S&GS Notes: If you've been watching silver prices this week, you would know we've seen a significant drop in spot prices
from the high $18.70's to the current price in the $16.90's. This is the typical volatility seen in a bull market, according to
many of the top precious metals experts. Not to lose heart… What caused this week's dramatic price drop? A couple of things:
1) "The loss of Mass. to the Democratic party has had the effect of causing the fear of evaporation of their political base. The immediate reaction landed deservedly on the banksters, but quickly it was realized that as much as Main Street hates the banksters, it is jobs and the general economy that has the power to deem this administration a one term wonder." The lack of investor confidence caused dramatic drops in the Stock Market across the board this past week.
2) In a highly volatile bull market, it is typical also to see fairly frequent corrections as the prices surge, then fall back, surge & fall back on a gradually upward trajectory.
A Critical Number for Silver Investors
By Chris Weber, editor, The Weber Global Opportunities Report
January 23, 2010
Six years ago, on January 15, 2004, I officially recommended silver for readers of my Weber Global Opportunities Report.
We'd had silver stocks, and I'd owned silver personally, but I was waiting for silver to fall in order to get in at a better price for the newsletter readers.
We got in at $6.18 per ounce... It soon went to $8 and then fell back to $6, and then climbed back to $8, where it stayed a couple of years before mounting a new rise in 2006.
I tell you this to show how wide silver's swings can be ($6 to $8 is a 33% gain in a few weeks' time, then $8 back to $6 is a 25% plunge in an even shorter period). I also want to show the long periods of flat prices that characterize the metal as well.
So now silver is over $18.50. How high can it go?
I've often mentioned that a key thing for silver is for the metal to get back to test the 50% level of its huge decline from 1980 to 2001. This level represents a retracement of 50% from the highest point it reached in the previous bull market to the lowest point it got in the bear market.
On January 21, 1980, silver's London fix price was $49.45. It has never been higher. From there, it began a plunge that would take it to a low of $3.5475 at the end of February 1993. That was a plunge of 92.8% in just over 13 years. A 50% retracement of this loss would be around $26. So far, it has not done that. I'm still waiting.
However, I want to give silver more leeway than gold, since it is so much more volatile. My feelings are that when and if silver soars, it will do so in a fairly short time and go to levels that are hard to believe today.
Several years ago, I thought if silver broke above that $25-$27 level, it could get to $50 in 2010. If it did, in real terms, after inflation, this would still be a lower price than the $50 silver briefly reached 30 years ago. In real terms, $50 in 1980 bought what it would take over $130 to buy today.
I think we are a long way from prices like that. Again, first I want to see how silver handles that 50% point. Maybe we'll get a chance to see that soon.
Already this year, the gold/silver ratio has fallen. This ratio shows the number of ounces of silver one ounce of gold will buy you. The ratio ended last year at 65:1. Now it is 59:1. Even this ratio is historically high for silver. The chart below shows the average annual gold/silver ratio from 1792, when the U.S. dollar began, to 2005.
The next chart updates this, and gives a view of the last 10 years: We've seen the traditional ratio is about 16 to 1. However, at the peak of the last precious metals bull market, back in January 1980, silver went as high as just 14.8 ounces per one gold ounce.
So far, in this bull market, silver has not gotten below about 45:1, back in 2006. I'd want it to make another attempt at that ratio, and then see what happens. This, too, I think will happen in 2010. It's something precious metals holders will want to watch closely.
The way to best play silver is just to buy it, and wait. Be prepared to see it very volatile, and don't have so much that you panic every time silver plunges. In silver bull markets, that's what silver does. If you can, just put your position out of your mind entirely, or at least at the very back of your mind.
But expect silver to run higher in the coming years. Nearly every government in the world wants their currency to decline in value to make it easier to service debt. That means real, timeless currencies like gold and silver will continue to rise in value.