How High will Gold and Silver Climb?
With gold advancing to record highs and silver hitting Hunt brother levels not seen in many of your life times, it's time for a little speculative competition.
Where will gold and silver stand by the end of the year?
By now, even the financially illiterate have memorized the textbook explanation of why gold and silver have skyrocketed:
U.S. sovereign debt concerns, combined with a weakened dollar are causing nervous investors to seek the alternative investment havens provided by precious metals, such as gold and silver.
Some days I feel the preceding stanza repeating in my head like a terrible pop song refusing to leave. It's like I'm back in the 80's. The very early 80's...
With the dollar sliding to near 3 year lows against a basket of six currencies, now seems to be the time to buy more gold and silver, right?
The catch 22 is that we have all been raised and trained to buy low, sell high in the financial jungle. Our brains have been programmed to abide by certain price points. It can be pretty difficult for financial professionals to wrap their heads around the idea that certain long standing asset prices can rise/fall beyond accepted levels. As an example, I often repeat the story of a commodity trader with over 30 years experience who swore his life's work to me that we would never again see $5 corn. This was around 2004 and is just a small illustration of how even the sharpest and most experienced players rarely know how the game will turn out.
Obviously, anyone who bought gold or silver at the right time is not looking to sell today. With all the stories we hear about supplies drying up, physical delivery becoming increasingly difficult and pawn shops popping up in upper scale American suburbs; there is no incentive.
What interests me is how many of you guys would advise your clients to buy gold and silver today? The logic is to never buy at the peak...but are we really there?
I have to be honest and say that I am stuck in the box, myself. I keep telling myself that $2000 gold and $60 silver is not possible. But then again...I recall saying the same about $1500/$45...
How about you guys, what do you think? Let's hear some predictions and reasons why gold/silver are buys, sells or holds. I also want to hear some price predictions, let's make it competitive.
Winner gets the amount of silver bananas closest to the silver closing price for the year...I'm afraid using gold as the bench mark, would simply be too much...
Silver will climb very high.Besides being a precious metal,it is widely used in the industry,therefore its price benefits from growth,unlike gold,whose price will drop as soon as debt concerns are over (i.e. after Greece announces a haircut/extended maturity on bonds,and US votes for a budget which takes firm measures against the deficit).
You forgot to mention QE 1 and 2 and the ridiculously low interest rates (one of the main reasons of why commodity prices have skyrocketed)
These have had a major effect on the the economy by helping to raise the stock market but it also devalued the dollar and there fore pushed up commodity prices(since all commodities are valued in the US dollar obviously).
As soon as QE 2 is completed in June gold and almost every other commodity price will drop significantly. (banking on the idea that their wont be a QE 3,4,5,...) Also when the Fed raises rates, which they will most likely do in early 2012, the dollar will gain even more value and again continue to push prices lower.
So in short no I wouldn't buy gold or silver at these levels.
Just want to add to my earlier post and say that very long term (5-15 years) Gold and Silver will continue to elevate in price and is a buy after the next 1-2 year correction. This is do to the fact that over many years the US dollar will continue to devalue because of Nixon abolishing the gold standard in the 70s. This devaluation will make these commodities a good buy in the future.
I don't think there is a more clear example of a bubble in today's markets than silver (except maybe Australian real estate). The arguments for why it will continue to go higher are exactly the kind of rhetoric associated with every past bubble, with people taking every explanation as another justification for the price moves. Just take a quick glance at zerohedge one day and you'll hear everything from emerging market demand for jewlery, central banks diversifying, the end of all paper currencies, industrial demand, labor strikes at silver mines, and conspiracy theories of banks that have repressed the price for years causing a short squeeze to occur again like 1980. If you dare take an alternative stance on these issues, gold and silver bugs will attack.
The fact of the matter is investment demand is at an all-time high and the notional value of investment contracts for silver is many many multiples greater than the amount of silver that exists in the world. The same goes for the silver and gold etfs which hold far less physical metal than their assets. So if push came to shove and the dollar really collapsed, those contracts wouldn't be worth any more than the paper they are betting against.
Silver has gone up well over 100% in the last year and 22 of the last 27 trading days alone. So long as developed market currencies (usd, eur, jpy, chf, gbp) continue to pay low nominal and negative real interest rates, investors will continue to use the metals as a hedge but it has gone too far. I was waiting to short until QE ends and rates go up again, but with the parabolic move lately, it may come crashing down before then. I would look at the July 16 put options on SLV, which is after the Fed's current asset purchase plan is supposed to (God willing) come to an end.
^^^Well exactly. There is more demand for paper silver than for physical. BUT, all of those paper contracts can demand delivery, and don't you think they'd do that if the dollar collapsed? I don't see how you arrive at the conclusion that those paper contracts will be worthless. If anything, they will go up in value because there won't be enough physical to satisfy paper demand, but that's ultra bullish; the price will go up.
The dynamics for silver are better than for gold. I have a pairs trade of long silver, short gold, that's done well for me. That ratio will be back to historical levels of 15 in like five years. I do think that the end of QE2 causes a correction in commodities, so that's why I'm playing it as a pairs trade with gold.
If you look at the percentage ownership of silver (relative to gold) in investors portfolios, you can see that what is happening is people are looking at the fundamentals and realizing silver is a better inflation hedge because it was much cheaper on a fundamental basis than gold. They don't want more exposure to gold, they want silver. Silver is simply playing catchup for the many years when gold rallied and silver did nothing.
[quote=alexpasch]^^^Well exactly. There is more demand for paper silver than for physical. BUT, all of those paper contracts can demand delivery, and don't you think they'd do that if the dollar collapsed? I don't see how you arrive at the conclusion that those paper contracts will be worthless. If anything, they will go up in value because there won't be enough physical to satisfy paper demand, but that's ultra bullish; the price will go up.
What I mean is if push came to shove they would not be able to supply the silver, so now you would be left with counterparty risk and trusting in the ability of the exchange to pay you back in full. The contracts are rolled each month and if you demand delivery and they cannot provide it, you are supposed to be paid the value of the contract plus a premium in cash. Now, just like AIG guaranteeing CDS, the counterparty would be left on the hook and its a question of whether or not they'd be able to pay. I'm not saying this will happen, just pointing out that if the dollar really collapsed like some of the silver/gold bulls predict, the paper contract (or share of the ETF) wouldn't be worth any more.
Though, I do find it curious that the only basis of valuation people have for silver or gold is their ratio relative to each other. What if both are overvalued?
I feel like I need to do a long post-my apologies ha. I invest in stocks all the time but will not buy gold. I'm not saying that gold won't go up, the Fed isn't screwing the dollar, or that there isn’t a significant tail risk in the economy. I would actually not be surprised to see gold go higher. I only invest in stocks, however, because companies produce cash flows and these can be analyzed and valued. I only buy a stock if its market value is significantly lower than this value, which at times, can be done fairly easily.
Gold, on the other hand, doesn't produce any cash flows. Buying gold is pure speculation that someone else will be willing to pay a higher price in the future. I'm not saying that this can't be done intelligently, but I would much rather buy a stock that I can value with confidence. To everyone that believes they can predict the future price of gold- I give you credit- but I know that I cannot.
Knowing expectations is key. For example- last year I bought a company going through liquidation. Most assets were easy to value, but one asset was not. I thought that this asset would be worth ~$300 million. Knowing this doesn't mean anything on its own though. What was important- however - was that I could value the other assets to isolate this tricky asset, compare it to the current market value of the equity, and then get what the market was implying the asset was worth. The market assumed ~$0 in value. Knowing the asset's true ~$300 million value would have been useless if I could not have compared my hypothesis against the market’s expectations implied by the market value.
You may think that another european company will default and help drive up gold, but how do you test if this is already priced into gold or not? Maybe everyone is already expecting it to, and if it does not happen, gold might actually drop. If it does happen, gold might do nothing because everyone knew it was coming. My whole point is that it's impossible to truly know, so you better have a level of humbleness if you are trading it…
Just my .02
^^^Well if both are overvalued, I don't lose money, because again, it's a pairs trade, I'm long one and short the other. I just care about the ratio of one to the other.
What you say about counterparty risk is true, but I don't think it will ever get THAT insane. I'm thinking "too big to fail", but I have a very small exposure to precious metals, so I don't really care.
Right now I think silver miners are a better bet than silver. Look at PAAS and the 1 year chart with it vs. SLV. 1 to 1 until January 1st, when PAAS flatlines while SLV explodes. Q1 earnings for PAAS should be stellar given all that price increase should flow straight to their bottom line (earnings come out May 9th). Worthy of a May or June OTM call if you ask me, and you can buy a put on SLV if you want to take out commodity risk. I plan to put this trade on this week. I'm thinking June $50 strike for 0.5% of my portfolio. Very risky strike given how far OTM (hence why only 0.5%), but if PAAS rallies like crazy (which I think is possible given my analysis of the profits flowing to the bottom line), expect to make 4+ ROI (keep in mind I just need it to rally a lot well before expiry, ie in May after earnings; don't actually need it to get to $50 to make money if I close out a month or so before expiry; I'm choosing June instead of May so I don't have as high a time decay and can close out with some value if it doesn't move post earnings).
Yeah I mean if you've had that trade on the last several months its been a home run so congrats, but I'd cash in at least some of the gains at this point. Since mid-09, silver is up ~200% and gold is up ~50%, so if mean reversion is all that's going on, its not been lost on the market.
As far as the miners, I agree its strange that they haven't moved as much relative to the commodity. I would guess a lot of them had hedged their production at lower prices and haven't been able to profit from the run-up.
In the case of PAAS, i just searched their last filing and theyre completely unhedged so that's obviously good for your thesis. My concern would be that at these prices they are incented to drill in previously uneconomic projects where the marginal cost of production is higher, so if the price collapses they will be the most exposed to losses.
I really hope PM's continue their run.. Got heavy exposure in junior resource stocks. With Greece going down the crapper, the rest of the PIIGS will probably follow through, and I'm willing to bet the down the line, so will the USA.
1500 was a HUGE psychological level... It may correct a bit, but i fully expect $1500 to act as support. Also, lots of calls being bought for $1800 gold.
Honestly with everything going on around the world, its the prefect storm for all PM's.
Cheers and goodluck in the markets :)
^^^^I held silver outright since early Jan, and then just converted it to a gold-silver pairs trade a few weeks ago, since I figure commodities will fall once QE2 ends but I'm still bullish on silver relative to gold (I think the ratio hits 30 this year and perhaps 20 in a year or two). It's only a couple percentage points in my fund. I run an energy focused fund, so I don't like taking very big positions in non-energy stuff.
I agree with the marginal cost of production risk on PAAS over the long-term; that's why I'm only doing it short-term before QE2 ends, with earnings as the catalyst.
Silver - $85/oz Gold - $1625/oz
Silver will hit 105/oz and gold will hit 1800/oz in late August, then start to head back down with oil as the summer ends. Nostradamus is the trunk of my family tree ;P
Does it necessarily have to go down? What if, like housing prices, it remains imbalanced long term?
Gold/Silver will continue to rise so long as the USD is being devalued. Investors are looking for a better store of value as the USD drops nearly every day relative to commodities and other currencies. So long as there is uncertainty in the dollar or until another currency can rival the dollar as global reserve, you'll see gold and silver as an alternative storage. The Euro and yen are equally shaky because of the debt crises and disaster. The strong currencies such as the Australian dollar or Singapore dollar are far too small for this. My predictions: Gold ~$1700/oz. Silver ~$100/oz.
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