Silver is Once Again Beginning a Runup

Silver prices are once again enjoying a run-up as they did from January through April. During that period they doubled and briefly touched $50 an ounce before settling back down to the low $30s. As I write, silver prices are back above $40 an ounce and that may be giving you the urge to sell. I would advise that you don't. This recovery is for real, and it has much further to go. While I have a price target of $50.00 by years end, I anticipate silver prices will peak at $150 an ounce in 18 months. Central banks around the world are pushing lax monetary policies and this leads me to conclude that prices for all commodities (gold and silver in particular) will rise. We've already seen this happen with gold hitting a record high $1,923.70 an ounce on Sept. 7 and when gold goes higher; its baby brother silver quickly follows. That's reflected in something called the gold to silver ratio, which shows how many ounces of silver it takes to buy one ounce of gold. Traditionally, this ratio acts as a price barometer for the two precious metals. And if you look at it right now, it's easy to see that $150 silver isn't far off. Gold and silver prices traditionally move together because both are considered stores of value in inflationary times and while the world considers gold as the premier store of value, other societies, most notably the Spanish empire in the Americas, Imperial China and Mogul India, used the silver standard and are therefore more focused on silver when inflation threatens. In the 19th century silver and gold prices maintained a fairly steady relationship to each other in a ratio of 16 to 1. This was due to the fact that both gold and silver were viewed as currency. However, in the 20th century silver depreciated against gold. This was due to the fact that silver began to be seen as a commodity that was mainly used in industrial applications. While the two metals are chemically very similar, but silver is much cheaper and therefore is more suitable for industrial uses. By 2010, gold traded well above $1,000 an ounce while silver traded at $12-$14 an ounce or a ratio of close to 80 to 1. This was unsustainable, and it resulted in the price of silver rising in 2010-11. At its peak, silver was trading for $50 an ounce and about a 30 to 1 ratio to the price of gold. Going forward, we cannot expect the gold/silver price ratio to reach 16 to 1, as it almost did in 1980. I believe the reason for this is the use of silver as an industrial metal has fallen off sharply when the price spiked. That freed up silver supplies while investment demand for gold soared. The second reason is that the 1980 silver price spike was caused by the Hunt Brothers' attempt to corner the silver market. No such attempt is visible today. So, I believe the peak ratio of silver to gold is much more likely to reach something closer to 25 to 1. The peak in gold is yet unknown, but for supply/demand reasons it seems likely to be above $2,500 an ounce - today's equivalent of the 1980 peak, adjusted for inflation - but less than $5,000 an ounce - the 1980 peak adjusted for growth in world gross domestic product (

) or money supply. That would suggest a silver price peak between $100 and $200 per ounce, with $150 an ounce the most likely outcome. In conclusion, the market will not ultimately turn bearish until global monetary policy tightens. With the November 2012 U.S. Presidential election looming large on the horizon, we probably have at least another year of rising prices. However, we may not have two years to wait for politicians decide to get our fiscal house in order. My recommendation would be to any silver holdings at least until prices reached $150 an ounce.