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Countdown To Gold and Silver Blast Off!

Sean Brodrick

September 24, 2010

Last November, I wrote a story titled “6 Reasons Why Gold Is Going to $1,300 an Ounce." Now, we’ve hit that target. And you know what? I think there’s much, much more to come. And you can make a bloody fortune if you position yourself right for the next move … a move that could be PARABOLIC!

What’s more, there may be an even better way to play the precious metals bull market than gold!

Why? Well for one reason, it’s happened before. The last bull market in gold and silver saw ENORMOUS price gains that put the current bull market to shame. Take a look …

So when the babbling heads on TV and radio try to tell you that “gold is overvalued,” tell them to go jump in a lake. Heck, when compared to the ballooning money supply, gold prices are still low by historic standards.

Looking at the previous price appreciation in the last gold and silver bull market, I think both metals have a long, long way to go. Here are some other things you may not know …

#1) Central Banks Are Buying Even More Gold. We’ve known that central banks have been buying gold for some time. Now the shift in the role of Central Banks has been confirmed by GFMS, a London-based consultancy that tracks the gold market.

GFMS says that thanks to buying by Russian and several Asian central banks, central banks would be net buyers of gold by about 15 metric tons of bullion this year. The last time that happened was 1988.

#2) Gold Is Nowhere Near Its All-Time Peak Price in Real Terms. In January 1980, the yellow metal reached $873 an ounce. Last week saw gold close at a new record of $1,277.50 an ounce, and adjusted for inflation, it was still under $460 in 1980 dollars.

Gold would have to rise above $2,435 an ounce to exceed its high from three decades ago, based on the CPI’s current reading. And I think it could go a lot higher than that.

#3) The Squeeze Gets Worse in Mining Costs. Mineweb.com quotes the ABN AMRO Gold Mine Cost Report Q2 2010, produced by VM Group/Haliburton commodity research, as saying that gold mine cash costs continue to rise, hitting $558 per ounce in the second quarter of this year.

The good news is that the profit margin on each ounce of gold is widening because gold prices are rising faster than costs. Interestingly, costs are rising faster for low-cost producers. That may be because they are exhausting current deposits of high-grade ore, so they move on to lower-grade, higher-cost ore.

#4) AngloGold Ashanti Ends Its Massive Gold Hedge. Last week, AngloGold Ashanti (AU) bought back its gold hedge book for $1.58 billion.

The move will “give us full exposure to the gold price,” Chief Executive Officer Mark Cutifani said.

So what does that tell you? It certainly tells me that AngloGold’s management thinks gold prices are going higher. Ask yourself: What does one of the world’s biggest miners know that we don’t know?

So, I think gold could easily go to $1,400 next year and $1,600 the year after that. But it may go higher yet, to its inflation-adjusted peak of $2,435 and beyond.

And you know what? I’m even more bullish on silver!

Why Silver Could Lead the Next Leg of the Bull Market

Silver lagged gold for quite some time. But that’s changing. Now, silver is leading (in percentage terms) the breakout to the upside.

In fact, my intermediate term target for silver isn’t $25 … or even $27. It’s over $31 an ounce! Take a look at this chart …

As this chart shows, silver has broken out of an ascending triangle. This gives us my new price target. Maybe it will take its time getting there — after all, nothing moves in a straight line. But as many of my friends in the business have been reminding me this week, when gold and silver take off, they can punish patience. The metals can head so high, so fast, it can make your head spin — and leave late-comers weeping with envy as the profit train pulls away from the station!

Longer-term I think $31.39 is only a milepost on the road to higher prices. I think silver is going back to its old high near $50 an ounce. That’s more than DOUBLE recent prices. That’s like gold moving to $2,580 an ounce.

And you know what? Gold CAN go to $2,580 an ounce! The fundamentals for gold AND silver are there, simmering explosively as they wait to ignite.

Here are three forces driving silver that you should be aware of …

#1) Industrial Demand for Silver in China Is Soaring! Slightly more than half of silver’s annual demand is for industrial uses. Silver is used in everything from small electronics and computers (silver is the best metal for making electrical connections) as well as batteries, chemical catalysts, silver plating, mirrors, even nanotechnology. Silver paste is used in 90% of all crystalline silicon photovoltaic cells, which are the most common type of solar cells. So, it’s no wonder that demand for silver in China, the factory to the world, is roaring higher.

Net imports of silver into China quadrupled in the first seven months of 2010. That is putting pressure on global silver supplies even as investors demand more of the metal.

#2) New and Growing Silver Investment Demand. We’ve already seen the silver ETFs buying silver hand over fist. The iShares Silver ETF represents over one-third of the global market for silver.

Now, two new silver funds joining the party!

In Canada, Sprott Inc. filed a preliminary prospectus for Sprott Physical Silver Trust, a closed-end silver bullion fund to be listed in Canada and United States, possibly as early as this fall. And Bullion Management Group Inc. plans to roll out a silver-bullion mutual fund early next year.

As gold gets more expensive, investors are taking another new look at silver. The end result could be an explosive move in silver prices.

The Gold-Silver Ratio Is Out of Whack. The current gold-silver ratio — or how many ounces of silver it takes to buy an ounce of gold — is about 61 to 1. That is much than the historical ratio of 16 to 1.

And if you don’t like looking back at the long term, just look at the ratio in the last precious metals bull market. In 1980, the price of silver to gold — how many ounces of silver it would take to buy an ounce of gold — never got higher than 38 to 1.

The gold-silver ratio is dropping, as silver starts to catch up with its flashier cousin. If we went back to a 38-1 gold-silver ratio, silver would cost over $33 an ounce. If silver did move toward the historical ratio of 16 ounces per ounce of gold, silver today would cost $80 an ounce. And that’s without gold budging another dollar. And gold’s trend is up — way, way up.

So is it time to sit on your hands, the way some analysts are suggesting? No. Heck, NO!