Silver hit a new all-time high this morning. Silver has risen over 144% since August 31. Why are we measuring from August 31? The end of August is when the esteemed Mr. Bernanke signaled that the Federal Reserve would print another $600 billion in Federal Reserve Notes. The money-printing campaign ignited a stampede into hard assets. Silver has been the big winner among the precious metals. Silver tends to be a more speculative metal than gold. The silver market is small and easily influenced by speculative capital. In 2010, total silver demand was 1.05 billion ounces or $21 billion dollars at 2010’s average silver price. For comparison, the total market capitalization of General Electric is over $213 billion.
How much higher can silver prices go? If you ask the bulls, they will point you to the ratio of gold to silver. The last time gold and silver were considered money, the ratio was 16 to 1. Today, the ratio is 32 to 1. To get back to a ratio of 16 to 1, silver prices would have to double from current levels. Will they? When investment demand is driving an asset’s price as it is with silver today, there is no telling how high prices can go. More buyers beget higher prices, which beget more buyers, which beget higher prices, and an upward price spiral forms.
Our silver chart shows that an upward price spiral has indeed formed in the silver market. Silver prices have a parabolic look to them. As we see it, there are two possible explanations for silver’s meteoric rise. Either there is a speculative bubble forming or the silver market is signaling the impending doom of the four-decade-long fiat monetary experiment. It’s probably even odds, but rather than speculate on which is the correct explanation, we are not participating in the silver market. Instead we are watching as an interested observer. If you have concerns about fiat money, as we do, gold is a suitable alternative.
Jeremy Jones, CFA
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