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Silver Price Forecast $86.75 in 2011, Precious Metals Investment Strategies

Commodities / Gold and Silver 2010 Dec 02, 2010 - 06:38 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticlePeter Krauth writes: Forecasting prices for anything can be tricky. And a precious-metal commodity such as silver is no exception.

With gold holding the leash on its "lapdog" - silver - the performance of the so-called "yellow metal" holds the key to silver prices in the New Year.


Here's why: For several years leading up to the 2008 stock-market panic, it typically took 55 ounces of silver to buy an ounce of gold. Today, a gold ounce will cost you 50 ounces of silver.

The message: There's been a fundamental shift, where precious metals investors see silver as the "more-affordable" true-money option. So, I expect this newer 50:1 ratio to hold, and perhaps to even decline - which portends a relative outperformance for silver versus gold.

And that brings me back to my price prediction. If we use the current 50:1 ratio - and my expectation that gold will be trading at $1,900 an ounce by the end of 2011 - I believe we're looking at a target price for silver of $38 an ounce.

That represents a 33% return over the approximate price of $28.50 an ounce at which silver was trading at midday yesterday (Wednesday).

That's a target I believe to be very realistic, given the times.

It's worth noting that Money Morning predicted the current breakout in silver.

How to Buy Silver - The "Other" Precious Metal
As a longtime observer of the mining, commodities and precious-metals markets, I'll be the first to admit that - as precious metals go - silver may not have quite the same mystique as gold.

But let's be honest: The "white metal" has its backers, too.

In fact, when Money Morning published its "How to Buy Gold" special report recently, one of the biggest questions that we received in response was: "When can you do the same for silver?"

When we published a full report on silver back on Sept. 1 - and recommended it as a "Buy" - the "white metal" was trading at about $19 an ounce. Readers who took our advice have reaped a 50% return in three months.

Although gold possesses the greatest allure of precious metals, silver has a longstanding tradition in many cultures - a tradition that in some cases reaches back thousands of years.

Here in the United States, silver alloys were still present in some of our everyday coins as recently as 40 years ago. Today, however, silver is no longer viewed that much as a monetary metal. But that's because about 40% of silver is used for industrial applications.

The physical silver market is small, with annual demand of slightly less than 900 million ounces.

Silver prices are volatile - on the upside and the downside. After hitting a bull-cycle high of nearly $21 in early 2008, the global financial crisis tipped silver prices into a near-freefall: They declined by more than 50% to drop into the $9 range later that year.

Since that financial-crisis nadir, silver prices have soared and have eclipsed that 2008 high.

An important metric to understand and watch is the silver-to-gold ratio. It tells you how many ounces of silver it takes to buy one ounce of gold. Historically, that ratio is 16 to 1. On this basis alone - with gold sitting at nearly $1,389 an ounce at midday yesterday - silver should be at $86.75.

That's a long way from the current price of $28.50.

Popular Forms of Silver
Like gold, silver investments can be made in a variety of forms. Let's take a look at some of the most popular.

Physical Silver: Physical silver can be purchased in a variety of sizes and weights, which determines its price. Most typical are 1.0 ounce silver coins, like the Austrian Silver Philharmonic, the American Silver Eagle, and the Canadian Silver Maple.

Their prices vary slightly due to differences in silver purity, with the Silver Maple being the highest at 99.99% pure. You'll pay about a 16% premium over the silver price for coins due to the cost of fabricating them.

Another popular option is the 100-ounce silver bar, which commands a 5% premium over the spot price of silver, meaning the bar is currently selling for slightly more than $1,900.

These coins and bars are essentially bought for their silver content and not as collectibles. If you're looking to build a silver stash - either large or small - bullion dealers may be the easiest way for investors to do so. But do your homework first, and check them out before you buy. Also, avoid paying more than the premiums I noted above for either coins or bars.

Some investors wonder if they should buy smaller denominations, like 1/20th, 1/10th, ¼, or ½ ounce (gold) coins. The thinking goes like this: If ever these coins need to be used to transact and make payments, one would want to have smaller "amounts" to carry around.

That's a valid rationale. Even so, keep in mind that you'll pay a premium to the actual silver content, since each individual coin has to be fabricated. I believe that, should we ever get to that point, you could just convert a one-ounce coin or bar into a number of smaller coins, and pay the premium, or perhaps receive whatever else is being used for transactions (a new currency?) in return.

Source : http://moneymorning.com/2010/12/...

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Comments

incent Dsilva
19 May 11, 05:02
Commodities

Need to buy Silver and hold it for a period of one year. Is this possible.


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