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G&G Associates Tax & Financial Consulting
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Gold should get ready to take a back seat…
Hotep G&G Readers,
As I mentioned last year, last month, last week, etc, I’m a gold-bug. I have been recommending my subscribers buy gold since it was selling at $700 an ounce back in 2007(currently $1175). And I continue to recommend gold plays to this day.
But as bullish as I am on gold, I still can’t deny the amazing opportunities available in silver right now. Universally regarded as the “poor man’s gold,” silver is on the cusp of a major secular rally that will outpace even gold in 2010-2011.
And why not? If you adjust for inflation since 1980, silver should be trading at roughly $128 an ounce. As of yesterday, silver is only at $17 bucks.
So what’s been holding silver back?
For starters, four major short-sellers including J.P. Morgan has been manipulating the silver markets. These short-sellers have placed enormous pressure on silver prices over the last several months. That’s a shame considering investment demand for silver continues to soar, mainly from booming coin sales and silver ETFs.
But that’s all about to change. There are several events happening around the world that will definitely put the odds in silver’s favor again. In fact, I see silver busting through its high of $20.78, the price silver reached in March 2008. Let me explain why.
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Why Silver Is Heading to $21 an Ounce Minimum
We have a supply demand issue happening here. Global silver production is projected to barely grow this year, at a time when investment circles continue to demand more of the poor man’s gold. Also, production costs are rising for silver, which will push the price higher.
But despite this obvious supply and demand advantage since 2000, silver continues to trail gold.
The price is way below silver’s all-time high of $49.45 reached in 1980 when the Hunt brothers tried to corner the market. Gold, on the other hand, hit a nominal all-time high in early December at $1,217 an ounce.
Over the last 10 years spot silver prices have rallied a cumulative 219%, while gold prices have shot up 295%. You can see gold and silver charts by clicking on the following link: http://www.kitco.com/charts/
But again this is all starting to change. Over the last 12 months – marked by a wicked recovery in most risk-based assets – silver has jumped 37% while gold has only climbed 25%.
A period of silver outperformance might have indeed begun. If demand continues to grow, courtesy of ETFs and silver coins, silver prices can easily surpass their March 2008 highs this year. In other words, silver should break through $20 again. Meanwhile, the supply-side story for silver remains bullish.
Silver Supply Drops By 94%, While Governments Hoard What Silver They Have
According to the consultancy firm CPM, 12 billion ounces of silver existed back in 1900. That figure has plunged to only 680.9 million ounces in 2008, according to the Silver Institute (latest figures available).
So over the last 110 years we’ve seen a massive 94% drop in above-ground supply. That’s a staggering figure!
In 2008, global silver mine production grew by 2.5%. That was actually the 6th year of consecutive output growth and 77% of total supply for that calendar year.
Peru once again ranked as the largest silver-producing nation in 2008. Peru produced a total of 118.3 million ounce of silver in 2008 or 17.4% of total world production.
After Peru, major silver miners include Mexico, China, Australia and Chile, according to the Silver Institute.
There’s another bullish trend for silver brewing around the world. It should underpin my forecast of $21 silver over the next 12 months.
It’s the accelerated decline of government silver sales. Nobody wants to sell their silver.
The net supply of silver from aboveground stocks fell by 14% in 2008 to 151.7 million ounces. That was mainly due to lower net government sales and a drop in scrap supply.
Russia, China and India all cut down their silver sales. That resulted in a 27% fall in government sales in 2008 to 30.9 million ounces.
So in short, supplies above ground are dropping and governments refuse to sell what silver they have.
Silver Conspiracy Afoot?
The major obstacle to higher prices over the near term remains the big banks, including J.P. Morgan. Some sort of financial conspiracy is now circulating around investment circles, and it’s suppressing silver prices. Silver-bugs are now saying that J.P. Morgan is aggressively shorting silver.
Also, the largest U.S. banks act as custodians for SLV or the iShares Silver Trust on the NYSE. These banks are rumored to hold a massive silver short position of 200 million ounces.
That statistic alone, more than any other variable is casting a shadow on major resistance at $20 an ounce – at least for now. (By the way, 200 million ounces is worth more than the entire production of Peruvian silver in 2008.)
But I suspect that over the next 6-12 months the forces of supply and demand will return to overwhelm the short-sellers because aboveground supplies will decline in 2010. If gold dominated the first 10 years of the precious metals bull market then silver will assume leadership over the next 36-60 months.
It’s inevitable. In the next few years, we will see a lethal combination of a sovereign debt crisis and any dollar crashes unleash a new demand for both metals in an environment of steadily rising inflation.
Also we have central bankers who can seriously destroy this recovery, starting with the Fed. I expect only a gradual tightening phase by the Federal Reserve starting later this year – and only if U.S. unemployment declines. If I’m right, then silver is bound to rise further and eventually break $20.78 an ounce.
Also, in the history of finance, we have never seen this much government stimulus poured into markets at any one time. Now, it’s up to the central bankers to remove that stimulus.
If they are not successful…if they make a wrong move…central bankers could trigger some sort of renewed liquidity crisis, currency meltdown or a crash in global financial markets. If that happens, hard metals will soar. You will want to have silver in your portfolio.
We are still living in uncertain economic times. Hard money always rules.
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Until the next time!
Asante Sana (Thanks)
Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
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