It’s easy to look back on the past and see investing ideas that should have been no-brainers. I suspect that will be case for investors sitting on the sidelines while silver prices continue to surge. The white metal rose more than 80 percent last year and is already up more than 40 percent since the start of 2011. It begs the question, though: why have the media and financial analysts gotten their silver price forecasts so wrong?

According to GuruFocus.com, silver “experts” came into the year with an average silver price forecast of $29.50 an ounce in 2011. It’s April, and silver prices are already approaching $46 an ounce. Something’s seriously out of whack, and here are a few ideas why silver price predictions have fallen woefully short of the mark:

Metals as the new reserve currency. The tight interrelationships in the global financial system exported the mortgage derivatives crisis around the world. When the U.S. economy tanked in 2008, so too did economies in Europe and Asia. That means bailouts haven’t been limited to the U.S, and the net effect is its not just the dollar that’s declining in value; it’s most of the world’s major currencies. That’s turned finite commodities like oil and precious metals like gold and silver into de facto reserve currencies. When there are questions about the stability of fiat money around the world, precious metals provide one of the few safe havens left. The media and silver analysts may have under-estimated the U.S.’s inflation exportation.

Bond backlash. Standard & Poor’s warning earlier this week that the U.S. government’s AAA debt rating could be lowered in the next two years came as a surprise to no one. What did come as a big surprise is the backlash from financial titans and foreign governments.

Just last week, the world’s largest bond investor Pimco completely exited its position in U.S. treasuries. It’s not just Americans who are becoming disillusioned by U.S. debt, either. China, in particular, has been vocal in the international media in its calls for stronger fiscal policies in the U.S. When no one wants to hold bonds, other asset classes – commodities and precious metals, in particular – are bound to rise. The extremely rapid pace of the rise points to growing uncertainties about how the U.S. government will respond to the mounting debt crisis.

Under-reporting inflation. If you listen to the official line, it seems like there’s not much to worry about when it comes to inflation. The U.S. Bureau of Labor Statistics is reporting that the Consumer Price Index is rising at a mere 2.7 percent a year. In reality, though, that number’s actually higher than 10 percent. Since the year 2000, the Bureau has stripped out energy and food prices from its model in an attempt to more accurately portray inflation (what they term “core CPI”). Shadowstats.com tracks CPI according to the old inflation calculation model, and per that “outdated” scale, we just broke into the double digits again. Heavyweight investors are well aware of that fact, and they’ve sought out gold and silver as a means to protect their assets.

A correction in the gold:silver ratio. With most of the emphasis on gold bullion over the past decade, it appears the pendulum is finally shifting toward silver. Many analysts had been calling for a correction in the gold:silver ratio in the face of rising industrial demand and a desire to invest in precious metals without shelling out for gold. Silver stands in as a great alternative.

According to GuruFocus.com, the gold:silver ratio has stood at a rough average of 13:1 over the past 1,000 years. Its only been in the past 100 years that the ratio has been heavily skewed. At one point in the 1990s, the gold:silver ratio approached 100:1. Today, it’s closer to 35:1, and Eric Sprott at Sprott Asset Management expects it to go as low as 16:1. It’s hard to blame analysts for expecting the ratio to change more gradually than it has over the past 18 months. The question now is, just how low will that ratio go? No one knows the answer, but if they did, their silver price forecasts would certainly be more accurate.

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Tags: currency, Eric Sprott, fiat currencies, inflation, silver price, silver price forecast

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