3 reasons to move from silver into gold

Precious metals investors are re-assessing their holdings, and here are three reasons why gold will likely out-perform silver in the months to come.

The manic rise and fall in silver prices over the past few months has a lot of precious metals investors re-assessing their holdings. In the near-term, it looks like gold bugs have the upper hand. Here are three reasons why the yellow metal will likely out-perform silver in the months to come:

1) Slow and steady wins the race. The fundamental case for gold and silver hasn’t changed, but investor perception has. Whatever the cause of silver’s violent 30 percent plunge, the aftershocks of that move will likely continue for several months. Meanwhile, gold’s proven that its support won’t be knocked out so easily. Over the past month, the iShares Silver Trust ETF (NYSE:SLV) has shed nearly 18 percent of its value. The SPDR Gold Trust ETF (NYSE:GLD) has actually appreciated 0.4 percent during the same time span. That shows unflappable support for the yellow metal even as panic seemed to set in for commodities across the board. When the muck truly hits the fan, there’s nowhere safer than gold.

2) A ratio gone mad. There’s been a lot of speculation about the gold:silver ratio of late. Silver bulls like Eric Sprott of Sprott Asset Management – which manages the Sprott Physical Silver Trust ETV (NYSE:PSLV) and the Sprott Physical Gold Trust (NYSE:PHYS) – have been calling for titanic shifts in the ratio. Sprott’s actually argued that the gold:silver ratio could fall as low as 10:1 (meaning gold would cost just 10 times as much as silver). If that were the case today and gold stayed at $1,491 an ounce, we’d be looking at silver prices around $150 an ounce. Perhaps such a move will be possible over the course of several years, but don’t expect it over the next few months. Since the 1980s, the gold:silver ratio’s been closer to 60:1, which means $25 silver is just as likely as $150 silver (in fact, it’s probably MORE likely). In the words of Dave Kansas at the Wall Street Journal: “It’s more likely that the ratio will revert to modern-era norms rather than race back to the Napoleonic era.”

3) Silver ETFs push down prices. One of the most powerful drivers of silver prices today comes from physical silver ETFs. These stock market vehicles use the cash they get from issuing new shares to buy physical silver. Conversely, when the price of silver falls, ETFs like the SLV must liquidate their physical silver holdings to buy back shares. When the market’s trending up, the SLV can accelerate the rise in silver prices. During extreme silver sell-offs, SLVs decline floods the silver market with excess supply.

“On May 4th as silver plunged below $40, SLV experienced such heavy differential selling pressure that it was forced to liquidate 4.8% of its holdings in a single trading day!” writes Adam Hamilton and Scott Wright of the Australian investing site, TheBull. “This was 16.8 (million) ounces of physical silver that hit the markets!” That’s an enormous amount of silver. Hamilton and Wright point out that it’s 60 percent of Silver Wheaton Corp.’s (NYSE:SLW) silver output for an entire year, and it hit the market in 6.5 hours!

Gold’s stability in the face of panic selling in the silver market is evidence that gold holders have the stronger hand. More selling in the silver space, though, could be on the slate as the gold:silver ratio moves back toward reasonable levels. The ratio hasn’t fallen as low as it did last month in 30 years, after all. Interpret that how you may, but I see it as evidence of an anomaly that’s in the process of correcting.

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Sprott silver predictions calling for uncharted gold-silver ratio

Sprott Asset Management’s chief investment officer Eric Sprott believes the silver:gold ratio could tumble as low as 10:1. What would that mean for silver prices in 2012 and beyond?

Sprott Asset Management’s chief investment officer Eric Sprott has been one of the most vocal silver bulls in the media these days. Sprott believes that the silver:gold ratio could tumble to 20:1 or lower; perhaps as low as 10:1, according to Brian Sylvester of The Gold Report. While gold may meet strong resistance at $2,000+ per ounce, Sprott believes silver will keep climbing – and, in the process, substantially lower the silver:gold ratio.

Let’s give that prediction some historical background before looking at what it might mean for the future price of silver:

1980: The silver:gold ratio hit its all-time low driven in part by the Hunt brothers’ efforts to corner the silver market. At its peak, the ratio stood at 17:1.

2003: The current bull market in precious metals starts gaining steam with the silver:gold ratio at 83:1.

2011: The current silver:gold ratio stands at roughly 38:1.

2012+: Sprott predicts the silver:gold ratio could enter uncharted waters sinking as low as 10:1.

Before dismissing Sprott’s predictions off-hand, keep in mind that’s he’s not an end-of-the-world-preaching silver bug who lives in a bunker in the Canadian wilderness. He directs a vast pool of cash that’s made a big bet on the silver metal. According to some estimates, Sprott’s got $1 billion or so of client capital and his own cash invested in silver.

A big chunk of that comes from the Sprott Physical Silver Trust (NYSE:PSLV), which launched in November 2010 and now stores more than 22 million ounces of physical silver.

“When you’ve got guys like Eric Sprott and Frank Holmes [CEO and CIO of U.S. Global Investors]-guys that are really recognized as ‘thought leaders’ in the space – predicting much higher silver prices, that in itself becomes a fundamental driver for the price,” James West, editor of the Midas Letter, tells Sylvester.

Should Sprott’s bullish calls on silver prove out, and the ratio sinks to 10:1, you could expect to see silver prices at $200 an ounce or higher depending on where gold stands. Those predictions would sound foolhardy if the future of the dollar and other global currencies didn’t look so dim. So long as that picture doesn’t change, though, Sprott’s got a backer in me.

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15 gold price predictions for 2011

A number of influential traders and executives have publicly weighed in with gold price forecasts for 2011. Here’s a recap of the more memorable predictions from 15 trading professionals and individuals.

A number of influential traders and executives have publicly weighed in with gold price forecasts for 2011. Here’s a recap of the more memorable predictions:

Chuck Jeannes: Goldcorp Inc.’s (NYSE:GG) CEO sees gold at $1,500 an ounce as “easily achievable,” and he could see the price eventually rising as high as $2,300 if and when inflation sets in (The Street)

Dennis Wheeler: Coeur d’Alene Mines Corporation’s (NYSE:CDE) CEO “would not be surprised” if gold prices rose to $1,500-$1,600 an ounce in 2011 (Reuters)

Sean Boyd: Agnico-Eagle Mines Limited’s (NYSE:AEM) CEO argues gold at $1,600 an ounce in the next 12 months would “not be a stretch” (Reuters). “Gold will ultimately go above $2,000 and I think it’s going to go in steps so I could see $1,600 this year,” he tells The Street.

Mark Cutifani: The CEO of AngloGold Ashanti Limited (NYSE:AU) see gold range-bound between $1,300 and $1,500 an ounce in 2011 (The Street)

Rick Rule: The founder of Global Resource Investments, which was acquired by Sprott Inc. (TSE:SII), expects “some event-driven spike in metals prices.” “I have no earthly idea where gold will close, but to be a good sport and play the game, I’ll say $1,750,” he says (SeekingAlpha)

Aaron Regent: CEO of Barrick Gold Corporation (NYSE:ABX) tells The Street he believes the “forward curve would suggest a gold price in the $1,500 range” (The Street)

Ian McAvity: The founder of the Central Fund of Canada (CEF), Central Gold Trust (GTU), and Silver Bullion Trust (SBT.U) expects a “monetary panic” in the dollar or euro to push gold to $2,000-$2,400 per ounce this year or in 2012 (SeekingAlpha)

Mark Bristow: The CEO at Randgold Resources Ltd. (NASDAQ:GOLD) expected gold to rise as high as $1,500 an ounce (The Street)

Morgan Stanley (NYSE:MS): The investment bank has set a gold price target of $1,512 an ounce for gold in 2011 (The Street)

Ross Norman: The co-founder of TheBullionDesk.com is looking for gold to trade between $1,350 and new all-time highs of $1,850 per ounce (SeekingAlpha)

The Street reader survey: Of the almost 6,000 people who have taken The Street’s gold poll, 47 percent believe gold prices will finish between $1,500 and $1,800 an ounce in 2011 (The Street)

James Turk: The founder and chairman of online precious metals vendor GoldMoney.com sees gold sprinting much higher “probably in the first half” of this year to $2,000 per ounce (SeekingAlpha)

Charles Oliver: The senior portfolio manager of the Sprott Gold and Precious Minerals Fund, Oliver sees currencies around the world continuing to plummet in 2011. He expects that will push gold up to $1,700+ by the end of the year (SeekingAlpha)

Adrian Ash: A researcher at BullionVault sees individual savers moving into gold bullion this year as negative real interest rates erode buying power. That could push gold 20 percent higher this year to $1,695 an ounce (SeekingAlpha)

Richard O’Brien: The president and CEO of Newmont Mining Corporation (NYSE:NEM) sees gold eventually rising to $1,750 an ounce by 2012 thanks to the protection the metal provides against inflation. In 2011, he sees gold trading between $1,350 and $1,500 an ounce (Reuters)

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