Silver prices setting up for 30-year high?

After silver’s miraculous run-up in prices last year, it’s easy to write the white metal off. Here’s why we think last year was just a teaser for what’s coming soon.

Almost one year ago to the day, silver investors witnessed a miraculous run-up in prices – one of the most aggressive silver price runs in three decades. From late August of 2010 to April of 2011, silver prices did little except go higher from a low near $18 to a peak just below $50 an ounce. That’s a return of 177 percent in 7 months.

Now that the hoopla has died down, a lot of investors are acting like the silver story has run its course. Not so fast says Eric Parnell of Gerring Wealth Management. He argues that what’s really interesting about silver’s peak last year is what happened afterwards – namely that prices didn’t collapse entirely.

“Within two months after this previous peak in 1980, Silver lost over 75% of its value in falling back to $11,” Parnell writes. “However, the same fate has not befallen the white metal this time around. While the losses since have been sizeable – it dropped by -30% within the first month after its April 2011 peak and continued lower through the remainder of the year to post a total peak to trough decline of -44% – it has since stabilized.”

Parnell believes that means silver is setting up to break through that $50 an ounce barrier and keep climbing beyond it. Why? If you look at a three-decade chart pattern for silver, it looks like it’s set the stage for a double top:

There’s been a lot of heartburn for silver investors who held onto their metal after the April highs. And yet, it’s important to remember that the fundamental reasons for the surge in prices still remain intact: governments around the world are aggressively printing money to stimulate their economies. In the face of the inflation that creates, investors and individuals have to find ways to protect their wealth. Silver and other hard assets are one of those ways.

It makes sense after all that silver speculators would aggressively sell their metals when prices neared $50 an ounce. They were in the trade for the quick and easy gain. As soon as the metals started poking its head into uncharted territory, those weak hands jumped ship. Now, we’re trading sideways as bargain hunters wait for prices to fall further. Once we see hedge funds moving back into precious metals, expect the frenzy to start again.

Still not convinced that inflation is on its way? Bookmark the Ludwig von Mises Institute‘s web site, and take a peak at their True Money Supply chart every few weeks:

If that doesn’t keep you honest about the state of the dollar, nothing will.

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