MunKnee.com: Silver’s Historical Correlation with Gold Suggests A Parabolic Top As High As US$714 per Ounce!
The current price of gold and the price of silver – the silver:gold ratio – continues to hover around the 67:1 range which is way out of whack with the historical relationship between the two precious metals. It begs the question:
“Is now the perfect time to buy silver instead of the much more expensive gold metal?”
It is critical to step away from all the noise and clutter that passes for knowledge and take the time to gain perspective on where the price of gold and silver are in terms of the ‘big picture’, i.e., where they are in respect to their historical relationship with each other over the long, medium and short term and, based on those relationships, how they might perform in the future.
Bull Market Stages
The key to a secular gold/silver bull is the collective gold/silver transactions of investors worldwide buying and selling gold/silver that ultimately sets the price and determines their fortunes. The collective demand trends of gold/silver investors effectively divide precious metals bulls into 3 distinct demand-driven stages, namely:
1. Stage One which occurs when a devaluation of the dominant currency in which gold is priced, i.e. the USD, leads to a moderate increase in the price of gold. Stage One for gold began on February 15th, 2001 when it reached a 22-year secular low of just US$255.10.
2. Stage Two which occurs when the decoupling of gold from local-currency devaluation begins to outpace the dollar’s losses and gold starts rising significantly in virtually all currencies worldwide. Stage Two began on June 5th, 2005 when gold (at US$417.67) first surpassed 350 Euros for the first time.
3. Stage Three which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. to go parabolic) in price. We are approaching Stage Three and it will become clearly evident when the price for gold begins its daily record ascents to dramatically higher prices.
Gold
We are now in the very early stages of Stage Three with gold having gone up 24% in 2009 and up 13.3% in the first 6 months of 2010. As such there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year (from a US$216.55 closing price on Jan. 1, 1979 to a closing price of US$843 per ounce barely a year later on Jan. 21, 1980) and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks! A 289% increase in the price of gold from US$1250 would put gold at $4,866. That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched.
Silver
Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle. The 49% increase in silver in 2009 attests to that in spades (albeit up only 10% in the first 6 months of 2010). During the last parabolic phase for silver in 1979/80 silver went from a low of US$5.94 on January 2nd, 1979 to a close of US$49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the current price for silver would represent a future parabolic top price of US$155. Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.
Silver:Gold Ratio
How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time which is called the silver:gold ratio.
Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attests.
Let’s look at the silver:gold ratio from several different perspectives:
- Over the past 125 years the mean silver:gold ratio (i.e. 50% above and 50% below) has been 45.69 ounces of silver to 1 ounce of gold.
- In the last 25 years (since 1985) the mean silver:gold ratio has increased to 66.9:1
- The present silver:gold ratio is range-bound between 63:1 and 70:1 (66.77:1 at the end of June 2010).
- Interestingly, during the build-up to the parabolic blow-off in 1979/80 silver outpaced gold going up 732.5% vs. gold’s 289.3% causing the ratio to drop from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January,1980.
Conclusions:
There are many! Let’s look at the various price levels for gold and the various silver:gold ratios mentioned above one by one and see what conclusions we can draw.
First let’s use the mid-year (June 30th, 2010) price of $1243 for gold and apply the various silver:gold ratios mentioned above and see what they do for the potential % increase in, and price of, silver.
Gold @ $1243 using the current 66.77:1 silver:gold ratio puts silver at $18.61 (June 30/10)
Gold @ $1243 using the above 45.69:1 silver:gold ratio puts silver at $27.20 (i.e. +46.2%)
Gold @ $1243 using the above 13.99:1 silver:gold: ratio puts silver at $88.85 (i.e. +377.4%)
Now let’s apply the the silver:gold ratio to projected gold prices of US$10, 000, US$5,000 and US$2,500 respectively to see what that suggests is the parabolic top for silver.
@ $10,000 Gold
Gold @ $10,000 using the silver:gold ratio of 66:1 puts silver at $150
Gold @ $10,000 using the silver:gold ratio of 45:1 puts silver at $222
Gold @ $10,000 using the silver:gold ratio of 14:1 puts silver at $714!!
@ $5,000 Gold
Gold @ $5,000 using the silver:gold ratio of 66.1 puts silver at $75
Gold @ $5,000 using the silver:gold ratio of 45:1 puts silver at $111
Gold @ $5,000 using the silver:gold ratio of 14:1 puts silver at $357
@ $2,500 Gold
Gold @ $2,500 using the silver:gold ratio of 66:1 puts silver at $38
Gold @ $2,500 using the silver:gold ratio of 45:1 puts silver at $55.50
Gold @ $2,500 using the silver:gold ratio of 14:1 puts silver at $178.50
From the above it seems that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate substantially greater returns than investing in gold bullion.
Summary
History will look back at the artificially high silver to gold ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they’re all an illusion. This fiat currency experiment will end badly in a currency crisis. The wealthiest people will be those who bought silver today and were smart enough to research and pick the best silver mining stocks and warrants.
Indeed, while gold’s meteoric rise still has room to run, silver’s run is yet to get started. As such, it certainly appears evident that now is the time to buy all things silver.
Source: MunKnee.com
Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.
Michael Maloney :The Tipping Point is Upon Us!!
The tipping point is upon us!
A “tipping point” in sociological theory is defined as “the level at which the momentum for change becomes unstoppable.” An idea or a movement has reached “critical mass.”
I believe the global economy has reached that point.
During my travels, one of the most remarkable phenomena I have observed is the extent to which the people of the world have been transformed, in the course of a generation or two, into investors.
This tipping point corresponds to the beginning of the second phase of the current bull market in gold and silver. In almost any bull market throughout history, the second phase of the cycle, when the public really becomes aware a bull market is occurring, is the longest phase in duration and also the phase when the greatest gains are made.
Over the past year I have had the privilege to take part in various speaking tours in numerous countries throughout Latin America and Asia-Pacific. During my recent partaking in the first Silver Summit in Singapore I had a strong sense that the second phase of the greatest gold and silver bull market in history is beginning. Here’s why:
Never before in history have all the world’s currencies been fiat currencies at the same time. Remember fiat currencies are established by government decree and have no intrinsic value. Because every currency in the world is a fiat currency, there is no place to run to protect your wealth against government confiscation by continuing to print more and more currency—nowhere to run, except to gold and silver.
The same phenomenon exists, everywhere in the world. The number of Australian dollars in existence has multiplied 180 times since 1960. There are 389 times more Taiwanese dollars in existence today than there were in 1962. Every government in the world is pursuing the same policy of currency debasement—and as a result—there is more than 10 times the currency circulating world-wide than there was in the 1970’s.
Here’s another big change between then and now: In the 1970s, during the last great gold and silver boom, 90 percent of the global population had no way of participating in the bull market. That’s because in the Communist Soviet Union and in Mao’s China, no markets existed, and there was not a single individual investor among those enormous populations. It was only America and Western Europe that drove gold and silver prices to their stunning heights.
This time around, the world is very different: there are billionaires in Russia, China, India, South America—every continent (except Antarctica) has its billionaires. The richest man in the world, Carlos Slim, lives in Mexico City.
Today, there are 10 times more people on the planet who have the freedom and the means to chase the next big thing, driving up market prices in the process.
Not only are there 10 times more people with the ability to participate in the market, there are somewhere between 10 and 100 times more people today who have an investment mentality than in the 1970s. Back in those days, before Nixon took us off the gold standard, people were savers. You could go to work in your teens or early 20s, save 10 percent of your income each month, and by the time you were in your 60s, you could retire and live the rest of your life off the interest on your savings.
That saver mindset evaporated the second Nixon ended the gold standard. From that day on, if you planned to enjoy your retirement, you were forced to become an investor or a speculator. The NASDAQ tech bubble of 1999 turned everyone into a day trader. The real estate bubble turned everyone into a flipper. Today, I hardly know anyone who doesn’t have an investment mentality.
This philosophical shift didn’t just occur in the United States; it happened everywhere. In modern China, investing is a sport, and Shanghai has its own riotous stock exchange.
And with the explosion of deficit spending and fiat currency creation, all over the planet, the next great bubble is destined to be precious metals. As people rush back to gold and silver to protect their wealth, they are going to drive precious metals into a bull market the likes of which the world has never seen. Those on the right side of the bubble will profit immensely.
The 2010s will be an exciting decade. For years I have been saying we have been presented with the greatest opportunity in the history of humankind, because global economic conditions are setting up the greatest transfer of wealth in history.
So, in a nutshell, in the gold and silver bull market of the 2000s compared to the metals bull market of the 70s, you have 10 times more people able to invest, of whom 10 to 100 times more possess an investment mentality and ready to pile onto the next big thing, and there’s 10 times the money (currency) in existence.
A critical mass of world investor’s are recognizing the unsustainable nature of the fiat system. And the second phase of this bull market is beginning right now.
The tipping point has been reached!
Source: GoldSilver.com
Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.
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