Silver Price Forecast for 2018 Looks Bullish, Bears Beware
The mainstream media might have you convinced that silver isn’t worth a look. Don’t get too distracted by this noise though. The silver price forecast for 2018 looks bullish.
Silver investors could be in for a surprise in the coming year. This silver price prediction for 2018 may be considered bold, but the gray precious metal could be making a solid run toward the $50.00-an-ounce mark.
This bullish silver price forecast for the coming year isn’t based on gut feelings. There’s a lot of data that supports this argument. There are at least five things worth looking at when trying to predict where silver prices could go in 2018.
1. There’s a Silver Rush Among Investors
While your evening news may be talking about Bitcoin and other cryptocurrencies, there currently is a rush going on and no one seems to be talking about it; investors are rushing to buy silver.
To see a glimpse of it, look at the mints sales around the world.
Year-to-date, the U.S. Mint has sold 17.3 million ounces of silver in American Eagle coins. Between September and October of this year, silver demand at the U.S. Mint surged over 200%. (Source: “2017 American Eagle (Sales totals by Month),” U.S. Mint, last accessed December 1, 2017.)
Then look at Australia’s Perth Mint. Silver sales at the mint amounted to 999,425 ounces in October. It was the highest in three months and up 43.2% from September. Between January and October, the Perth Mint has sold 8.2 million ounces of silver. (Source: “Perth Mint Silver Bullion Sales Near 1 Million Ounces in October,” CoinNews.net, November 2, 2017.)
Beyond mint sales, pay attention to India as well. The country known for its gold appetite is buying a lot of silver. In the first few months of 2017, we saw significant growth in silver imports into the country: triple-digit growth. We still see strong silver import numbers from India.
In October, $346.8 million worth of silver was imported into the country. This was 90.6% higher than the same period a year ago. (Source: “Quick Estimates For Selected Major Commodities For October 2017,” India’s Ministry of Commerce and Industry, last accessed December 1, 2017.)
If investors continue to buy, this could be one catalyst that sends silver price soaring in 2018.
2. Don’t Ignore Silver’s Industrial Demand
Don’t forget, silver isn’t just a precious metal. A lot of silver is used for industrial purposes. In fact, over 50% of all silver mined is used for industrial purposes. The metal is used as a key ingredient in many industries.
To give you some perspective, consider that an “iPhone” has about 0.3 grams of silver. (Source: “Your old phone is full of untapped precious metals,” BBC, October 18, 2016.)
According to Gartner Inc (NYSE:IT), a research and advisory company, in the third quarter of 2017, smartphones amounted to 383 million units. Sales increased three percent year-over-year. Major smartphone makers witnessed a robust growth in sales. (Source: “Gartner Says Top Five Smartphone Vendors Achieved Growth in the Third Quarter of 2017,” Gartner Inc, November 30, 2017.)
Now, let’s do some math. If we assume that each smartphone sold in the third quarter of 2017 used just 0.3 grams of silver, then all together, almost 4.1 million ounces of silver were used.
Here’s what must be noted: smartphone sales are expected to increase globally for the next little while. So, it’s not irrational to assume that more gray metal could be needed to make more smartphones.
As said earlier, silver is used in many industries. In some industries, it is very critical. For example, with the current technology in place, you can’t have solar energy without silver. Solar demand is booming as well.
Saying the very least, if the industrial demand for silver remains strong, then silver could be worth holding in 2018.
3. Supply Side Issues in Silver Market
The supply side of the silver market is very critical to watch as well. If silver prices remain at their current levels, there could be a possible shortage in the silver market and it could send silver prices soaring.
Will it happen in 2018? This may not be the case, but we could see even more evidence of a coming shortage.
After the sell-off in silver prices back in 2013, silver mining companies started to reach for high grades. They needed to lower their costs and were successful in doing so.
But now, their costs are rising. Many silver mining companies are reporting massive increases in their cost of production.
Also, as they were reaching for high-grade ground, they pulled back on exploration spending. Don’t forget, exploration spending is an investment in future production. In mining, resources deplete, so mining companies must continue to spend on exploration or their survival becomes questionable.
This phenomenon is worth watching further. If silver prices remain at the current level, we could see mining companies suffer more and production could be on the line.
If you look at major silver-producing regions like Mexico, we already see mine production starting to look anemic.
If the supply side issues persist and demand remains strong, basic economics suggests silver prices could jump higher.
4. Key Valuations Ratios Suggest Silver Worth the Investment
Beyond the basic demand and supply in the silver market, understand that key valuation ratios for silver prices suggest the metal is severely undervalued and could be worth the investment.
One ratio is the gold-to-silver ratio. Before going into any details, please look at the chart below.
Chart courtesy of StockCharts.com
What is the gold-to-silver ratio? At its core, this ratio tells how many ounces of silver it takes to buy one ounce of gold. Currently, almost 78.3 ounces of silver are needed to buy one ounce of gold.
In the chart above, there’s something interesting happening over the last 25 years. You see, whenever the ratio hits around 80, it makes a move toward 40. The last time we saw this happen was in 2011.
If we assume that the gold-to-silver ratio drops to 40 again in 2018, then what’s next for silver prices?
If we keep the gold price the same (around $1,280), then the silver price would need to rise to around $32.00 an ounce. This is roughly 93% above the current price.
5. Could There Be an Upcoming Crisis?
Lastly, think on a big-picture level. Could there be a financial crisis in 2018?
According to the most recent derivative report by the Office of the Comptroller of the Currency, the top 25 U.S. banks have derivatives that have a notional value of $184.9 trillion. And these banks have assets of just $10.8 trillion. (Source: “Quarterly Report on Bank Derivatives Activities,” Office of the Comptroller of the Currency, last accessed December 1, 2017.)
Digging a little deeper, 75.1% or $139.3 trillion of the derivatives are based on interest rates.
See the problem here?
As it stands, interest rates are moving higher. The Federal Reserve has made it very clear that it wants to raise rates. We are seeing other central banks around the world pitching higher interest rates as well. The Bank of Canada has raised rates once and the Bank of England is thinking about raising rates.
With this, one has to question if the derivative market could see some trouble. $184.9 trillion is a massive amount. In nominal terms, U.S. gross domestic product (GDP) is around $17.1 trillion. These derivatives have a notional value of 10.8-times the U.S. economy!
Banks are severely leveraged. Just 25 banks in the U.S. have $16.52 worth of derivatives for every one dollar of assets.
The derivative amount globally is much higher.
Imagine what would happen if, all of a sudden, one major bank comes out and says, “We are facing huge losses on our derivative positions due to interest rates moving higher and we can’t remain in business for too long.”
This could send waves of uncertainty around the global economy. The global financial system is very connected.
Where do you think investors will run to? In times of uncertainty, precious metals provide a strong refuge. We could see them coming to the silver market, and this could send silver prices surging in no time.
Silver Price Technical Analysis
If you look at silver prices from a technical analysis perspective, the precious metal could be headed much higher.
Remember the most basic rule of technical analysis: the trend is your friend until it’s broken.
The long-term trend on silver prices remains intact. So, with this, it’s not irrational to believe the precious metal price could continue to move higher. See the chart below.
Chart courtesy of StockCharts.com
There’s one more chart that investors need to pay attention to. See it below.
Chart courtesy of StockCharts.com
At the top of the chart, we have plotted silver prices over the last 45 years. At the bottom, we have plotted the correlation between the silver prices and the S&P 500.
Now, look closely…
Whenever the correlation between silver prices and the S&P 500 becomes extremely negative, we see a bottom in the precious metal price. For instance, look at 1976 and 1992. After both of these instances, a major rally in silver prices followed and continued for several years.
In 2016, this correlation hit extremely low again. We are asking if the bottom in silver prices is in place and if the precious metal is setting up to soar.
How High Could Silver Go in 2018?
Going into 2018, as we see, it may be foolish to have a bearish take on the silver price. As said earlier, the gray precious metal could surprise investors.
Here’s the thing; if silver starts to see a rapid escalation in price, then it would mean speculators coming in, and the price may not be sustainable for the long term. We want to see a gradual increase. Unless there’s an outright economic collapse, then a rapid increase is understandable.
In 2018, there are a few levels we are keeping a close eye on.
The first level worth keeping an eye on to the upside is $21.00. If the price is able to close above it, we could see buyers rush to buy more. This is the level where sellers came in back in 2016. Silver breaking above $21.00 would mean the resistance level is broken. Remember, when resistance breaks, it becomes a level of support.
Silver breaking above resistance could really cause fireworks in the silver market. The next level of resistance for the precious metal isn’t until $25.00. If silver prices break above $25.00, the next level isn’t until $35.00.
What Should an Investor Do? Look at Mining Stocks
You see, if an investor buys silver bullion, they will earn solid returns if silver prices hit $50.00 in the next few years.
Doing simple math, if they buy an ounce of silver for $18.00 and it goes to $50.00 an ounce, their profits will be around 177%. Mind you, while the prices get there, investors will be on the hook for storage costs.
Dear reader, 177% is a respectable gain, but investors could make the gains on silver much sweeter.
They could look at silver mining stocks.
Consider that if a silver miner produces an ounce of silver for $10.00 an ounce, with silver prices currently at around $17.00 an ounce, their profit margin is around $7.00 an ounce.
Now, if they continue to produce at a similar cost, with a price of $50.00 an ounce, their profit margin per ounce of silver shoots to $40.00 an ounce. This represents an increase of over 470% from just $7.00 an ounce. Obviously, their stock price would reflect this.
If this is the case, we could see several silver mining stocks soaring, and they could turn out to be the next “millionaire makers.”