James Turk: Silver to Reach $44 in 2010


Let me cut to the chase as to how I expect 2010 to unfold: a) the decline in the US dollar will put the economy on the edge of hyperinflation, b) the gold/silver ratio will drop to 45 and, if gold hits $2000 as I expect, then silver will be $44.44 per ounce, c) mining stocks will outperform gold and, as such, the XAU Index will break above its record high of 206.37 back in 2008.; By: James Turk; Words: 1275

Here are the details of my rationale:
1. The US dollar
The US dollar is on the edge of hyperinflation. Reckless spending by the US government is causing it to borrow increasing amounts of money, which in the aggregate is more than the market is willing to lend to it.

Given its trillion dollar deficits, the US is borrowing more than it can attract from global savings. If it cannot attract enough savings to meet its borrowing needs, rather than reduce its borrowing by cutting spending, it has to ‘print’ the dollars it spends. I expect it will become harder for the US government to find buyers for its paper (too little demand). This is of course what “quantitative easing” is all about. The Federal Reserve in the year ahead will therefore continue to purchase government debt and turn it into currency, which will eventually – and probably in 2010 – cause the US dollar to begin hyperinflating.

2. Gold
Gold will reach $2000 per ounce ($64.30 per goldgram) some time during 2010. Gold will not fall back below $1000. In fact, it is likely that a floor has been put under the market around $1050, the price at which India made its recent gold purchase from the IMF, though I don’t expect gold to fall below $1080. Like 2009, the low point for gold will probably occur early in this year’s first quarter.

There will be two forces driving gold higher: the continuing purchases of government paper by the Federal Reserve as the dollar moves ever closer hyperinflation; the growing demand for physical metal in preference to paper-gold.

a) Physical Gold vs Paper-Gold
An important tipping point occurred in July, 2009 when Greenlight (a major US-based hedge fund whose decisions are widely followed) announced that it was converting its large position in GLD (the big NYSE-listed gold ETF) into physical metal. Greenlight’s decision was a wake-up call for investors and asset managers who began to study Greenlight’s decision.

These investors and asset managers are now realizing that there is a fundamental difference between owning ‘physical gold’ and ‘paper gold’ in its different forms (ETFs are one of those paper forms). With paper gold you do not own gold. You only own a derivative that gives you exposure to the gold price, and this exposure comes with counterparty risk. Paper gold is a financial asset. Physical gold of course is a tangible asset and therefore does not have counterparty risk.

Also, these investors and asset managers are realizing that the annual carrying cost of ETFs is considerably higher than owning physical metal. For example, the annual management fee, administrative costs, shareholder reporting, etc. of GLD is in the aggregate about 3-times more expensive than owning physical gold in GoldMoney.

Here is the key point that the market is only now starting to understand: there is a huge amount of paper gold outstanding relative to the available stock of physical gold at these prices. Therefore, to keep supply and demand in the gold market in balance as the demand for physical metal rises, gold’s price has to rise in order to entice present holders of physical metal to sell and hold some national currency instead. After all, physical gold cannot be ‘printed’ by central banks to satisfy the demand for physical metal.

So how high does the gold price have to rise? My sense of it is that this scramble for physical metal could lead to a vicious short squeeze. Regardless whether or not one occurs, the demand for physical metal won’t abate until gold hits at least $2000, which I expect will happen some time in 2010. A huge short squeeze could send gold to that price in a matter of weeks. Otherwise, a continuous demand for physical metal will put gold in a steady climb throughout the year that sends it to $2000 by year-end.

b) The Gold:Silver Ratio
The gold/silver ratio will drop to 45, and perhaps make a new multi-year low around 40. If gold hits $2000 and the ratio reaches 45, then silver will be $44.44 per ounce. A ratio at 40 would put silver at $50 with gold at $2000. I mention this $50 target on purpose.

Silver will eventually exceed its $50 per ounce all-time record achieved in January 1980. Will it happen in 2010? It is I think only a 20% probability, but that is high enough for me to mention it. We need to start thinking about silver hurdling above $50. If it doesn’t happen in 2010, this important event – which is unimaginable to many – will I expect happen in 2011.

The major driving force behind silver will be – like gold – the demand for physical metal. The probability of a short squeeze in silver sometime in 2010 is higher than it is for gold. My guess is that a silver short squeeze is at least a 33% probability.

c) The XAU Index
The XAU Index in 2010 will break above its record high of 206.37. Also, the mining stocks will outperform gold, so that the XAU Index returns to more reasonable levels of valuation above 6 goldgrams. My upside target for the XAU Index for 2010 is 300, which would be about an 80% increase from its 168.25 price for year-end 2009.

If it takes 6 goldgrams to purchase the XAU Index if it reaches 300, gold would be $1555. At 7gg and 300 on the XAU, gold would be only $1333. At 7gg and 400 on the XAU, gold would be $1777. I indentify these relative levels of valuation to highlight how cheap the mining stocks are compared to gold, the product they mine. While political risk always remains the unknown wild-card when it comes to mining stocks, their low relative valuation at present makes it likely that the XAU Index will outperform gold in 2010.

No one can predict the future so instead of relying upon predictions focus on undervalued opportunities and avoid overvalued assets and, as such:

1. avoid the dollar and other national currencies as well as the paper issued by governments. Given the huge deficits they are incurring and their refusal to make the hard decision to cut spending, a sovereign debt default in 2010 has to be considered a realistic possibility. It will come either through hyperinflation of the currency or a flat out refusal to repay its debts.

2. continue accumulating the precious metals, and if you are so inclined to take the investment risk, the mining stocks as well. Keep in mind that in an environment in which people are increasingly fearful about the downturn in the economy, the safety of banks, and the outlook for the dollar, anything is possible for gold and if 2010 turns out to be the year when the biggest bubble of them all pops (i.e., the dollar becomes suspect), the sky is the limit for gold.

As I said in the opening paragraph a) the decline in the US dollar will put the economy on the edge of hyperinflation, b) the gold/silver ratio will drop to 45 and, if gold hits $2000 as I expect, then silver will be $44.44 per ounce, c) mining stocks will outperform gold and, as such, the XAU Index will break above its record high of 206.37 back in 2008.

Editor’s Note: The above article consists of edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered. Lorimer Wilson (

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