A sovereign debt default, a credit downgrade of U.S. debt or a housing collapse in Asia could easily push the price of silver above $50 per ounce as investors would be left clamoring for a safety trade.
Silver’s low price and its hybrid status between a monetary metal and an industrial metal makes it vulnerable to major price swings. Here are what I see as three major triggers that could push silver over $50 an ounce:
1) Geo-political turmoil. It’s easy to slip into a false sense of security regarding the U.S., European and Asian economies. While we averted a widespread collapse of the banking system in the U.S., governments around the world are growing their money supply in a race to devalue their currencies. The implications of this could be far more reaching than investors and the public anticipate. A sovereign debt default by a major European country, a credit downgrade of U.S. debt or a housing collapse in Asia could all push the price of silver above $50 per ounce as investors will be left clamoring for a safety trade in an environment where there aren’t many safety trades left.
2) Government buying. Large-scale gold purchases by central banks and governments around the world made headlines last year. If central banks and governments followed suit this year by buying and storing silver, they’d be sending a very clear message to the markets that silver is a monetary metal, and its one that, like gold, offers protection against falling fiat currencies.
3) The emergence of new industrial uses for silver. Entirely new industrial uses for silver are growing rapidly. Phillips Baker, CEO of Hecla Mining Company (NYSE:HL), claims silver’s use in new products grew by 18 percent last year. Specifically, Baker cites last year’s adoption of silver as a component in the manufacturing of solar panels and iPads.
Silver’s antimicrobial properties, though, prove more tantalizing to me. Researchers at Bar-Ilan University in Israel announced last week that they’d created a new form of silver-infused paper that can can fight bacteria including E. coli and S. aureus. If their development receives FDA approval, it could transform the food industry and become standard packaging for meats around the world. That would be great for consumers and just as good for silver bulls. Similar transformative breakthroughs that involve silver could aggressively push up prices for the metal.
One of the more tantalizing prospects about investing in silver bullion is the metal’s growing use in emerging products and technology. By some accounts, it’s up 18 percent.
One of the more tantalizing prospects about investing in silver bullion is the metal’s growing use in emerging products and technology. Phillips Baker, CEO of Hecla Mining Company (NYSE:HL), claims silver’s use in new products grew by 18 percent last year.
“Those sorts of things people didn’t envision even existing and that market has just grown, taken off,” Baker tells TheStreet.com. “We’ve seen in the last year the growth in that type of use increase about 18%.”
Specifically, Baker cites silver’s use in the construction of solar panels and iPads. The metal’s also being explored in other industries, too. Chemists at Bar-Ilan University in Israel, for example, announced the development of so-called “killer paper” last week. The material is infused with silver nanoparticles, which gives it anti-bacterial properties. If the paper ever receives FDA approval, it could be used throughout the food industry as a packaging material.
Large-scale studies into the safety and effectiveness of antimicrobial garments woven with silver have also shown promising results, and the tests could foreshadow widespread adoption of antimicrobial garments and bandages by hospitals.
What percentage of silver is used for industrial products?
Bloomberg reports that some 30 percent of silver consumption comes from industrial use. Only 10 to 20 percent of gold demand is driven by industrial use. India, for example, imported 4,000 tons of silver last year with 1,300-1,500 tons consumed by industry, according to CommodityOnline. Look for these numbers to rise as researchers find new uses for the metal.
New industrial uses for silver including use in solar panels and iPads has grown by 18 percent in the last year.
With commentators predicting the demise of fiat currencies in favor of asset-backed regional currencies, here are 5 reasons to invest in silver bullion over gold:
1) The current silver to gold price ratio doesn’t align with historical trends. “Throughout human monetary history the Silver to Gold ratio hovered in the 10-1 range until the invention of futures and options trading in metals,” writes silver bull Bix Weir at RoadtoRoota.com. “After the massive manipulation maneuvers by the Banking Cabal the silver-gold ratio now stands at over 62-1.”
2) Thanks to its relatively cheap price point compared to gold, silver’s much more accessible to everyday investors. Lower priced assets are typically subject to more volatility than higher priced assets. A mania in precious metals would likely press silver up higher and faster than gold.
3) Unlike gold, a large percentage of the silver that’s mined is used in unrecoverable industrial products, which prevents the worldwide silver bullion supply from continually accumulating. Industrial demand for silver has expanded in recent years from flat screen TVs to iPads and solar panels. “We’ve seen in the last year the growth in that type of use increase about 18%,” Phillips Baker, CEO of Hecla Mining, tells TheStreet.com.
4) Silver, gold and other precious metals will serve as hedges against inflation if investor confidence in the Dollar or Euro erodes further. Other geo-political problems can also push investors toward safety trades in gold or silver as evidenced by a surge in prices during the Egyptian riots.
5) In dollar amounts, the relatively small size of the silver bullion market makes its price sensitive to institutional investments. If hedge funds and mutual funds begin taking long positions in the silver bullion market, prices would spike significantly.
The supply of silver as a bullion-grade investment can be more easily calculated than the total worldwide supply of silver.
Quantifying the total worldwide silver supply is difficult as silver has been used throughout history for coinage, silverware, jewelry and in industrial applications. That said, the supply of silver as a bullion-grade investment can more easily be calculated. Market estimates from ArabianMoney.net suggest the total worldwide supply of investor-grade silver bullion is roughly 1 billion ounces. That’s less than half the supply of investment-grade gold bullion, as gold is more frequently saved as a hedge against currency devaluation.
Based on today’s prices, the total supply of investment-grade gold bullion is worth $4.3 trillion. The total supply of investment-grade silver bullion is worth $28.8 billion. During inflationary periods, owners of scrap precious metals such as jewelry will likely sell their gold scrap, not their silver scrap, as gold commands higher prices. This fact can lead to investment-grade silver demand out-pacing the demand for investment-grade gold bullion.
Based on silver’s returns over the past decade, a price target of $50 per ounce in 2011 doesn’t seem out of the question. The recent dip in prices might be a great buying opportunity if you haven’t added the metal to your portfolio yet.
All told, silver prices shot up more than 80 percent in 2010. Who knows where silver prices will go in 2011, but taking a look at the precious metal’s returns over the past decade could give us a rough idea. Based on analysis from Jeff Clark at CaseyResearch.com, silver forecasts of $50 per ounce in 2011 don’t seem unreasonable.
First, take a look at the past decade’s returns for silver (see Clark’s chart to the left). Excluding the decline in silver prices in 2001 before the start of the bull run in metals, the past decade averaged a silver return of 27.5 percent. If silver returns that average in 2011, expect the metal to rise to $39.41 per ounce.
With the threat of ongoing currency devaluation around the world, though, it’s not unrealistic to expect silver to match or come close to 2010’s returns. If silver matches 2010’s returns in 2011, look for the metal to rise to $56.22 this year.
If you really want to jump into the deep end of the pool, let’s look at where silver might go if it matched the all-time record gains the metal set in 1979. Silver price manipulation and the threat of rampant inflation pushed prices up more than 267 percent that year. If silver did the same in 2011, we’d be looking at prices of more than $113 per ounce by the end of the year.
If the Fed can manage to keep the dollar from crashing this year, gains will be subdued. If inflation sets in (as many investors have been calling for since 2008), expect returns to be substantial. Either way, silver at $50 per ounce in 2011 doesn’t seem out of the question, and the recent dip in prices might be a great buying opportunity if you haven’t added the metal to your portfolio yet.