Silver Prices: Top Reasons Why Silver Prices Will Soar in 2016
Silver Prices Poised to Skyrocket in 2016
Silver prices continue to be under pressure, down more than 70% over 2011 highs near $50 per ounce. As it stands, 2015 looks like it will mark a record fourth consecutive year of declines.
And the future doesn’t look bright for silver either. That is, if you listen to the silver price forecasts of most analysts. Their silver price predictions have silver trading near $14.00 an ounce in 2016.
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But the truth of the matter is, investors shouldn’t waste too much time listening to analysts. The fact of the matter is, the fundamentals suggest silver prices are undervalued. And the silver outlook for 2016 is bullish.
Why? Basic economics are at play in the silver market. Demand is surging and supply is dwindling. In some case, the silver supply is already plummeting. This is the perfect recipe for silver prices in 2016 and 2017.
The chart below that shows the movement in silver prices over the last few years
(Chart courtesy of www.stockcharts.com)
A technical analysis would tell you that demand for silver is anemic, in large part, because there is so much supply. What else could be behind the 50% drop in silver prices since 2013?
But nothing could be further from the truth.
Demand for Silver Reaches Record Levels
Case in point, consider the sale of silver coins at the U.S. Mint. In 2012, the U.S Mint sold 33.74 million ounces of silver American Eagle coins. In 2013, the number of one-ounce silver coins sold increased 26% to 42.67 million. The number of silver American Eagle coins sold in 2014 increased to a record 44 million ounces. (Source: “Bullion Sales/Mintage Figures,” U.S. Mint, last accessed December 4, 2015.)
2015 will be another record year for silver American Eagle coins. There’s still a month left in 2015 and already, the U.S. Mint has sold 44.8 million ounces of silver American Eagle coins.
Lower silver prices, instead of scaring investors away, is actually driving investors into the market. This is the exact opposite of what we’re told would happen when silver prices started to slide lower in 2013 and 2014.
The increased demand for silver is not limited to the U.S. Mint. Demand for silver coins is strong at the Canadian Mint, Royal Australian Mint as well as other mints around the world.
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Silver Supply Plunging
Demand is only one part of the equation. When you look at the supply (mine production) it’s clear that it’s plunging.
Take for example Canada, one of the top silver producers. In the first three quarter of 2015, silver production from Canadian mines came in at 285,184 kilograms. Which seems like a lot. But it’s all relative. In the first nine months of 2014, Canadian mines produced 374,184 kilograms. That’s a drop of almost 25%. Silver production in the U.S. also declined in 2015. (Source: “Production Of Canada’s Leading Minerals,” Natural Resources Canada, last accessed December 4, 2015.)
This Ratio Points To Surging Silver Prices
Supply and demand are not the only factors that suggest silver prices will surge in 2016. To get a handle on the silver price forecast for 2016, investors need to pay attention to the gold-to-silver ratio. This is a ratio that refers to how many ounces of silver are needed to buy one ounce of gold.
Why is this important? Silver has a historical relationship with other precious metals, such as gold. The correlation between these two commodities can help investors determine what silver prices should do.
This long-term chart shows the gold-to-silver ratio since 2006.
(Chart courtesy of www.stockcharts.com)
Today, the silver-to-gold ratio stands at 75.42. Since 1970, the gold-to-silver ratio average averaged around 55. In late April 2011, when silver was trading near $50 an ounce, the silver-to-gold ratio was 30:1.
The silver-to-gold ratio, while not an absolute predictor of future price action, does suggest silver is undervalued and, if it recalibrates to historical levels, will soar. At 75.42, the silver-to-gold ratio says silver is an undervalued buy.
If the silver-to-gold ratio went to its more recent historical level of 55, silver should be trading at $23.65 an ounce. Or, 67% higher than it is today. And historically, the last time this ratio was at a similar level, we saw a massive rally in silver prices for the next few years.
There is another silver-to-gold ratio though: geological. IF you measured the silver-to-gold ratio based on the geological availability of both precious metals, the gold-to-silver ratio would be 20:1.
If this ratio was to balance out, silver prices would soar 360% to around $65 an ounce. We’d need a pretty big catalyst for that to happen. Especially when you consider the global economic slowdown (that Wall Street seems to be ignoring) isn’t (yet) propelling silver prices higher.
Regardless, there are more than enough catalysts to propel silver prices higher in 2016. It’s just matter of when investors wake up to the prospect of a global recession and ongoing geopolitical tensions in the Middle East. Then there’s the Presidential election in November 2016. Who knows what effect that will have on precious metals like silver and gold?
Silver Price Forecast for 2016
There is no crystal ball for predicting where silver prices will go in 2016. When it comes to silver prices though you don’t need a crystal ball. The fundamentals are screaming ‘higher silver prices’.
The supply-demand metric is distorted and the gold-to-silver ratio suggests silver is seriously undervalued. If the same metrics were applied to a stock Wall Street would be screaming ‘BUY’. But since silver has a negative relationship to the markets, few are willing to admit stocks are overvalued and vulnerable to a major correction.
And stocks are overvalued.
According to the Case Schiller CAPE/PE Ratio, the S&P 500 is overvalued by around 42.24%. The index is currently sitting at 25.97, the 10-year average is 15. This means that for every $1.00 of earnings a company makes, investors are willing to spend $25.97. The ratio has only been higher three times: 1929, 2000, and 2007. Each time it was followed by a stock market crash. (Source: Yale University, last accessed December 4, 2015.)
Stocks are seriously overvalued and at unsustainable levels. And as a hedge against economic uncertainty, investors will flock to silver in 2016 as stocks start to correct. Until then however, silver prices are at the mercy of the Federal Reserve and investor sentiment.
Come 2016 however, it’s going to be a whole different story. In fact, investors may be surprised at just how well silver is going to do in 2016.
