A Silver Lining at $20.78 an Ounce!

Eric Roseman (July 26, 2010)

But This Shiny Investment Has MUCH Farther to Climb …

Gold hit a nominal high in June at $1,266 an ounce.

But silver continues to lag her sister metal since 2008. Silver hit an intermittent peak of $20.78 in March 2008 and has since failed to recapture that level on several rallies.

A lot of commodity bulls see this price action as bearish.

Gold hit new highs while silver prices have sputtered. And both metals should run together in a secular bull market. But this just hasn’t been the case since 2008.

Is the silver bull market over?

Has the industrial metal failed to confirm the primary trend of its ten-year bull market?

A Pause on the Road to $75 an Ounce

My forecast (ever since 2002) continues to peg silver hitting at least $75 an ounce in this bull market.

I remain a staunch bull for a lot of good reasons. And I continue to recommend buying at these low levels.

I’ve been plugging silver since it was $5.50 an ounce and I’m still buying!

I can’t think of another commodity so badly manipulated as silver. Oil and gold are a close second.

But the silver market is constantly rigged by speculators and even banks trying to make a market on a trade.

And the CFTC (Commodity Futures Trading Commission) recently announced an investigation into JPMorgan’s “unorthodox” silver trading practices, which resulted in short sales of the metal.

That same bank is also the sponsor of SLV, or the iShares Silver Trust on the NYSE.

Ten years ago, when gold traded around $280 an ounce, I called for a peak of $2,500 an ounce.

Naturally, audiences thought I was from another planet!

But at $1,200 an ounce now, that forecast might not be as outlandish. A series of macroeconomic events since 2008 have unleashed great danger.

The destruction of credit continues to spread, and sovereign nations are ransacked by bond market vigilantes forcing austerity cuts.

Furthermore, the global exchange rate system has been rendered dysfunctional and absurdly volatile. Since Nixon broke the gold standard in 1971, the dollar “anchor” hasn’t done its job keeping the system grounded. Currencies devalue or revalue all the time.

And the financial burdens land on businesses and on our long-term purchasing power.

Day of Reckoning Coming

By the time gold and silver hit their respective peaks, the world as we know it will have changed dramatically.

A massive financial crisis changes the socio-political landscape. It forges new economic rules and almost always results in a violent change for the worse.

The expensive bailouts of 2008-2009 only delayed our day of financial reckoning.

Instead of approaching a bottom in this Depression, the government bailed out the culprits instead of letting the bear market run its course.

Unlike the Reagan Revolution of the early 1980s, the Obama economic agenda is littered with misguided economic solutions. These include much higher taxes, healthcare deficits, two expensive overseas military conflicts, and a contraction of broader monetary aggregates and bank lending.

How can a President raise taxes amid a contraction in credit that threatens to derail the soft recovery since 2009?

Obama’s recipe for recovery will backfire because the tonic is worse than the underlying disease!

Domestic consumption is badly wounded by twin bear markets in housing and stocks. And it won’t witness a resurgence in spending vis-à-vis higher taxation – that’s for sure.

The United States is heading down the wrong path.

ETF Boom!

Like gold, silver’s fate now lies in the hands of the individual investor and institutions.

The advent of gold and silver exchange-traded-funds (ETFs) over the last decade has resulted in a massive consumption boom as these funds lunge after physical supplies.

Silver industrial demand has historically closely tied to the global economic cycle. But industrial demand has now taken a back seat to ETFs. Provided ETFs continue to command a larger percentage of total available supplies in the silver market, spot prices will continue to rise.

I also suspect most money managers, including pension funds, have yet to allocate meaningful positions to silver. And as prices bust through the next resistance level of $21 an ounce, this will change – and rather quickly.

Silver Approaching Net Deficit

According to financial markets analyst Robert Palmer, silver production is not expected to grow in 2010.

CPM, a consultancy firm, states that 12 billion ounces of silver existed in 1900.

In 2008 only 680.9 million ounces existed.

That’s a 94% drop in the above-ground supply!

And in 2010, it’s about 300 million ounces.

Once the world’s refined silver has been consumed by industry, it’s gone. And it’s gone forever.

More than 95% of all the silver ever mined has already been consumed by industrial use.

Fed Caught in a Corner

The Federal Reserve has short-term rates at 0% and U.S. inflation data through June sits at +1.1%.

That leaves us with a negative inflation-adjusted interest rate. So the opportunity cost of holding silver is about the same as it is to holding crummy dollars – nothing.

Silver pays me nothing, but the same is true of the dollar. Historically, every time inflation-adjusted rates have traded at 2% or less, gold and silver prices have enjoyed strong gains.

If interest rates stay low the Bernanke Fed won’t be in a rush to hike monetary policy. And the evidence suggests rates will stay low due to a softening economy again this summer coupled with ongoing European credit fears. Also a plus: High unemployment won’t force the Fed’s hand; the Fed has never raised interest rates amid rising unemployment.

Silver’s high in this rally was $20.78 an ounce in March 2008. We should hit that level and violate resistance before the year is over. Possibly during the first quarter in 2011.

Silver’s inflation-adjusted price since 1980 is $128 an ounce. And it’s quite possible we’ll reach half that threshold before this bull is laid to rest.

I would use every correction as an opportunity to accumulate silver.

Investors should concentrate their silver investments in physical bullion, mostly in coins. This includes the Canadian Maple Leaf and U.S. Silver Eagles. I’d also complement this asset class allocation with a few large-cap silver mining companies like Silver-Wheaton (NYSE-SLW) and Fresnillo (London SE-FRES.L).

The major economies of the world are in a protracted cycle of long-term debt de-leveraging. Interest rates will have to remain low at the short end longer than most investors think.

The one major risk to interest rates is an attack on U.S. Treasury bonds by foreign creditors down the road. This would force long-term interest rates much higher, possibly triggering a deep recession or a depression.

Ahead of that scenario, the Fed will be extremely busy printing dollars en masse to defeat the destructive forces of deflation. That’s bullish for gold and its sister metal, silver.

My Commodity Trend Alert subscribers receive detailed information from me each week, on how and when to buy silver, gold and other “hard assets” … and when to cash out and enjoy the best returns for getting in at the right time. (Check out this special CTA offer for A-Letter readers – click here now.)

If you’re looking to “polish” up your portfolio for the long haul, you should buy silver now, before it hits $75 an ounce.

Eric Roseman
Editor, Commodity Trend Alert

Tags: globalinvesting