Peter Krauth writes: Let’s face it, 2013 was rough on silver. The precious metal started out the year at $31, and ended at $19.50, continuing an overall slump dating back roughly to mid-2011. That, however, obscures a massive run, like gold, that silver embarked on in 2001 when it was near $4, eventually topping out around $49 in April 2011. At its peak it generated a return of 1,091%.
Heading into 2014, I’ve pinpointed a number of key drivers – some often missed – that say silver may be poised for another spectacular run. Two Bullish Signs – That Others Miss.
Firstly, The gold market is much bigger than the silver market. For that reason, silver traders closely watch gold price action. Since the 2001 bull market began, 92% of silver’s price behavior has correlated to gold’s. That’s why gold’s recent strong price action since the start of 2014 is a positive sign that silver’s poised to rise too.
And secondly, there are a few more drivers specific to silver that all point to higher prices. Like gold, silver’s often hated. That in itself is often a great contrarian indicator. The way to gauge this is to observe what the speculative traders are doing. Particularly when their bets are at or near a sentiment extreme, doing the opposite can be lucrative indeed. That’s been the case a number of times since 2001. Back in early December, silver-futures short positions of all speculators (in the Commitment of Traders COT reports from the US Commodity Futures Trading Commission) hit a bull-to-date high at 54,000 contracts. This kind of extreme often signals a strong performance in the silver price over the next 1 to 3 months.
Since bottoming at $19 in early December, the silver price has already gained 7%. And I think that’s just the opening act. The most recent COT reports show speculators have already pared back their short bets considerably, so this reversing trend is playing out in textbook fashion. The extreme pessimism is already subsiding. We saw this happen in each of the past three years, and conditions look ripe for a repeat.
Another useful way to gauge whether silver is cheap or expensive on a relative basis is to use the Gold/Silver ratio. By dividing the gold price by the silver price, you can tell how many silver ounces one gold ounce will buy. In the past decade, the range for this ratio has mainly been between 45 and 60. Currently, one gold ounce is good for 63 silver ounces. That’s high by historical standards, and it’s high by bull-to-date standards.
Simple reversion to the mean tells us to expect silver to climb relative to gold. If silver were to just return to the middle of that range, then a Gold/Silver ratio of say 53, with gold at $1,250/ounce, would yield a silver price around $23.60, or 18% higher from here.
But silver is so overdue for a corrective bounce, it could easily reach for the bottom of the range. If the Gold/Silver ratio went to 45, we’d be looking at $27.75 silver based on $1,250 gold. That’s a whopping 39% higher from here, and all with gold staying put! Coin Collectors to ETF Managers “Predict” This Rally
Thanks to weak silver prices last year, silver coins went like hot cakes. The U.S. Mint got top spot, selling 42.4 million one-ounce American Eagle silver coins. By mid-November, the Mint had set a new sales record. The Royal Canadian Mint was second, setting its own record with 26.4 million ounces sold. And Australia’s Perth Mint came in third, selling 8.6 million silver ounces, up 33% over 2012.
And all of this happened as silver declined 37%. Rather than scaring off investors, lower silver prices encouraged them to load up in what many consider the last opportunity to buy silver cheap. Such intense physical accumulation of silver is another clearly bullish sign. Uniquely, ETF managers are lining up with coin collectors in increasing their holdings.
Have a look at this chart.
Here are the main takeaways:
Based on all the factors I’ve detailed above, I think silver will close the year higher than it started, and a 50% to a 100% gain is not out of the question. Buying French antique sterling silver flatware and tableware products (95% pure silver) is practical and intellegent way to take advantage of this upcoming silver rally.
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As I’ve outlined above, bullish price action in both gold and silver, the out-of-whack gold/silver ratio, extreme pessimism of speculators, record coin sales, and sticky ETF holdings are all converging toward a higher silver price.
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