It’s no secret that the Fed’s quantitative easing measures have had a negative impact on silver prices, but silver might soon be set to skyrocket.
There’s one economic trend that has a solid track record of forecasting unexpected spikes in silver prices, but few investors know about it. It in fact has the potential to create huge gains for savvy investors, with upside potential in the range of 200% or more.
Don’t believe me? The last time this happened in 2011, silver prices rose above $50.00 per ounce.
But before you go out and invest in silver, keep in mind that you won’t be making huge profits in the short-term. Broader market softness, stock volatility, and slumping commodities demand are all coalescing together to create some pretty volatile economic conditions.
Once you factor in the Chinese stock market crash and slowing growth in emerging markets, you get the picture; the get-rich-quick schemes are a thing of the past.
But if you can’t double your money overnight, then what can you do? The smart investor realizes that when it comes to silver prices, paying attention to historical trends can lead to massive profits over the long-term.
When you sit down and have a sober look at patterns in silver price movements in the last two decades, a stunning trend emerges which seems to come in cyclical waves. Almost every single time this indicator rears its head, silver prices decline. But when it disconnects itself too far from the average for a long enough period of time, a sudden market drop usually follows.
Now, this indicator has an inverse relationship with silver prices; silver rises when this trend goes south.
No one can deny that investing in silver is a complex affair. Knowing when to jump in and out of the market can test even the most knowledgeable person’s nerves. But one fact always remains constant.
Anyone can tell you about buying low and selling high, but a serious investor knows that you have to go above and beyond simply betting on value rising. The key to make the smart moves in silver markets is recognizing the right moment to dive in.
Is Silver the Best Hedge Against Recession?
Now, because we’re so used to paper money and virtual transfers, we often forget that silver and gold had been the monetary foundation of economic systems for thousands of years. Gold and silver bullion were used as everyday items of universal exchange long before people were putting pictures on pieces of paper. The importance of this historical legacy cannot be overstated, and it has carried over into precious metals’ value as stable security assets.
Translation: silver has been valuable for thousands of years, and any decline has always been followed by an increase over time.
But why has silver been so stable over the long term? It’s simple, really. There is a limited quantity of it, which means that its supply and demand dynamics are constrained by real physical factors. Compare this to paper money, which often only exists in virtual form on a bank’s electronic balance sheet.
Governments prefer the paper stuff because they can simply print more of it when the negative effects of a business cycle set in.
Got that? The rise of virtual paper money did not necessarily mean the end of silver bullion as a form of currency, but rather its transformation into a financial hedge against economic collapse. Gold is of course no exception, and is important for the same reasons.
The yellow and grey havens have historically been used as a security policy against tough economic times, as investors always knew that when the going got tough, they could safely park their money in commodities that historically retain their value. Gold and silver prices tend to move together; but sometimes disconnections arise. This is where the indicator I spoke of earlier comes into play.
The ratio of gold to silver prices is the best way to flesh out the details of their price relationship
Shockingly enough, gold and silver prices have entered a dangerous imbalance.
But let’s backtrack for a second. The silver price has fallen by more than 70% since its 2011 high price point of $50.00 per ounce. The grey metal currently sits at $15.92 per ounce.
Considering the gloomy economic atmosphere in today’s global markets, it’s rather strange that silver has not soared in value. But that’s where the ratio we spoke of becomes important. Unlike silver, gold prices have dropped by only about 40% since 2011.
Now, the historical average of the gold top silver price ratio for the last four decades is approximately 43:1. Using this figure, ounces of gold can theoretically be converted to almost 43 ounces of silver. But using the last 40 years as a timeframe to measure the average can lead to distortions, as our monetary system had introduced paper money. If you take into account the real, historical ratio of gold to silver prices, you get a very different figure in the range of 17:1.
Ready for a shocker?
In the last two decades, an almost continuous pattern can be identified. Whenever the ratio of gold to silver value hits more than 70 ounces of silver to one ounce of gold, it indicates that markets are undervaluing silver.
Consider the following. The ratio in question maxed out in 1997, but it also peaked in 2003 and 2009. Every single one of these occasions was followed by a large silver price rally. Those investors who recognized the perfect opportunity and purchased silver made exponential gains, often in the range of 200% or more.
Our Silver Price Outlook for 2016 is Decidedly Bullish
And where is the gold to silver price ratio sitting at right now?
You guessed it; it’s in that range where silver is due for a huge upswing. The ratio is now in the range of 75:1. Now, I can’t claim to predict the future, but it doesn’t take an MBA to figure out what might happen next.