Case for $50/Ounce Silver Gets Stronger
If you’re looking for valuable assets at dirt-cheap prices, pay close attention to silver. The gray precious metal has been ignored for a long time, but silver’s outlook seems rosy. Silver prices could make a run for $50.00 an ounce in the next few years.
There are a few factors that make a compelling case 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-to-silver ratio. This shouldn’t be a new concept to 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-to-silver ratio drops below 40, silver enters overvalued territory. If the ratio goes above 80, it means silver is getting into undervalued territory. The higher the ratio goes above 80, the lower the price of silver.
This key valuation measure currently suggests that silver trades for pennies on the dollar.
Chart courtesy of StockCharts.com
Not too long ago, the gold-to-silver ratio reached a level not seen in recent history, above 110. At this moment, it’s still above 80, which indicates that silver is undervalued.
Here’s something else worth noting: whenever the gold-to-silver ratio goes above 80, it almost always eventually comes down to around 40. If gold prices remain at $1,700 per ounce, silver prices would have to go up by roughly 106% to $42.50 for the gold-to-silver ratio to go down to about 40.
Robust Demand for Silver
Beyond valuations, investors should know that the demand for silver remains robust. That’s partly because silver is a key industrial metal. The world is moving toward electrification, and silver plays an important role in that. For example, you can’t have functional solar energy without silver. Electric cars and gadgets like “iPhones” also have silver in them.
The investment demand for silver is solid, too.
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,” U.S. Mint, last accessed October 6, 2022.)
It’s not just the U.S. Mint that’s been selling silver like hotcakes.
The Perth Mint, Australia’s biggest mint, reported that its silver sales between January and August of this year amounted to 15.7 million ounces, up by 23.4% compared to the 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 gold appetite, 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 of 2022, $3.1 billion worth of silver was imported into India, versus 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,” India Ministry of Commerce and Industry, last accessed October 6, 2022.)
Therefore, it wouldn’t be wrong to say there’s a silver rush happening.
Great Risk/Reward Ratio: Silver Prices Set to Surge
Dear reader, silver’s fundamentals are extremely attractive. The market certainly isn’t paying attention to them, though. Otherwise, the price of silver would be a lot higher than it is today.
I remain extremely bullish on silver. I truly believe that silver’s downside 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 production costs, and even if they do, investors tend to do great by buying more of the commodity rather than panic-selling it. The average cost to produce silver ranges from $12.00 to $15.00 per ounce. Higher oil prices, poor silver grades, and fewer silver discoveries could take the cost of production higher.
So, assuming that silver prices drop to as low as $12.00 an ounce, that’s a downside of $8.00 from the current price. Assuming a price target of $50.0, the upside could be about $30.00 an ounce. That’s a solid risk-to-reward ratio; for every $1.00 of risk, there could be a reward of $3.75.
For investors who are a little more adventurous, silver miner stocks could pay off big-time. If silver surges to $50.00 an ounce, strong silver miner stocks could double, triple, or even more. However, keep in mind that stocks come with risks. If silver prices remain low for a long time, silver mining companies could face financial problems if their costs aren’t kept under control.