Gold and Silver Prices Going Higher
This is the second blog in our investor series focus on silver and gold. The first blog was on the technical analysis reasons of why gold and silver are poised to move much higher in 2012. This article will concentrate on the ten macro-trend drivers and fundamental reasons for supporting our claims that gold prices and silver prices will move much higher over the next few years and beyond.
Reason #1: Silver is used in coin money and is acting more like a real currency.
Silver has been used in coins for thousands of years. Both the sales of Silver Eagle Bullion coins and the general coin fabrication as measured in millions of ounces of silver has been growing exponentially since 2006. Further upward pressure from both collectors and those using silver in coin fabrication will continue.
In fact, just recently, China announced the production of a record eight million 2012 Silver Panda coins. And, China and their citizens have an insatiable appetite for both gold and silver. Some previously issued China Silver Panda coins now command huge premiums in the marketplace. It is a craze that will only increase in popularity and it will definitely drive up the underlying silver prices.
Reason #2: Silver is very cheap at its current $32 level based on both an inflation adjusted basis as well as measured by the Gold to Silver Ratio.
Remember that silver reached over $90 in the 1980′s on an inflation adjusted basis. Furthermore, silver measured against the historic Gold to Silver Ratio (GS) is significantly undervalued. The typical GS ratio in modern times has been around 15. The ratio right now is about 52. We also know that silver will do the majority of the price movement to close this ratio based on its higher beta.
So it is not out of the question, as both silver and gold move up in price, that silver could hit $60/ounce or even $90/ounce over the next 2 to 5 years. For example, $2400/oz for gold would put silver at $160/oz to get a 15 GS ratio. It is also worth noting that since gold’s peak in 1980, gold’s up only 65%, while inflation is up 175% and stocks have gained 900%.
Reason #3: The silver supply is actually disappearing much faster than gold as it is actually used in industrial applications.
Some would argue that it will become even more scarce than gold in the future. Unlike gold that is stockpiled by countries and also preserved in jewelry, etc., silver is generally not and it is also used extensively in industrial applications for electronics. That means that a large amount of it is being heavily used and then discarded and not being safeguarded or preserved.
So the silver supply is quickly vanishing and the industrial uses remove that supply forever unless it is somehow recycled. That is not the current practice with expiring and older electronics. They are moved to the trash heaps of the world and that silver is most likely gone for good.
Reason #4: Both gold and silver are moving off the open markets at a very fast rate and into the hands of private investors which reduces the available supply.
The open market or public supply of gold and silver is dwindling at an alarmingly fast rate. Even the US government has a difficult time finding silver to use for making coins. A recent estimate shows declines from 1800 million ounces in the open market in the early 1990′s to what is now about 600 million ounces of silver available. In addition, there are estimates that private investors now hold over 90% of the world supply which will increase even more in the next few years.
People in India, Asia, and China are continuing to buy and store their own gold and silver and China citizens are actually being encouraged to do so. China is a huge wildcard driver in this market and that is going to change dramatically with the new mercantile exchanges coming.
Reason #5: Inflation will become a much bigger issue in the next few years and beyond. This will put significant upside pressure on gold and silver prices as it did in the late 1970’s and 1980’s.
This reason alone supports a minimum move of gold to over $2,600 and silver over $60 once inflation starts kicking in. Those are very conservative estimates based on what happened in the late 1970′s.
Reason #6: Individual investors and numerous countries are accumulating and stockpiling gold and silver.
Gold is a safe haven in times of wars and political and economic uncertainty. This is the world we live in. Countries have been increasing their gold reserves and stockpiles by large amounts (China, India, and Russia to name just a few).
For example, in October 2009, India purchased 200 tons of IMF gold. This was the single largest purchase of gold by a central bank in the past 30 years. This need and desire to buy gold and silver by countries will dramatically push the prices up and their purchases are likely going to increase in the coming years. Again, less supply and higher demand equals much higher prices ahead.
Reason #7: Individual investors in China are being encouraged to buy gold and silver as investments.
In the past, the Chinese government forbade ownership of all precious metals. But now, the ban has been lifted. China recently introduced silver and gold bars for investment. The state-run China Central Television (CCTV) is running a campaign encouraging the population to invest in gold and silver.
That means there are over a billion potential new silver and gold investors ready to stockpile their own reserves. This is especially significant when you consider the average savings rate in China is 30 to 40%.
This increased demand could significantly affect the supply and drive up gold prices and silver prices. MR will amplify on this point in our third blog in this series as some new mercantile exchanges are getting ready to open.
Reason #8: The fast growth of the emerging market middle classes and their huge demand for electronics, technology, and jewelry will put heavier demands on both silver and gold.
Silver is used extensively in electronics and it will continue be used extensively going forward. It is simply a superior conductor and ideal for small electronics. The middle class is buying more and more gold and silver jewelry as their incomes allow throughout Asia, China, and India especially. It is simple. Middle class growth means more money to spend on higher ticket items that ultimately include silver and gold.
Reason #9: Decades of very low precious metal prices stalled and postponed production and exploration that have significantly lowered gold and silver supplies worldwide.
New gold and silver locations are limited and production is still not what it used to be and probably never will be again. Furthermore, the relative cost of finding new precious metals through exploration is extremely high in today’s economy. A barrier to new finds and production will strip the current supply in due time.
Reason #10: The emergence of the gold and silver ETFs have changed the supply curves of precious metals in the world.
The ETFs are backed by real gold and silver bullion that must be purchased. Therefore, momentum in the ETFs as an investment actually lowers supply which will continue to put upward pressure on the prices. And, they seem to be adding more precious metal ETFs all the time which will make this affect even more dramatic in upward price movements going forward.
In addition, these ETFs are now becoming the momentum vehicle of choice for very big trading institutions. This was clear on the silver price run-up of almost 200% from mid 2010 to the Spring of 2011. The automated programs and momentum traders are plentiful now and that will once again help spur on another huge momentum move up. This year could see another big move that these momentum traders play a big role in.
In conclusion these ten macrotrends and fundamental forces in the world economy today will drive the prices of gold and silver much higher in the future. Smart investors need to recognize that these powerful drivers and economic factors are already in motion. The gold and silver prices could start rising sharply in the next several months and probably will trend higher in 2012 and for years to come.
And for proof that Momentum Rider has a track record of market timing in silver and gold, you can read our blog on the last big “breakout call” written on August 24, 2010. It was literally only a day before the 200% move up in silver started. (click here to read). That doesn’t mean that this call is to the day or even week but it could happen soon.
MR recommends that you start accumulating gold and silver in the form of ETFs, mining stocks, coins, jewelry, or even bars if you have a good way of buying and storing the actual metal. But please be careful with any company you buy gold and silver from and those companies that claim they will store it for you.
Another parabolic move in silver and gold prices similar to what happened in 2010 and 2011 is very probable and it could be even bigger this time around.
The simplest method is to simply buy the ETFs. Silver ETFS we like are SLV or SIVR and Gold is GLD or IAU. Start buying in small amounts right now and on any pullbacks before the big momentum move really kicks in. Watch for Momentum Rider’s frequent updates on gold and silver prices in blogs and in the MR Power Stock Newsletters.
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Good luck in your trading and investing,
CEO Jalexa Trading Consultants, LLC
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