Why Silver Prices Could Easily Double From Here

November 5, 2013 at 10:54

truthing

In the first 10 months of this year, the U.S. Mint sold 39.2 million ounces of silver in coins.

In the same period last year, the Mint only sold 28.94 million ounces of silver in coins. A general negativity by investors surrounding silver this year has not stopped people from buying silver coins. In fact, demand is up 35% so far in 2013. (Source: U.S. Mint web site, last accessed November 1, 2013.)

Meanwhile, if I look at the chart of the gold-to-silver ratio—which shows how much silver is needed to buy one ounce of gold bullion—silver prices look undervalued.

 

Chart courtesy of www.StockCharts.com

At present, it would take 60 ounces of silver to buy one ounce of gold bullion. The 200-year historical average is 37 ounces of silver to buy one ounce of gold bullion. (Source: Market Watch, July 19, 2013.) If we go back to the historical average, and we eventually will, silver prices would have to rise to $35.00 an ounce given the current price of gold bullion.

And if we look at the “natural gold-to-silver ratio,” that’s the amount of silver in the earth’s crust compared to gold, then the ratio is 17 to one. Yes, in that case silver would have to increase in price to $77.00 an ounce!

The more realistic picture, dear reader, is for silver to go back to its record high reached in April 2011 of $48.70 an once—that’s more than twice the current price of silver.

Since silver prices fell this spring, silver producers don’t have much incentive to explore for more silver—they have started to cut back on their production. So supply is soft for silver, demand is rising, and investor sentiment is very negative—the perfect scenario for silver prices to start rising again.

It’s also very interesting to note that for gold bullion prices to get back to their peak of $1,900 an ounce, they would have to increase 44% from today’s gold bullion price. But for silver prices to get back to their peak of $48.70 an ounce, they would have to rise 132% from today’s prices. Silver prices have been much harder hit than gold prices—and that tells me silver has more upside potential.