Silver in Mega Bull Market That May Rival the 1970's

Mark O'Byrne - Fri 27 Nov, 2009

Silver Undervalued against Gold

Gold gets all the news at the moment, but you should really be paying attention to silver. There could be a far greater move to come there.

Silver remains very undervalued on a historical basis and is undervalued even against gold. While gold has begun to receive some interest from a small minority of retail investors, silver remains the preserve of relatively few contrarian investors and the media and financial press rarely if ever covers silver. And yet silver is likely in the intermediate stage of a bull market that will rival the 1970’s.

Silver is currently trading at just below $17.50 per ounce. Silver rose to a recent nominal high $20.88/oz in March 2008. After an 18 month period of correction and consolidation, silver looks set to challenge that high in the coming months. We continue to be bullish on gold and particularly silver and believe that silver will likely surpass its non inflation adjusted high of $48.70 per ounce and its inflation adjusted high of some $130 per ounce in the coming years.

Why Silver Is In a Bull Market and How High Could it Go?

Precious metals has been the best performing asset classes in recent years with gold and silver outperforming equities, property and most asset classes over a 3, 5 and 10 year period. This outperformance looks set to continue in the coming months due to the very bullish fundamentals. The primary reason for our bullish outlook on silver is due to the continuing and increasing global macroeconomic, currency and geopolitical risks; silver’s historic role as money and a store of value; the declining and very small supply of silver; significant indus trial demand and perhaps most importantly significant and increasing investment demand.

Gold, oil and nearly every major commodity, stock indices and property market surpassed their record highs in recent years. Favourable supply and demand factors, continuing global macroeconomic and geopolitical risk and concerns regarding the emergence of inflation and stagflation as the massive global monetary and fiscal reflation affects the value of fiat currencies all point to higher silver prices in the long term.

In the 1970’s silver rose from under $2/oz in 1970 to nearly $50/oz in 1980 - more than 25 times. Thus were silver to replicate its performance in the 1970’s again, it would have to rise 25 times. The average price of silver in 2001 was $4.37/oz and 25 fold increase would result in silver rising to $110/oz. While this price target may seem outlandish to some, it is worth remembering that silver’s record high in 1980 adjusted for inflation was some $130/oz.

Admittedly, the final phase of the silver blow off was a speculative bubble as the billionaire Hunt brothers attempted to corner the silver market. Today there are hundreds of billionaires, some multi billionaires, thousands of millionaires and hedge funds and many sovereign wealth funds. Small allocations by any will see sharp moves up in the price. Indeed, the silver market is so small that it could very easily be cornered again (as appears to be happened in the tin market today).

Is silver a hedge against inflation and systemic risk or an opportunity to profit?

Silver is a hedge against macroeconomic, systemic and inflationary risk with the attractive added potential for significant capital gains. Real asset allocation and prudent diversification would be an important reason to have an allocation to silver. Silver is highly correlated to the safe haven of gold and is in effect a leveraged sister of the precious yellow metal. Thus, informed investors use gold more for wealth preservation purposes and silver in order to make a return.

Silver Undervalued Versus Gold

Silver is undervalued versus gold with the gold silver ratio at 64:1 ($1150oz/$18/oz). This is particularly the case on a long term historical basis. The long term historical average gold to silver ratio is 15:1 and this is because it is estimated that geologically there are some 15 parts of silver in the ground for every one part of gold. In 1980 the ratio nearly reached 15 ($850/$50=17) and the average in the 20th century has been around 40:1.



It is important to note that silver, unlike gold, is heavily used in industry and it is believed that since the dawn of the indus trial revolution some 95% of the world's silver has been used up in indus trial applications. Because of gold’s much higher value, it gets recycled and all the gold mined in the world ever is still with us but photography, mirrors and other indus trial uses makes silver like oil - when consumed it is gone forever.

Why There’s Plenty More Upside in Silver

Silver is priced at some $17.50/oz today. The average price of silver in 1979 and 1980 was $21.80/oz and $16.39/oz respectively. In today’s dollars and adjusted for inflation that would equate to an inflation adjusted average price of some $60/oz and $44/oz. It is for this reason that we believe silver will be valued at well over $50/oz in the coming years and silver remains the investment opportunity of a lifetime.

EDITOR’S NOTE: Mark O’Byrne is Executive Director of international bullion dealers, GoldCore, ( www.goldcore.com ). He is regularly quoted in the international press and takes part in the Bloomberg Gold Survey and the Reuters Precious Metals Poll.

How to Speculate in Silver

• Silver options and futures
• Silver ETFs
• Silver mining stocks
• Spread bet silver

How to Invest in Silver

• Allocated and unallocated silver accounts in Via Mat London and Zurich
• Perth Mint Government Silver Certificates ( can be owned in pension)…
• 1000 troy oz bars – (weigh some 31 kgs) These bars are COMEX good delivery bars.
• 100 troy oz bars – (weigh some 3.11 kgs) These bars are among the most popular with retail investors. Popular brands are Engelhard and Johnson Matthey.
• 90% Silver Bags
• 40% Silver Bags
(Pre-1970 U.S. legal tender 90% and 40% silver coins, which were used as money until they were replaced by the precious metal free coinage introduced in 1970 and used today. Bags of U.S. dimes, quarters, half-dollars containing 90% silver or 40% silver are traded based on their precious metal silver weight.)
• Silver Eagles and Silver Maple Leafs ( Legal Tender 1 oz coins)

NOTE: Silver bars and silver bags can be taken delivery of but due to the volume, weight, difficulty to store securely and cost of insured delivery, most investors buying silver in volume opt for unallocated and allocated silver accounts or government silver certificates due to their being no annual and ongoing storage, insurance or administration fees.

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