This was written a while back, but was worth another look IMHO>
About a month ago, I wrote a two-part commentary looking at the long-term “price targets” for gold and silver, and how those numbers tended to lose meaning because in the hyperinflation scenarios envisioned for the future (where paper currencies go to zero) the value of any hard asset correspondingly moves to infinity.
The purpose of that piece was not so much to see how many “zeros” I could attach to gold and/or silver, but to remind people that since we can’t “understand” hyperinflation that we were likely “under-preparing” for such a scenario. While we have very good reasons for looking at such the-sky-is-the-limit price-targets, as prudent investors it’s also essential to engage in more conservative forecasting. It is only by looking at both upper and lower parameters that we can make optimal decisions as investors.
The purpose of this commentary is to provide that “lower parameter”, to guide us in answering two questions: how aggressively should we be buying (in particular) silver over the short-term, and (over the longer term) how much silver can we/should we accumulate?
To answer those questions, I will attempt to provide readers with a realistic approximation of the rate of price-appreciation, rather than to simply assign some arbitrary, long-term number to the price of silver. In this respect, we must automatically look to the gold market. While silver has recently been “leading” gold higher, this is extremely atypical – due to the much larger size of the gold market. In any “conservative” long-term appraisal of the silver market, our base-assumption should be that gold will lead silver, not the other way around.
Looking at the gold market, we see that over the last two years (the first time in decades that the bankers gold-manipulation scheme has been obviously unraveling) that the price of gold has advanced by roughly 30% each year - assuming that the current rally takes gold to somewhere around the $1500/oz mark by year end.
More importantly, we have seen obvious indications that the price of gold is being steadily marched higher by the big-buyers who now control this market. Apart from the ever-shorter, ever more-trivial “ambushes” of these markets by the banking cartel, we are seeing a fairly stable progression.
Let’s assume that this 30% per year appreciation-rate is deemed “optimal” by these big-buyers. We can make a fairly persuasive argument that this is the case. Allowing the gold market to progress at a slower rate would not only impair supply, but would also allow the smaller, retail buyers to afford to purchase a bigger piece of the 'gold pie'. Conversely, pushing the price up faster than 30% per year pushes-up their own price for purchasing gold to a painful level. So we will consider the 30% annual appreciation rate to represent the “Goldilocks” scenario for the gold market.
What does this imply for silver? The answer to that question depends totally on whether we want to make a “bullish” case for silver, or to answer more conservatively. Since I have already dedicated this analysis to “conservative” forecasting, this is the path I will currently pursue. Obviously, the most-conservative analysis of the price of silver (in relation to the price of gold) would be for the current price-ratio of 50:1 to persist.
I do not, for the moment, believe this ratio to be sustainable over the longer-term. But (for the sake of argument), I will use this 50:1 ratio as our baseline assumption, and wait until the end of this piece to argue against my own scenario.
If the price of gold continues advancing at roughly a 30% annual rate, this would also (roughly) translate into the price of gold increasing by an average of more than $500/ounce per year – even if we only extrapolate over only a five-year time horizon. A less-conservative appraisal would be that the price of gold will advance by at least $500 per year (and generally much more), but I’m happy for purposes of analysis to use the “round” and very conservative number of $500/year.
Using that level of price appreciation for gold, and keeping our conservative 50:1 price ratio, we come up with our “conservative forecast” for the price of silver: that we can expect the price to advance by at least $10/ounce per year. While those new to the sector, or with very pessimistic appraisals of the silver market may disagree that this number represents a conservative forecast, certainly most of the silver-bulls who have looked at this market closely may consider this price-progression to be extremely conservative.
Specifically, for the price of silver to be restrained to only an advance of $10 per year, we would have to make a number of pessimistic assumptions about the silver market:
a) Inventories. Regular readers are familiar with the detailed arguments I’ve made that the “inventory” numbers supplied to us by the quasi-official “record keepers” for this sector are asabsurd as they are fraudulent – making a default in this market imminent. For my conservative forecast to be valid, the inventory numbers which we doubt with such strong convictions would have to be accurate.
b) Silver “shorts”. We are all familiar with the gigantic, manipulative (and likely “naked”)short-positions of the banking cabal in the silver market, notably that of JP Morgan. If (or “when”) those short-positions implode, such a default event would instantly launch the price of silver to many multiples of the current price. Thus, for the conservative forecast to be valid, the “shorts” will have to somehow manage to postpone their own, inevitable funerals.
c) Investment demand. as has been reported by myself and others, not only has general “retail/investment” demand been incredibly strong in the silver market (even while the price shoots higher), but there has been a literal “explosion” in demand in both India and China – the world’s two-largest populations, with the world’s largest “appetites” for precious metals. This year, Indian demand has shot-up by more than 500%, while Chinese demand is roughly 400% higher. For my conservative forecast to be valid, demand must cool-off in those two markets, since if that level of increased demand continues, already-depleted inventories will be quickly, totally exhausted.
d) Industrial usages. Regular readers are very familiar with my bullish outlook on futureindustrial demand for silver, especially with respect to its “anti-microbial” properties. With more new patents for silver being created in recent years than for any other metal, and given silver’s many superlative metallurgical/chemical properties, the outlook for future industrial demand is for more strong (if not exponential) growth. For my conservative forecast to be valid, industrial demand would have to quickly begin to level-off, given that there is no indication that silver supply can be rapidly increased, under any price/market conditions.
Most sophisticated investors in the silver sector would consider the pessimistic outlook for those four variables to be unlikely, while the chance of all four pessimistic scenarios proving to be valid would be considered virtually impossible. However, I would argue that there is still value in constructing this worst-case scenario for the silver market.
While we consider the “known” variables to be little threat to the future price-explosion of the silver market, there is always the possibility of “unknown” variables bubbling to the surface. Could some large, previously unknown “stockpile” of silver magically emerge? Could some rapid, unexpected technological advances suddenly and dramatically curtail industrial demand (i.e. better/cheaper applications, using other metals)? More generally, what could occur in the silver market, if “something bad” were to happen?
For readers who are satisfied that the price parameters of the silver market have been adequately defined, and the conservative, baseline scenario of the price advancing by $10/year is reasonable, this gives us a reasonably firm time-horizon on how much longer “cheap silver”might remain available. While it is very difficult for any of us to know how much bullion we will need to hold for the economic calamities which await us, this price guide will hopefully help people ascertain how much silver they will likely be able to afford to purchase going forward – assuming that some dramatic, market-changing event doesn’t occur first.
There are obviously no guarantees here. The silver market could implode tomorrow. But if we assume that such implosion can still be delayed for a substantial period of time, we should be able to calculate how much money we will have to budget for our future silver bullion purchases – prior to that event occurring.