Case for $50/oz silver gets stronger
If you are looking for valuable assets at very low prices, pay special attention to silver. The gray precious metal has long been overlooked, but the outlook for silver looks good. Silver prices could reach $50.00 per ounce over the next few years.
There are a few factors that argue for a much higher silver price.
The first thing investors need to look at is the valuation of silver relative to gold, i.e. the gold/silver ratio. This shouldn’t be a new concept for long-term readers of this publication, but for those who are new, this ratio tells us how many ounces of silver it takes to buy one ounce of gold.
Whenever the gold/silver ratio falls below 40, silver enters overvalued territory. If the ratio exceeds 80, it means silver is entering undervalued territory. The more the ratio exceeds 80, the lower the price of silver.
This key valuation metric currently suggests that silver is trading for pennies on the dollar.
Chart reproduced courtesy of StockCharts.com
Not so long ago, the gold/silver ratio reached a level never seen in recent history, above 110. Right now, it is still above 80, indicating that the money is undervalued.
Another thing to note: whenever the gold/silver ratio goes above 80, it almost always ends up falling to around 40. If the price of gold stays at $1,700 an ounce, the price of silver should rise. by around 106% to reach $42.50. for the gold/silver ratio to drop to around 40.
Robust demand for silver
Beyond valuations, investors should be aware that demand for silver remains robust. This is partly because silver is a key industrial metal. The world is moving towards electrification, and money is playing a big part in it. For example, you can’t have functional solar power without money. Electric cars and gadgets like “iPhones” also contain money.
Investment demand for silver is also strong.
In 2021, the U.S. Mint sold 28.3 million ounces of silver in American Eagle coins. In 2022, between January and September, the Mint sold 13.2 million ounces of silver in American Eagle coins. (Source: “Bullion Sales”, US Mint, last accessed October 6, 2022.)
It’s not just the US Mint that’s selling silver like hot cakes.
The Perth Mint, Australia’s largest mint, said its silver sales between January and August this year were 15.7 million ounces, up 23.4% from the previous year. same period a year ago. (Source: “Perth Mint Gold Bullion Sales Quicken in August”, CoinNews.net, September 8, 2022.)
India, a country known for its appetite for gold, has been buying more silver lately. In August 2021, the country imported $15.5 million worth of silver. In August 2022, the country imported $684.3 million worth of silver. This represents a year-over-year increase of 4,317%.
Between April and August 2022, $3.1 billion of silver was imported into India, compared to just $66.4 million in the same period a year ago. This represents an increase of more than 4,600%. (Source: “Quick Estimates for Selected Major Commodities for August 2022”, Indian Ministry of Trade and Industry, last accessed October 6, 2022.)
Therefore, it would not be wrong to say that there is a rush for money.
Excellent risk/reward ratio: Silver prices are set to soar
Dear reader, the fundamentals of silver are extremely attractive. The market is certainly not paying attention to it. Otherwise, the price of silver would be much higher than it is today.
I remain extremely bullish on silver. I truly believe that the downside of silver could be very small, while its upside could be huge. Silver prices of $50.00 an ounce, if not higher, are possible within a few years.
In the meantime, how low could the price of silver go? Commodities rarely fall below their cost of production, and even if they do, investors tend to do a lot by buying more commodities rather than selling them in a panic. The average cost of producing silver ranges from $12.00 to $15.00 per ounce. Higher oil prices, poor silver grades and fewer silver discoveries could drive up the cost of production.
So, assuming silver prices fall to $12.00 an ounce, that’s down $8.00 from the current price. Assuming a price target of $50.0, the upside could be around $30.00 an ounce. It’s a solid risk-reward ratio; for every $1.00 of risk, there could be a reward of $3.75.
For slightly more adventurous investors, silver miner stocks could pay off big. If silver climbs to $50.00 an ounce, strong silver miner stocks could double, triple, or even more. However, keep in mind that stocks carry risks. If silver prices remain low for a long time, silver mining companies could face financial problems if their costs are not contained.