Those Betting Against Silver Prices Now Could Be Kicking Themselves Later
Silver prices have fallen a long way from their 2011 highs, but there are some indicators showing an upswing for the silver price forecast. Silver had previously hit a peak of $50.00 in 2011, but the weight of monetary stimulus finally broke silver prices down by nearly 70% to their current level of $15.89.
There are two factors in the upcoming silver boom: China’s bid for reserve currency status and the silver-to-gold price ratio. The former will propel silver prices over the short term, while the latter helps us set a target for silver prices over the long term.
China’s aggressive bid to elevate the yuan is causing tectonic shifts in precious metals. They just got the China Construction Bank added onto the list of firms that help set the daily price of silver. This is a move that will help bolster the short-term silver price outlook.
In order to pacify investor concerns about the stability of the yuan, they’re continually buying gold and silver bullion. I know we left the gold standard a long time ago, but central banks still use precious metals as a hedge against economic certainty.
For all the complex monetary economics of central banking, it’s ultimately the hard assets like silver that protect a currency’s value. Currency speculators are swayed by the amount of gold and silver held in central bank vaults.
Silver Prices Hinge on China Movements
The China Construction Bank has signed on to CME Group to help set the daily price of silver. It joins the ranks of HSBC Holdings plc, JPMorgan Chase & Co., Mitsui & Co. Ltd., Bank of Nova Scotia, the Toronto-Dominion Bank, and UBS Group AG. (Source: China Construction Bank to join LBMA silver price-setting mechanism, Reuters, October 19, 2015.)
By taking part in the daily auction of silver, China is more deeply entrenched in the precious metals market than ever before. In June, the Bank of China got a seat in the gold price setting process, illustrating its commitment to gaining reserve currency status.
The International Monetary Fund will vote on China’s application in November. Elevating the yuan to reserve currency is something China has wanted for a long time, and hard assets like gold and silver are crucial to the plan’s success.
As a safe haven asset, silver acts as a de facto insurance policy against economic headwinds, thus securing the currency’s value. When the Chinese economy began to slow in the first quarter of 2015, China nearly tripled its silver stock from 122.8 tons to 341.5 tons of silver bullion. (Source: China Silver Stockpiles Surge as Demand Wanes on Slowing Economy, Bloomberg, April 16, 2015.)
And that was before the stock market crash. The continuing slowdown of economic growth in China will ensure high levels of buying in the silver market. China has everything to gain from buying silver at its current lows.
What other silver investors should bear in mind is this: as China continues to buy, the price will inevitably edge higher. We can ride the wave of soaring silver prices on the back of China’s coattails.
Silver-to-Gold Price Ratio Shows 420% Gain
The best thing about silver prices is that we can game out what the medium-term price target looks like. You may be skeptical. After all, when it comes to stocks and bonds, figuring out the greatest possible return is a fool’s errand. But silver is different.
Let me explain.
Silver prices tend to move in tandem with gold prices, both on the up and down swings. But there can come a time when gold and silver fall out of sync, and one becomes undervalued. Right now that is true of silver.
Calculating the silver-to-gold price ratio is fairly simple. How many ounces of silver can you buy with one ounce of gold? The historical average over the last 40 years is 42.8, meaning an ounce of gold costs as much as almost 43 ounces of silver.
Chart courtesy of StockCharts.com
In the past 25 years, silver has become severely undervalued three times: in 1997, 2003, and 2009. Every time the silver-to-gold price ratio crosses a threshold of 70, we see a sudden crash. The ratio rebalances and silver prices skyrocket.
The returns on silver for 1997, 2003, and 2009 were 70%, 200%, and 420% respectively. Right now the silver-to-gold price ratio is back above 70, sitting at an astonishing 74. What happens next shouldn’t be a surprise.
Silver investors who get in at today’s low silver prices could see massive returns. It’s happened before when the silver-to-gold price ratio peaked, so history suggests there’s potential for gains of 420%.