How High Could Silver Go?

$25… $50… $126… $189?

They say “Anyone can fly, but it takes an expert to land”. To adapt it to the investing arena “Anyone can buy, but it takes a genius to sell”. We will most probably sell when “there is gold and silver flowing thorough the streets and investing news headlines”. So when we sell, how much could we expect to be selling for? Chris Webber fills us in.

By Chris Weber

Courtesy: www.weberglobal.net


This is written with some trepidation. Silver is much more volatile than gold, and forecasting it is fraught with peril. Nonetheless, I think it is important to have some goal or target in mind when you take a position in an investment. Over the past few years I have taken a major position in silver, so I want to take this opportunity to think my way through where I think it could go, and how long it could take to get there.

I want to explore this from a number of ways. First, I’m going to use the same approaches I previously did for gold. But then, I want to discuss the important area of the silver to gold ratio.

My first “target” was to see a process, Like gold, I wanted to see silver rising in terms of all major currencies, and not just the US dollar. This happened last year. It was clearly the world’s strongest currency of 2005. It rose by 29% against the US dollar, but against the Japanese yen it was up 46.9%, against the euro 47.7%, and it soared against the Swiss franc by 48.6%. So clearly, even though it is rarely talked of in these terms, this process of silver being a strong currency has clearly been underway for quite some time.


The 50% Principle

Last October the gold price was $470. I said then that the second thing I wanted to see was how gold would handle the $550 mark. This was the level which represented a retracement of 50% from the highest point it reached in the previous bull market ($850) to the lowest point it got in the bear market ($250).

After a huge move in one direction —like the 20 year gold bear move from $850 to $250– an asset will rise again and it may rise strongly enough to test the level that represents 50% of the previous move. We see an important indication of the strength of that new move in how it handles the half-way point in the previous fall. The way it handles this often makes the difference between a “dead cat bounce” and the confirmation of a new bull market.

For gold, the price moved up fast but it stuck at the $550 area. For a while it battled with it, but gold finally broke through this area and it’s now around $625. That’s a good sign for its future.

But what about silver? Can we use the same idea there?

On January 21, 1980, silver’s London fix price was $49.45.It has never been higher. From there it began a plunge that would take it to a low of $3.5475 at the end of February, 1993.

That was a plunge of 92.8% in just over 13 years.

You really can’t say that the bull market started back then in 1993, but at least it never fell lower. For the next nearly nine years, it lay as if near dead from that huge fall. In November of 2001, silver touched $4.07.

We can say that here began the current bull market in silver. However, if you are trying to apply the 50% principle, you use the highest point and the lowest point. In gold’s case, the low point more clearly coincided with the approximate start of the new bull market. In silver’s case it did not. Lots of years came and went first.

However, for our purposes, it really doesn’t matter. The 50% mid-point between $49.45 and $3.5475 is $26.49875. Let’s call it $26.50. But even if we use the start of the bull market, the 2001 low of $4.07, we find it doesn’t make much difference. The mid point between high and low this way is $26.76.

On January 21, 1980, the London fix reached $49.45. But later in the day, the US market cash price never reached that high. It went only to $48. Taking this as the high, and the $3.5475 for the low, you get a 50% point of $25.77. Or with the $4.07 low, $26.04.

So taking all these figures together, I’m going to say that the 50% retracement level for silver is $26. Going from this, we can expect silver to test the general area from $25 to $27.

Warning: Volatile!

This is my next target for silver. However, I want to give silver a lot more leeway than gold.

We’ve seen how volatile silver’s moves can be. In 1997 Warren Buffett became convinced that silver was extremely cheap —it was then $4.40— and bought 100 million ounces. As he did, the price soared to a high of $7.31 in early 1998. Later of course, the price fell back. By November, 2001 it reached $4.07. Buffett held fast and has been amply rewarded, as he usually is when he invests. Many people buying some silver near $7.31 and watching it fall by 44% over the next nearly four years would likely bail out, especially when so much else was soaring from 1998 to 2000.

I don’t know the exact prices Buffett paid, but the very fact of him buying vaulted the price.

Before that, during the 1970s the Hunt brothers also became convinced that silver was cheap and started to buy. As it rose more they bought more. Finally, in 1980, they were accused of trying to “corner” the market.

They were true believers in silver, and unlike Buffett, kept buying even as the price soared.

The idea of cornering any market is something I wonder about. Can it really be done? To corner a market means to buy most or nearly all of it up. But though you can try this, the price gets progressively higher as you go along. Whether the Hunts were trying to corner the silver market or not, the fact is that they —and many others like them— bought more of it the higher it went. At last, the price was far too high. But not to the buyers: with silver at near $50, I remember a major silver “guru” telling me it would go to $100, and he was buying even more. But finally market reality takes over, and the price falls. Those who bought but did not sell are hurt badly.

To me, that’s not the way to do things. I prefer the Buffett way. You become convinced that something is cheap, and you take a big position: big for you at any rate. Then you wait. And when you see everyone else trying to get in, you sell.

That this is the better way is proven by the fact that Buffett is still going strong. The Hunt brothers were broken by their experience, as indeed –sadly– was my friend, the silver guru.

Old Highs

So keeping in mind that silver’s moves are much more wild than gold’s, I think sooner or later we will see silver approach the $25-$27 level. If it breaks above this, then the next target would be the old highs of 1980.

But $50 in 1980 is not the same as $50 in 2006. And even though I think silver will once again trade at $50, this may not be for years —perhaps not for five years, or until 2010, who knows? And if so, who knows how much $50 in 1980 terms would be in 2010 terms?

All we can say is how much it is in 2005 terms. Using the Inflation Calculator (http://www.westegg.com/inflation/infl.cgi ) we see that $50 in 1980 equaled $126.98 in 2005, the latest year for which you can do this. Using the actual London high of $49.45, we get $125.59.

This is a way of saying that even if silver reaches its old high of around $50, this would still be very much lower in real terms than it was at the peak. And remember, that this real term level of $126 is based on 2005 dollars. Let’s say that silver reaches $50 in 2010. It could well be that the price level in 2010 is 50% higher than it was in 2005. If so, then $126 in 2005 would be $189 in 2010.

I have no way of knowing if silver will reach $50 in 2010, but I’m showing that if it does, it could still be cheaper in real terms than it was in 1980. And I can certainly say that even if silver reached $50 per ounce next month —which I don’t expect— it would be cheaper in real terms than it was the last time it reached that level. Based on the inflation of the dollar as of now, it would have to be about $130 to equal what it was at the highs.

In fact, silver at $50 this year would translate in real terms into less than $20 in 1980 terms. And even with silver at $12 in today’s dollars, this is less than $5 in 1980 dollars, or about one-tenth the price it briefly reached.


$80 Silver?

During silver’s last bull market it went from $1.29 to $49.45. That was a rise of 3,733% in just over 10 years. You can say that the $1.29 price of the 1960s was artificially low by government control; it was the “official” price of silver. We don’t have an official price now. But what we do have is much worse levels of debt and other factors that counterbalance what we had then.

However, if we take the low of $4.07 and assume that this bull market is only half as strong in percentage terms as the old one was, that’s a rise of 1,867%, or $80. So I think that $80 is a conservative target for this bull market, not even considering the difference in real dollars, discounting for inflation. Of course, it has to get past the $26 level first!
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