Silver Should Outshine Gold

03/15/2010 1:00 pm EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says silver will begin to outpace gold in the next phase of the decade-long precious metals rally.

Universally regarded as “poor man’s gold,” silver is at the cusp of a major secular rally that will outpace gold prices as the next leg of the bull market takes hold in 2010-2011.

With global silver production projected to barely grow in 2010, the odds favor a major recovery off the March 2008 high of $20.78 an ounce. That price is still way below the all-time high of $49.45 per ounce in 1980 [when] the Hunt brothers tried to corner the market. Gold, on the other hand, hit a nominal all-time high in early December at $1,217 an ounce.

Silver, despite bullish supply and demand fundamentals since 2000, has trailed gold. Over the last ten years, spot silver prices have rallied a cumulative 219% compared to 295% for gold. And over the last 12 months—marked by a wicked recovery in most risk-based assets—silver has gained 37% versus 25% for gold.

A period of outperformance by silver might have indeed begun, and if demand continues to grow, courtesy of exchange traded funds and silver coins, prices can easily surpass their March 2008 highs this year.

The supply-side story for silver remains bullish. According to CPM, a consultancy firm, 12 billion ounces of silver existed back in 1900; that figure has plunged to only 680.9 million ounces in 2008, according to the Silver Institute (latest figures available).

So, over the last 110 years, we’ve seen a massive 94% drop in above-ground supply. In 2008, global silver mine production grew by 2.5%, representing the sixth year of consecutive output growth and 77% of total supply for that calendar year.

Another bullish trend that should underpin my forecast of $21 silver over the next 12 months is the accelerated decline of government sales. Russia, China, and India reduced their disposals, resulting in a 27% fall in government sales in 2008 to 30.9 million ounces.

The major obstacle to higher prices over the near term remains the big banks. The largest US banks [are] rumored to hold a massive silver short position. That is casting a shadow on major resistance at $20 an ounce—at least for now.

But I suspect that over the next [six to] 12 months supply and demand will return to overwhelm the short sellers, because aboveground supplies will decline in 2010. Production costs are now rising again for silver. And since I expect only a gradual tightening by the Federal Reserve starting later this year—and only if US unemployment declines—silver is bound to rise further and eventually break $20.78 an ounce.

If gold dominated the first ten years of the precious metals bull market, then silver will probably assume leadership over the next 36-60 months as a lethal combination of a sovereign debt crisis and a massive currency crash unleash demand for both metals in an environment of steadily rising inflation.

Central banks will not successfully unwind the post-2008 stimulus without triggering some sort of renewed liquidity crisis, currency meltdown, or crash in global financial markets. We are still living in uncertain economic times. Hard money rules.

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