Although silver investors have suffered enormously in recent years, a key leading metric is suggesting that prices may soar in the near future. Silver investors who bought precious metals the last time this indicator hit its top would have earned a stunning 420% return.
I should warn you; this isn’t a get-rich-quick scheme. There could be severe turbulence along the way, but if you buy at the right time and under the right circumstances, there is a lot of money to be made. The upside of silver is perennially undervalued, but it’s rarely been as bad as this.
An ounce of gold is currently worth 77 ounces of silver, as opposed to 32:1 in 2011. When you consider long-term trends and the headwinds against precious metals, it becomes clear that silver’s present cheapness is a historical anomaly.
So what’s happening here? What combination of factors are conspiring to keep the grey metal down?
Chart courtesy of www.StockCharts.com
The uncomfortable reality is that capital fled from commodities between 2011 and 2015, but we saw a huge stock market rally. Money poured into equities as the Federal Reserve printed tens of billions of dollars every month, inflating share prices without any regard for reality.
Since bottoming out in early 2009, the S&P 500 and the Dow Jones grew 120% and 98%, respectively. The NASDAQ returned a whopping 197% in the same timeframe. In contrast, silver has fallen more than 70% from its $50.00 peak in 2011.
Curiously, gold prices only declined by little more than 40%. Quantitative easing fostered a speculative bubble in equities, thus reducing the need for safe haven assets like gold and silver. But why was silver so disproportionately affected?
The answer is frustratingly simple: investors sometimes act irrationally. Let me explain.
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Gold and silver prices tend to move in tandem over the long haul, but their relationship can fracture in the short term when market psychology overtakes fundamental analysis. The correlation is modeled by the silver-gold price ratio, which averaged a conversion rate of 42.8 over the previous 40 years.
Silver prices traditionally mirror gold’s movements, and vice versa, but there are moments when the silver-gold ratio strays absurdly far from the mean. At such times, investors stand to make a killing.
There have been three such instances in the last 20 years:
Chart courtesy of www.StockCharts.com
What the chart above illustrates is a distortion in the true value of silver. Since we moved to a fiat system, precious metals are occasionally mispriced because their value is determined by market forces.
When the gap between gold and silver prices exceeds a multiple of 70, a correction is around the corner. The last three times the ratio peaked were in 1995, 2003, and 2011. The respective gains were 70%, 200%, and 420%.
Can it happen again?
Is Silver Going to $50.00?
The prospect of $50.00 silver is exciting for fans of the grey metal. And better yet, it could happen sooner than anyone expects. Remember that 70 was the magic number for the silver-gold ratio, and right now we’re sitting at a conversion rate of 77.
The last time gold was so expensive relative to silver, a smart investor would have bought the grey metal and just sat back. And they would have made a whopping 420%!
Another reason silver prices always rebalance is the natural silver-gold ratio. When investors look at their screens and see price charts for the precious metals, they often forget about these are physical properties.
The Earth has a finite supply of each metal, and intrinsic value of silver and gold is ultimately tied to their physical abundance. When you compare the total number of silver and gold deposits, the ratio rounds out to 17, which reinforces my point about silver being grossly undervalued.