silver Ratio (white) – 40 Years. Click on the image to view full size

Silver

Analysts from GFMS and elsewhere are forecasting that "poor man’s gold" silver will reach over $30/oz in 2011. Given the favourable supply and demand equation and the significant increase in investment demand this seems likely and may happen early in 2011.

Silver is currently trading $26.67/oz, €20.15/oz and £17.00/oz.

Silver, unlike gold, remains well below its nominal high of just over $50/oz in 1980. Hedge funds and investors with a knowledge of the technicals are targeting this level and will likely continue buying and accumulating until the price level has been reached. Then, many may sell, take profits and/or reduce allocations.

Silver is in effect playing catch up with gold. It remains undervalued versus gold on a historical basis. The gold/silver ratio remains favourable to silver at 50.25 ($1,367/oz divided by $27.20/oz) and the ratio is falling.

Gold to Silver Ratio – 40 Years.Click on the image to view full size.

Silver could be the surprise outperformer in 2011 as it was in 2010. Silver’s industrial uses should mean that the gold/silver ratio will likely gradually regress to the average in the last 100 hundred years – around 45:1. If the tiny silver market was to see real funds enter it, the ratio could return closer to the historical average of 15:1. This occurred as recently as in 1968 and in 1980 and this time around could result in silver surpassing its 1980 nominal high at $50/oz. 

Silver reached $50/oz briefly in 1980 when just one billionaire family, the Hunts (one of a handful of billionaires in the 1970s) attempted to corner the silver market causing the price to surge (in conjunction with many investors seeking to hedge themselves from the stagflation of the 1970s). Today there are hundreds of billionaires and hedge funds throughout the world – some of whom may be tempted to squeeze the large concentrated short positions of JP Morgan in particular. JP Morgan is now facing lawsuits and being sued for manipulation and suppression of silver prices.

Silver is priced at some $27.20/oz today. The average nominal price of silver in 1979 and 1980 was $21.80/oz and $16.39/oz respectively. In today’s dollars and adjusted for inflation (government CPI) that would equate to an inflation adjusted average price of some $60/oz and $44/oz. It is for this reason that we believe silver will be valued at over $50/oz in the next 2 to 3 years.

Silver remains undervalued vis-a-vis gold and remains a contrarian play with little or no media coverage and few retail investors having any allocation to silver whatsoever. A close above $28.50/oz could see silver quickly rise to $30 per ounce.

Platinum Group Metals

Platinum is currently trading at $1,636.00/oz, palladium at $667.00/oz and rhodium at $2,300/oz. 

 

Mark OByrne

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