Silver Price Forecast Shows 263% Gain
As 2015 draws to a close, silver prices may finally rebound from their disastrous four-year slump. A majority of economists believe the Federal Reserve will raise interest rates this week, which could drive a lot of money out of the bond market and into safe-haven assets like silver. (Source: “When Will The Fed Raise Its Interest Rate?” Bloomberg, December 11, 2015.)
Interest rates have been at historic lows for the last seven years. The Federal Reserve reacted quickly after the implosion of Solomon Bros. blew a hole in the financial markets. They cut interest rates and printed enough cash to fill the crater, but there were unintended consequences.
Yes, the Fed saved us from a deeper and more damaging crisis, but those actions were not without cost. Investors and businesses became too accustomed to the constant state of stimulus. Any thought of reverting to normal standards would send markets on a rollercoaster ride.
But the Fed has slowly been unwinding its support over the last year and a half. Raising interest rates would be the beginning of the end. However, a lot of companies with high-yield bonds and tight cash flows are going to be stretched if their borrowing costs go up.
The fear of insolvency will send investors running for the hills. As junk bond yields keep rising to unsustainable levels, the search for safe yields could lead investors back to precious metals. Silver could finally get its long-overdue recovery.
Junk Bonds Become Worthless
The high-yield bond market is already under pressure. Three junk bond funds have gone under in the last week alone. First off, we saw Third Avenue Management stopped granting redemptions on its $788-million junk bond fund, then Stone Lion Capital Partners and Lucidus Capital Partners followed suit. (Source: “Investors See Third Avenue Fueling More Bond Market Carnage,” Bloomberg, December 13, 2015.)
Those kinds of high-profile losses do more than foreshadow a crash; they scare the heck out of investors. After all, the Federal Reserve doesn’t control all the interest rates in the economy, just the federal funds rate, the base from which all other rates derive.
The difference, or spread, between bond yields and the federal funds rate reveals how investors feel about that asset. If they perceive more risk in the investment, then the spread grows larger. Unfortunately, that’s exactly what’s happening and it’s pushing many bond funds into dangerous territory.
History is littered with examples of what could happen next. Faced with the prospect of losing all their money, many investors will flee the junk bond market in search of a safer investment.
So ask yourself: what is a cheaply priced asset that is also a physical store of value?
The answer is precious metals. Among the various commodities in the metals sector, silver is probably the most inexpensive. By the end of 2016, I wouldn’t be surprised if silver prices have bounced back to their previous peak of $50.00 an ounce.
Silver Is Ready for a Turnaround
The more I think about it, the more it makes sense. Wall Street has been drunk off easy money for far too long and they are prone to excess. Cheap credit was used to build another bubble, but we didn’t understand that was the cases until the Fed announcement grew closer.
Loans were given to companies that couldn’t afford them if interest rates were even a little higher. That shouldn’t have been the case, but it was. Now it looks like the Fed will end the saga of easy money, as investors are starting to wake up from their dream-state.
While that’s worrying for the economy at large, it promises a lot of relief for hard-hit silver investors. The grey metal is due for a rebound.