$200 Silver Prediction from 2011

Editor's Note: This article was originally published in April of 2011 on the Daily Libertarian. The Daily Libertarian, apparently, is not an active site at this point in time. Some of the predictions made in this article are now obviously wrong. This was written at a time when silver was approaching its high price and many were predicting $200 silver as evidenced in a previous post here. At a later point, we plan to flesh out more arguments for $200 silver or $150 silver, which also seems to be a common level that some are predicting. Originally the title for article was "Silver is Screaming". The article was followed by another in June of 2011 titled "What's Silver Saying?" Hope you enjoy this article. If you have any questions or comments please feel free to leave them in the comments section.

If I were the Mogambo Guru over at The Daily Reckoning might open by ranting about how the idiots at the Federal Reserve are creating Too Much Freaking Money (TMFM), leading to a devaluation of the U.S. Dollar and increasing food, fuel and commodities prices. However, I don't need to scream, silver is yelling at the top of it's lungs. What's silver screaming about?

Silver's screaming about the incredible shrinking dollar - whether measured by the U.S. Dollar index (DXY), or one of the Trade Weighted Exchange Indices, the message is the same. The U.S. Dollar is going down like the Titanic.

It may not be obvious to Helicopter Ben Bernanke, but the rise in silver prices has coincided with the decline of the dollar. While the DXY was falling from around 120 to below 75 from 2000 to present, silver bumped along around $5.00 per ounce for years before beginning it's climb to $43.00 per ounce at present.

Sadly, but not surprisingly, the declining dollar is the result of a deliberate government policy of devaluation. In "The Global Recession Risk: Dollar Devaluation and the World Economy" by Pelaez and Pelaez, they discuss how a 40 percent devaluation of the dollar might be necessary in order to bring the current account deficit (CAD) of the U.S. back into balance. Interestingly, a FEDPOINT from the Federal Reserve Bank of New York outlines why a country might devalue its currency and what effects that might have. The effects of devaluation reads a bit like those warnings on prescription drugs:

A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country's economy and hurt the country's ability to secure foreign investment.

Let's see - inflation, higher interest rates, jeopardized creditworthiness and inability to secure foreign investment. Sign me up Dr. Kevorkian!

The flip side of increasing exports and closing the current account deficit is that Americans will have to reduce their consumption plus ("The Global Recession Risk: Dollar Devaluation and the World Economy" by Pelaez and Pelaez):

The US must abandon residential

construction in favor of export activities and the rest of the

world must buy American goods and services. The US government as

well as those of surplus countries must engage in fiscal consolidation.

Does any of this sound familiar? It should since we're living it right now.

Devaluation also aids the United States with at least two other issues:

Reduces the burden of the U.S. debt by allowing it to pay its creditors in increasingly worthless fiat currency.
Pushes China to unpeg its currency from the dollar allowing its currency to float. Most likely this causes the Renminbi (RMB) to appreciate against the dollar. This makes Chinese imports more expensive when priced in dollars and helps reduce the current account deficit.

People are waking up to the cold, stark reality of devaluation. The dollar in your pocket is likely worth less today than it was yesterday. Government policy is designed to force you to consume less and save more. But, why would you save an increasingly worthless fiat currency like the dollar? Many people refuse to do so. Purchasing silver isn't just for survivalists waiting for something to hit the fan or silver bugs. Silver has become the common man's way to unplug from the government controlled currency matrix and hold onto money (yes, silver and gold are money) that maintains its value as the dollar declines.

Take that Nostradamus.

Here's the part where, if I were really clever, I would write some vaguely worded quatrains in dead languages, and let you interpret them. Fortunately for you, and unfortunately for me, I'm not that clever.

The decline of the dollar is an ongoing trend. Devaluation is a deliberate, coordinated government policy. In January 2002 the U.S. Dollar Index (DXY) was roughly 120. By December 2004 it had declined to 81.

By June of 2010 the DXY had made a pretty stunning recovery to around 88. Using the January 2002 to December 2004 decline as a guide, I am predicting the DXY to decline to about 60 by May 2012. That also lines up pretty nicely with an overshot - 50 percent instead of the 40 percent decline - thought necessary to bring the current account deficit (CAD) back into balance.

So, what does that mean for the price of silver?

I believe silver will go to $200 per ounce, perhaps more. How did I get there?

This is based on a few different factors. First, even though it was the subject of manipulation by the Hunt brothers, silver did reach $50 per ounce. Inflation adjusted silver, to match the $50 high, would have to be valued north of $100. The number I hear thrown around often is $140 per ounce. I haven't checked the exact number out, but that doesn't sound far off.

Second, the gold-silver ratio is declining. A year ago it was around 60 to 1. Today it is around 35 to 1. This combined with experts Peter Schiff and James Turk predicting gold prices of over $8,000 per ounce lead me to believe that $200 per ounce silver is not an unreasonable expectation. In fact, both men are predicting a 1 to 1 ratio of Gold/Dow ratio - in other words if an ounce of gold is $10,000 per ounce then the Dow will be 10,000. Although I'm not sure gold and the Dow will meet at such a high level, I would not be surprised if the Dow declined 25-35 percent and gold climbed to meet it somewhere around $8,000-$9,000 per ounce. A 40 percent decline in the Dow would put it around 7,200. With a 35 to 1 gold-silver ratio silver would be priced around $205 per ounce.

So, at $43 per ounce, it looks like silver is just warming up its lungs. Yes, it may be screaming, but think how hoarse it (and perhaps you) will be from screaming as it approaches the $200 per ounce mark. Of course, if I'm wrong, my next prediction may be written in quatrains.