Interesting Target price for silver from the Professional Money Managers

Two years ago, on March 24, 2009, silver closed at $13.44/oz. And two years later, the white metal finished the day at $37.42/oz. on the NYMEX—a gain of 178%.

West believes we will see $40/oz. silver by the end Q211 and that the white metal could hit $50/oz. by year-end based on not only the typical industrial and investment demand drivers, but also what he refers to as "smart money" entering the space.

By "smart money," West means the cash behind the big players like Toronto-based Sprott Asset Management. Eric Sprott, the firm's bearish leader and chief investment officer, is staking his reputation on precious metals. He's telling anyone willing to listen that gold will see strong resistance above $2,000/oz. and that, during this current bull market in precious metals, the silver:gold ratio—or the number of silver ounces it takes to buy 1 ounce of gold—will return to its historical norm of less than 20:1, perhaps even as low as 10: 1.

Others aren't quite so bullish.

Riding the Ratio

"[Eric Sprott] is indicating that silver will go to $2,000/oz. I'm not in that camp, but there is a squeeze going on. There's a lot of new equity traded funds and funds getting into the silver space that are drying up [silver] production, in terms of the delivery of actual physical silver, and that's what's driving the price up. It's a bit of a manipulation from the perspective that it's the investors who are stepping into [the silver space] and squeezing the supply for the end users. I think that's very real and that's why the [silver:gold] ratio is changing," Thomson says.

The last time the silver:gold ratio closed the gap that much was in 1980 when brothers William and Nelson Hunt attempted to corner the silver market. The ratio peaked at 17:1 before the silver price collapsed on the ill-fated Silver Thursday, which occurred in late March, 31 years ago.

In 2003, when the current bull market in precious metals really started rolling, the silver:gold ratio was roughly 83:1. With silver now approaching $40/oz., the gap has closed to about 38:1 and is steadily narrowing.

"When you've got guys like Eric Sprott and Frank Holmes [CEO and CIO of U.S. Global Investors]—guys that are really recognized as 'thought leaders' in the space—predicting much higher silver prices, that in itself becomes a fundamental driver for the price," West says.

Liquid Silver

Sprott put his money where his mouth was and further boosted silver demand by launching the Sprott Physical Silver Trust in November 2010 at $10 per unit. It closed at $17.38 on March 24 with a market cap of $869 million. The trust trades at a premium to net asset value (NAV) and its silver bullion is tucked away safely in a Canadian vault, a task that took longer than expected. In November, the trust had contracted to purchase 22,298,525 ounces (22.3 Moz.) of silver bullion but by the end of 2010 had taken possession of roughly 21 Moz. The remaining 1.4 Moz. or so did not arrive until well into 2011. The delivery delay clearly demonstrated the tightness in the physical silver market.

"Frankly, we are concerned about the illiquidity in the physical silver market. We believe the delays involved in the delivery of physical silver to the trust highlight the disconnect that exists between the paper and physical markets for silver," Sprott said in a January press release.


The Sprott Physical Silver Trust is just one prong in Sprott's multipronged approach to precious metals investing. Sources close to the situation say he's buying equity in just about every silver play coming to market and can't write the checks fast enough. They estimate Sprott's total bet on silver, including the trust, approaches $1 billion.

David Morgan, editor of the Morgan Report, a silver-focused newsletter, provided Sprott with some names to help him source his silver bullion. Morgan was in the market when silver's last bull market ended in 1980. He knows what it's like when the music stops, and he recommends caution.

"The problem with the gold-silver cycle is that it's such an emotional market because the people who are in it—the gold and silver bugs—have an attachment to [gold and silver] being money. All markets that have a bull market go from undervalued, to fair valued to overvalued; and nothing gets to the extreme overvaluation level, at least in the last bull market, that gold and silver do. What happens at the top of the market—and we're far from that now, mind you—is that anything with silver in the name of it will go sky high regardless of its merit," says Morgan.

Thomson agrees but says good assets are good assets in bull and bear markets.

"I think it's like anything. The museum-quality assets are going to rise to the top, and the stuff that's smoke and mirrors will always be smoke and mirrors. And, at some point when the market falls apart, the quality will persist and the crap will fall by the wayside," Thomson says.

Great read! Thanks!

I have bolstered my portfolio with precious metals. Lead, copper, and brass.

Me thinks you wise man (Terra Confucius) to include copper......most overlooked metal in my book. Silver & copper.......highly necessary in modern manufacturing.....gold is not as critical......more of a historical mindset than a critical metal.



Edited 1 time(s). Last edit at 04/02/2011 08:57AM by TerraDigger.

Correct. Don't underestimate copper (and silver)!

Copper is not as scarce as silver. But definately a valuable commodity. I recently bought a few rolls of 10-2, 12-2, and 14-3 wire,for a wiring project. Its priced almost like silver!!!! Sheesh.

I wonder how long it will be before the mint starts making clad nickels? Currently the nickel in your pocket contains 6.7c worth of nickel metal, not to mention the price of manufacture.

In the fine print of the Obamcare bill, there is verbiage of changing the content of the U.S. nickle in 2011-12.

Polymer?

Yes, Possum mo! "When you've got guys like Eric Sprott and Frank Holmes [CEO and CIO of U.S. Global Investors]—guys that are really recognized as 'thought leaders' in the space—predicting much higher silver prices....
So buy all the silver you can get your hands on, Possum mo. Especially the "museum" quality pieces. That's the only quality silver I will accept. Gold is rallying, also. (as usual, like the price of gas). You might want to get as much gold and gasoline you can, too. Especially the museum quality stuff.
Seriously, I used to follow the gold/silver ratio. I've got data and charts going back to around 1984 or so, when ever the gold ETF's came out. I've traded my share of gold, too. But after a while, I noticed that gold and silver tend to go up and down in tandem, with some variation, of course. On a percentage basis, silver never performed as well as gold over most time periods. So I kind of lost interest in the gold to silver ratio. Now, I'll take gold anytime I can get it. Especially the museum quality stuff.