How low can gold and silver go?

A word of warning – if you’re a gold or a silver bug, you’re not going to like what I have to say.

Gold looks absolutely awful.

It’s up the proverbial creek and there’s no paddle in sight.

Silver looks even worse.

Just how much more ugly can all this get?

What’s the worst-case scenario for silver?

We’ll start with silver.

Last week, Reuters reported that silver holdings in exchange-traded funds (ETFs) were at all-time highs.  That is incredibly bearish – and it was worrying me a few weeks back.

Bear markets do not end when record numbers of people own the asset in question. Bull markets end that way. Few people owning the asset means there are more potential buyers out there. A lot of owners means there are a lot of potential sellers.

If those people holding silver in ETFs decide to sell, they could seriously hurt the price ­– just as the introduction of the ETFs brought in a lot of buying pressure in the late 2000s.

For all of silver’s volatility, its chart is actually quite symmetrical. This chart shows silver since 1970. From the 1980 high ($50 per ounce intraday) to 2011 is an enormous saucer shape.

Silver price chart

There are pivotal prices to which it keeps returning – $50 is the high (of 1980 and 2011). Other key price points include $4, $8, $10, $15, the $17-22 range, $26 and $36.

I’ve illustrated some of these on the chart below, which shows silver from its 2001 bear market low to now. But these have all proved pivotal price levels as far back as the 1970s bull market.

Silver price chart

There’s a chance that Monday’s price of $17.50 is the low. But I don’t believe the rout ends until ETF holdings are much lower.

I think silver will hit $15 before it is over. If that doesn’t hold, $12.50 and $10 are the next lines in the sand.

We could even see $8. If we do, just about every silver mine in the world that’s still left would be loss-making.

What about gold?

If there is one overriding message to take away from all the articles I have written this year for MoneyWeek, it is to manage your risk. If there is another, it is this: the more something tests a price, the less likely that price is to hold.

I mentioned how concerned I was about silver retesting $18.75. Last week, that number gave way. 

The problem I have with gold is that the $1,180 number is approaching again. That was the point at which gold found support twice in 2013. I really don’t want to see that level tested again. I’m worried it won’t hold.

Gold price chart

If it fails, the next line of support for gold is, as I see it, $1,050 – the 2008 high.

When I wrote my new year’s predictions piece, I suggested a low for the year of $1,050 and a high of $1,425. So far, the high has been $1,392. If $1,180 doesn’t hold, it might be that I’ve called the low.

After $1,050 the next big levels of price support for gold are $850 and $730. I would be surprised to see either. But you never know. Trends can go on for a long time – much longer than anyone expects – and we’re in a downtrend for gold and silver.

It’s not just gold and silver, by the way. Most metals look decidedly dodgy and are re-testing old support levels – platinum, copper, iron ore. Oil looks weak too. In fact the entire CRB (the commodities index) is re-testing lows once too often for my liking. Recent US dollar strength is a big factor in all this, but the sector was weak anyway.



What we can learn from the gold-silver ratio

Below – courtesy of Nick Laird of Sharelynx – we see how many ounces of silver it has taken to buy an ounce of gold since 1950. This is known as the gold-silver ratio.

It currently takes 68 ounces of silver to buy one ounce of gold.

Gold/silver ratio

At silver’s $50 peak in 1980, just 15 silver ounces were needed to buy an ounce of gold. (The ratio of gold to silver in the earth’s crust is about 17:1, by the way. The above-ground stock ratio is slightly different, as the silver has been mostly consumed, while the gold has been hoarded).

The all-time high in the 1990s was 95:1. I bet if you told people in 1983, when the ratio was at 35, that it was going to 95, they would have laughed you. Silver had never in all history been that low before. Well, that is how loathed an asset can become.

As you know, silver is more volatile than gold. It outperforms both to the upside and the downside. So, at the end of bear markets, the gold-silver ratio tends to spike up. It does the reverse in bull markets.

The ratio hit 82 in 2003. It actually spiked to 88 on an intraday basis in 2008. It’s currently at 68 and it’s been in a rising trend since 2011. I suggest it’s going back to 80 – at least.

If the gold-silver ratio was 80, then $15 silver gives us a rough target price for gold of $1,200. Maybe then $1,180 will hold. At $10 silver, and a ratio of 100, we get $1,000 gold.

So, despite my overwhelmingly bearish article, the conclusion I draw is that gold will stay above $1,000, even if silver plummets from here.

So what do you do? Investment decisions you make from here should be based on your timeframe and circumstances. The MoneyWeek house view is that gold is a good diversifier for your portfolio and a good insurance holding, so you should have about 5% of your money in it regardless.

If you have more than that, and you’re long-term holder of physical metal – there’ll be another bull market, though we’re a way from it yet. Gold is extremely frustrating to own, yes, but probably not worth selling now unless you need the money. Silver I’m more cynical about.

If you’re a trader, I’ve suggested some price levels above. You’ll have your own ideas. But for goodness sake, manage your risk!

PS Of course not everyone agrees with me – former MoneyWeek writer David Stevenson thinks just the opposite. He believes silver could be about to start a record climb. I can’t see it myself – but David is convinced. Click here (capital at risk) to read about the three irresistible forces David believes could push the price of silver through the roof. 

 

Is it time to get back into gold?

With political and financial upheaval in the air, investors are flocking back to gold once again.

But gold is more than a safety net, more than an insurance policy against disaster…

It’s up more than 20% over the last year. And could have a long way to go from here. One private wealth manager thinks it could top its $1,900 all-time high.

That’s why, in this free report – ‘Is it time to get back into gold?’ we give you everything you need to start investing in gold for yourself

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  • JC

    Hi Dom

    Keep an eye on the Yen and ESPECIALLY the Jgb market it’s the key to golds next leg up!!

  • Rabinder Singh

    Couple this article alongside MW’s views on house prices, inflation and the oncoming Armageddon and you have a sad indictment of what MW has preached for many years!

    MW got as carried away in its rhetoric as the markets did with theirs.

    I ‘ve noticed a distinct change in the views expressed in MW’s articles since the ‘crash’ of gold.
    For example at one time this article would have ended with the phrase “there’s blood on the streets ….it’s time to buy”.
    There is indeed blood on the streets but no one has money to buy.
    Now your editor will understand why nobody brought when she lived in Japan and they suffered their bust.

    How many ounces of gold to buy an average house now!?

  • George Gunning

    Hi Dom

    Given the under whelming views on gold and silver how do you continue to include Hochschild, Fresnillo and Barrrack Gold in your recommended portfolio.

    Kind regards

    George Gunning

  • Richard Brooker

    Its best to compare this article on the “technical” analysis of the Silver price against the David Stevenson article on the future “demand” and uses of Silver and the possible scarcity of the metal and make your own mind up as to the future direction of the silver price. Both have merit, yet if David’s “demand” figures are correct I cannot see the Silver price dropping to a level where silver mines stop producing and are put on “care and maintenance” as they become unprofitable (as is happening with Iron ore at the moment due to a supply glut and consequent drop in price) and thus compounding the future Silver supply problem. For those wanting to stockpile Silver (e.g India / China) the lower the price the better, so I can see the price of Silver being depressed “technically” in the short term but rising rapidly when the scarcity factor become more prevalent in the future.

  • Angus Neill

    Why “bad”? Cheaper gold would be great news! Pinkers LOVES gold and would love to buy more… and the chart is clear: The price of the precious metal is going down and will continue to do so until the real support levels have been tested: Levels well below $1,000 per ounce. This, of course, makes complete sense: The gold party has been going on for a hellishly long time (a whole decade!) and it is hardly a surprise that a serious hangover should follow. The froth needs to be whipped off!

    Furthermore, gold has been a bit of an unruly child recently, responding in an erratic and unpredictable manner to hitherto reliable indicators such as the threat of inflation (QE!), political turmoil and currency movements. This new, rather random ‘behaviour’, appears to have coincided with the rise of Exchange Traded Funds (ETF) that have introduced more flexibility and ease of trading and hence facilitating more speculative trading. Dubbed as a ‘cheaper’ and more ‘user-friendly’ platform, the ETF appears to have eroded gold’s traditional role as a trusted hedge and insurance policy.

    It is a myth to believe gold is a constant store of value. Like anything else, the price of gold is created by supply and demand. Further to this: http://pinkerspost.com/?p=213

  • Stephen Thomson

    Another meaningless rant devoid of any real content, do you pay ANY attention to your readers comments Dominic? Where’s the factual analysis of all the issues affecting price, the evidence to support your analysis and a reasoned conclusion?

    The factual truth is:-

    1. The precious metals prices are very heavily manipulated to the downside. If you need proof, go to GATA’s webpage, the evidence is all there, decades worth of it. In particular, watch the recent interview between Larry Parks and Chris Powell for a detailed explanation of the situation. It’s just a shame that the MSM, Dominic included, lack the cojones to produce some real journalism on the subject. Why are they manipulated downwards? Because if left to their own natural market-force devices, the metals prices would rise to reflect the recent destruction of currencies around the world, shattering the illusion that we can print money without consequence and that business can continue to grow in value while their customer’s disposable income continues to evaporate.

    2. Throughout history, gold and silver have always, ALWAYS risen in price to account for increases in the currency supply, regardless of short term price management schemes that have temporarily held them back. With the world printing like there’s no tomorrow for some years now, it is just a matter of time before the metals rise again. There are already many nails in the coffin of the current price management scheme, the most recent being the creation of the shanghai physical gold exchange. This will begin a gradual change towards pricing of the metals by the physical market rather than the suppressed paper markets in which they are priced today.

    3. It’s the very manipulation of the metals that makes them such a bargain today and as such, for the patient at least, the suppression scheme ought to be welcomed. In a world where nations and businesses survive on money printing and cheap debt, where there is such unrest in the middle east, the “containment 2.0” situation with the US and Russia, the steady decrease in supply and discoveries of physical PMs and the massive increases in demand in recent years, the fact that many miners are running at a loss at current prices which if sustained long term will reduce supply…… the list goes on but suffice to say, the PM prices should be A LOT higher, or so every fundamental/common sense/historical metric would suggest. If you are looking to trade gold and silver, know that the market is extremely well rigged and tread carefully, we may well head lower from here. But if you believe in the 100% record shown by economic history, that Gold Silver will rise to account for the increased creation of fiat currency, as it never fails to do, then buy now while it’s cheap. If the price goes down from here? Buy more while it’s cheaper. Worst case scenario? I’m too early with my timing and my kids will enjoy the huge transfer of wealth that ensues, rather than me.

    So long as you can afford to live your life and maintain your investment position for at least the next 5 years, I fail to see how you will regret it. Fwiw I think we won’t have to wait more than a year or so.

  • Joerg Standfuss

    The last bull died. Gold should go up soon.

  • Benjamin Burford

    The fact that many miners are not very profitable at current prices reflects inflation in the cost of doing things – which confirms Stephen Thomson’s post (above.) If prices drop and sustained – more miners will stop producing. This is bullish long term for gold.

  • Edward Lark

    Does anyone still listen to Dominic? The fact that he never comes on to these threads and replies says it all really.

    A voice over artist/comedian who moonlights as a ‘metals expert”, who like many others was seduced by the metals story put forward by the likes of KWN.

    I see also Bengt was bullish on silver a few weeks back, almost as a good a call as his Tescos play.

  • Anthony Reid

    As usual, the charts above ignore inflation. How can the price in nominal $ in the year 2000 have any bearing on the price in actual $ today, unless, of course, you believe in voodoo as Dominic obviously does.

    Have a look at http://www.macrotrends.net/1333/gold-and-silver-prices-100-year-historical-chart which deflates all prices to 2012 levels for a proper comparison. Perhaps Dominic can draw some conclusions from that!

    Another worthless set of coloured lines.

    Is this MW’s “investment advice”? May as well read Magic Meg.

  • D Frisby

    Thanks for all your comments. I may not agree with them, but they are noted.

    Given the price action since this article was written on Sept 24th, the bearish outlook was right. Let’s hope the market turns, but I’m not holding my breath. I still think we’ll see $15 silver and probably $1,050 gold before the bear market is over.

    • Stephen Thomson

      Lmao, Dominic, did you really just come onto this thread a month after the last of 10 comments to point out that you were right?! Or am I crazy for even thinking that is how it looks?!

      Perhaps while you are here you could address some of the real issues raised above?

      You have been right on the price direction but not for the reasons you think. Along with Mr Burford you remain of the view that sentiment is driving the gold price, when it is actually priced by the paper comex market that is leveraged at least 100 times to the physical market and the comex market is completely manipulated by JP Morgan et al. Unless of course you have an explanation for how $1.5b of gold dumped on the paper market at 00.30 EST last night (start of the Japenese trading lunch hour during the already illiquid Asian trading period) was an example of “sentiment” lol.

      Clearly, they have decided to take the price below the $1180 bottom and from here we may well see the $1000 mark in gold and $13/14 in silver.This will allow JPM to washout the managed money one last time on the way down and finally get prices low enough to allow them to switch their silver short position to a net long (as they now have in gold) in preparation for take-off in the PM prices. Once they take their foot off the PMs throat, look out above.

      In the meantime I am sitting patiently in my truck, looking to engage reverse gear the second things look like bottoming out.

  • Emailonly

    Silver now at $15 and down 30% in a year. Tin below $20,000. Commosities down 10% Oil down to $78. This whole mess can go very much lower yet. Silver at under $10 by Easter.

  • Emailonly

    Silver now at $15 and down 30% in a year. Tin below $20,000. Commodities down 10% Oil down to $78. This whole mess can go very much lower yet. Silver at under $10 by Easter.

  • Jason1

    “I still think we’ll see $15 silver and probably $1,050 gold before the bear market is over.” Silver hit $15 overnight before bouncing up to 15.7 today. If you are right and gold heads to $1,050 at some point, won’t that pull silver down with it? Can $15 hold if that happens?

  • Kam

    Kamtest1

  • Spartacusstoo

    It’s always the same…the pros and cons on the topic. I would say that the real issue is simply: are these commodities manipulated? Ed Steers report is an excellent source on this topic and has been for a long time. I do beleive that the CB’s are afraid of the precious metals and other commodities as well due to all the money printing, the QE’s, with more to come as has to be. Do the CB’s have motive here…absolutely. The PM’s represent real threat to the dollar standard and now the CB;s really have no choice but to manipulate markets via their “open market operations” also known as the Plunge Protection Team. We all have to recognise that the manipulation is total including the equity markets as no one in their right mind would beleive that the current state of the stock markets reflect real price discovery and with gold, a hundred claims on every ounce of gold that exists. All the graphs, chartings and sundry are of no avail as they thrive only when markets experience real price discovery.
    Everyone reading this should take the time to investigate the market rigging that is going on internationally. The information is there, you just have to do a little digging to uncover it.