A Crucial Number for Silver Investors
Commodities / Gold and Silver 2010 Jan 24, 2010 - 05:06 AM GMTBy: DailyWealth
Six years ago, on January 15, 2004, I officially recommended silver for readers of my Weber Global Opportunities Report.
We'd had silver stocks, and I'd owned silver personally, but I was waiting for silver to fall in order to get in at a better price for the newsletter readers.
We got in at $6.18 per ounce... It soon went to $8 and then fell back to $6, and then climbed back to $8, where it stayed a couple of years before mounting a new rise in 2006.
I tell you this to show how wide silver's swings can be ($6 to $8 is a 33% gain in a few weeks' time, then $8 back to $6 is a 25% plunge in an even shorter period). I also want to show the long periods of flat prices that characterize the metal as well.
So now silver is over $18.50. How high can it go?
I've often mentioned that a key thing for silver is for the metal to get back to test the 50% level of its huge decline from 1980 to 2001. This level represents a retracement of 50% from the highest point it reached in the previous bull market to the lowest point it got in the bear market.
On January 21, 1980, silver's London fix price was $49.45. It has never been higher. From there, it began a plunge that would take it to a low of $3.5475 at the end of February 1993. That was a plunge of 92.8% in just over 13 years. A 50% retracement of this loss would be around $26. So far, it has not done that. I'm still waiting.
However, I want to give silver more leeway than gold, since it is so much more volatile. My feelings are that when and if silver soars, it will do so in a fairly short time and go to levels that are hard to believe today.
Several years ago, I thought if silver broke above that $25-$27 level, it could get to $50 in 2010. If it did, in real terms, after inflation, this would still be a lower price than the $50 silver briefly reached 30 years ago. In real terms, $50 in 1980 bought what it would take over $130 to buy today.
I think we are a long way from prices like that. Again, first I want to see how silver handles that 50% point. Maybe we'll get a chance to see that soon.
Already this year, the gold/silver ratio has fallen. This ratio shows the number of ounces of silver one ounce of gold will buy you. The ratio ended last year at 65:1. Now it is 59:1. Even this ratio is historically high for silver. The chart below shows the average annual gold/silver ratio from 1792, when the U.S. dollar began, to 2005.
The next chart updates this, and gives a view of the last 10 years: We've seen the traditional ratio is about 16 to 1. However, at the peak of the last precious metals bull market, back in January 1980, silver went as high as just 14.8 ounces per one gold ounce.
So far, in this bull market, silver has not gotten below about 45:1, back in 2006. I'd want it to make another attempt at that ratio, and then see what happens. This, too, I think will happen in 2010. It's something precious metals holders will want to watch closely.
The way to best play silver is just to buy it, or one of the ETFs (SIVR is best), and wait. Be prepared to see it very volatile, and don't have so much that you panic every time silver plunges. In silver bull markets, that's what silver does. If you can, just put your position out of your mind entirely, or at least at the very back of your mind.
But expect silver to run higher in the coming years. Nearly every government in the world wants their currency to decline in value to make it easier to service debt. That means real, timeless currencies like gold and silver will continue to rise in value.
Regards,
Chris Weber
P.S. Chris has an incredible story – starting at age 16, with money he saved from his paper route, he made over $1 million from his precious metals investments alone. Quite simply, Chris is the best investor we know. We have never seen him wrong about a major market call. If you're interested in learning where Chris is putting his money today – including his favorite way to play silver right now – click here.
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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