The steady upward march in gold and silver prices has the power to seduce investors into thinking that the trend is going to continue indefinitely. I’ll go ahead and tell you now that’s it’s not. Markets are ultimately driven by supply and demand, and what’s driving silver prices right now is the extraordinary growth in the money supply. So long as the Fed keeps pumping cash into the economy, the dollar will continue to weaken and that means higher gold and silver prices.

The most important question then is, “How far will silver prices go before they peak?” Global Investing Strategist at Money Morning, Martin Hutchinson, was brave enough to make a prediction over at MoneyMorning.com. His call? We’ll see silver prices at $150 an ounce within the next 12-18 months.

How likely is $150 silver within a year?

Since silver prices are, in large part, dictated by policies set by the Federal Reserve, we’ve got to look at the Fed’s roadmap for the next year to get an idea of where silver prices are headed. Reserve Chairman Ben Bernanke has already made it clear that interest rates will remain near-zero through at least 2013. That gives banks at least another 15 months of cheap cash to pump into the economy.

If we are going to see a mania in silver prices, it’s going to happen before the Fed raises interest rates. That means 2012 could be the sweet spot for silver prices – particularly if the Fed embarks on another round of quantitative easing (something Bernanke hasn’t ruled out).

Outside of the Fed’s actions, we can look to the gold-silver ratio for an indication of where silver prices are headed, Hutchinson argues. During the height of the silver mania in 1980, the ratio of silver to gold briefly touched 16:1. If that were the case today, silver prices would be at $113.25 an ounce. Instead, silver’s trading at $40.66 an ounce for a silver-gold ratio of 44:1.

Hutchinson believes the gold:silver ratio can’t hit the extremes of the 1980s for two main reasons: 1) The silver market was being manipulated by the Hunt brothers (see my post Silver Thursday, the Hunt Brothers, and the collapse of a precious metal for more); and 2) Industrial demand for silver declines when the silver price spikes.

Still, Hutchinson doesn’t rule out silver hitting a 25:1 ratio to gold. If that plays out, then every dollar gold goes above $2,500 an ounce, silver should climb higher than $100 an ounce. I’m convinced we’ll see gold prices above $2,000 an ounce by the end of the year (reference 10 reasons why we’ll see gold over $2,000 an ounce), and Hutchinson’s equally convinced gold will re-touch it’s inflation-adjusted high of $2,500 an ounce that was hit in 1980. He even speculates gold could approach prices near $5,000 an ounce (the 1980 peak adjusted for growth in the world’s money supply). If that happens, it’s difficult not to see silver prices north of $150 an ounce.

No matter where the price ultimately goes, it’s clear silver’s in an uptrend that should continue for at least a year and possibly as long as two years. Keep an eye on Fed policy for a barometer of just how high silver could go.

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Tags: Ben Bernanke, Federal Reserve, gold-silver ratio, silver price forecast, silver price predictions, Silver Price Target

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