Silver Prices in 2017: This Chart Shows Silver Prices Could Hit $100
Silver Price Outlook 2017
What is the silver price forecast for 2017? Most analysts seem to have taken a dim view of precious metals like silver and gold in 2017. In particular, most believe that silver prices will face headwinds in 2017 because of a stronger U.S. dollar, inflated stock market, encouraging U.S. economic data, and unbridled optimism that President Donald J. Trump’s policies will be good for corporate America.
Without question, silver will face some hurdles in the first quarter of 2017 as investors take a wait-and-see approach about the new Trump presidency. But, when it comes to the longer silver price trends in 2017, there are a lot of reasons why investors should be bullish about silver prices in 2017. In fact, because of these factors, silver prices could very easily double in 2017 to more than $34.00 per ounce.
This might be a bold prediction, especially when you consider that silver prices have fallen more than 10% since Trump won the U.S. presidential election last November. Silver prices have fallen more than 20% since hitting multi-year highs in August 2016.
Will These 5 Factors Send Silver Prices Soaring in 2017?
The silver price forecast for 2017 remains bullish because the U.S. economy remains fragile. Investors flock to precious metals like silver and gold to hedge political and economic uncertainty. Silver can protect your assets and is a great hedge against inflation. Investors flocked to silver during the Great Recession and in the beginning of 2016 when the markets started to tumble.
Silver will continue to be attractive to investors because the U.S. economy remains extremely fragile. Investors and consumers are optimistic that the U.S. economy is on the right track, but most of the U.S. economic data rolling in suggests otherwise.
1. U.S. Economy Remains Fragile
U.S unemployment came in at 4.6% in November, with 178,000 new jobs created. This sounds impressive. It’s not. (Source: “The Employment Situation — December 2016,” Bureau of Labor Statistics, January 6, 2017.)
The unemployment rate does not include discouraged workers who cannot find jobs and have stopped looking. The improved jobs data is a result of a lot of new low-paying part-time jobs (only 9,000 new full-time jobs were created) and more people retiring or leaving the work force.
The number of Americans not in the work force soared by 446,000 in November to a record 95.1 million. The participation rate hit 62.7%, a little shy of the October 2015 all-time low of 62.4%.
The state of the U.S. economy is hitting the younger generation of workers the hardest. The unemployment rate for those 16 to 19 years of age is 15%. Overall, the total underemployment rate is 9.3%.
Even if you do have a job, wage growth isn’t keeping up with inflation. The official U.S. inflation rate increased 0.2% month-over-month in November, with prices climbing for gas, rent, and used cars. On a year-over-year basis, overall prices were up 1.7%. (Source: “Consumer Price Index Summary,” Bureau of Labor Statistics, January 18, 2017.)
Unfortunately, that inflation rate doesn’t jive with what Americans are actually paying for things on a daily basis. According to the Chapwood Index, inflation is running above 10%. The Chapwood Index is an alternative non-government measure that looks at the unadjusted costs and price fluctuations of the top 500 items we buy (insurance, gas, coffee, “Advil,” dry cleaning, movie tickets, etc.) in the 50 largest cities in the United States. (Source: “Chapwood Index,” Chapwood Index, last accessed January 4, 2017.)
In New York, Los Angeles, Chicago, Philadelphia, San Diego, San Jose, San Francisco, Seattle, Boston, and Detroit, the five-year average for inflation is over 10%. Even in Colorado Springs and Wichita, the cities with the lowest inflation rates, the five-year average for inflation is around 7.5%. That far outpaces any wage increase anyone is getting—unless you’re a CEO, of course.
With inflation outpacing life, more and more Americans are getting further and further in debt. Over the last 10 years, U.S. household debt has soared by 11%, with the average household owing $132,529. (Source: “Household Debt Nears Pre-Recession Levels, Study Shows,” NASDAQ, December 4, 2016.)
Total U.S. consumer debt in 2016 is expected to come in at $12.5 trillion, topping the $12.37 trillion in total debt from December 2007, when the Great Recession started.
The most expensive debt (from credit cards) costs the typical household $1,292 annually in interest charges.
With interest rates expected to rise three times in 2017, that debt burden is going to get even worse. Almost half of all Americans (47%) would have to borrow money if they had an emergency expense of just $400.00. Not surprisingly, more than 10% of Americans need food stamps just to get by, (Source: “66 million Americans have no emergency savings,” CNBC, June 21, 2016.)
Keep in mind, the U.S. gets more than 70% of its gross domestic product (GDP) from consumer spending. The U.S. economy will not be able to churn out strong growth numbers when those expected to keep the economy strong are saddled by debt, have no money, and can’t find secure, well-paying jobs.
2. Additional Rate Hikes to Send Silver Prices Higher
Make no mistake, the U.S. economy is extremely fragile right now, and additional interest rate hikes could push the economy off a cliff. This runs counter to what rate hikes are supposed to do, of course. A rate hike shows that the Federal Reserve has confidence that the U.S. economy is strong enough to withstand a hike. It isn’t.
Don’t get me wrong, the Fed should have been raising rates slowly for years now. But it waited too long. Now it needs to raise rates in quicker succession, and this will hurt the average American.
In December 2015, the Fed raised its key lending rate for the first time in a decade. It was a small hike, but it showed consumers how even a small increase affects mortgages, car loans, savings rates, and other forms of interest-sensitive credit.
In December 2016, the Fed raised rates again, by a quarter of a percentage point, to a range of between 0.5% and 0.75%. Fed Chair Janet Yellen said the economy has proven to be remarkably resilient, and that the hike is a vote of confidence in the economy. (Source: “Federal Reserve Press Release,” Board of Governors of the Federal Reserve System, December 14, 2016.)
The Fed might be a little premature raising rates this time around too. The U.S. economy continues to face headwinds, including high household debt, high underemployment, a lack of secure, well-paying jobs, and wage growth. The U.S. only needs so many waiters and waitresses with university degrees.
It’s going to be hard for Donald J. Trump to get the U.S. economy moving in the right direction, no matter how hard he tries. The Fed expects the U.S. economy to grow just 1.9% in 2016 and 2.1% in 2017. Those are not stellar numbers for the world’s biggest economy. That’s especially true, considering that the Fed threw trillions of dollars at the U.S. economy to resuscitate it after the Great Recession.
Naturally, Donald J. Trump has big plans for igniting the U.S. economy, but that’s going to be a tough haul. The country is already $20.0 trillion in debt, and Trump wants to cut taxes and increase spending.
Weak economic growth and rising interest rates could further impede the U.S. economy and send silver prices higher.
3. U.S. Stocks Significantly Overvalued
Stock markets are only as strong as the underlying stocks. The markets may be at record levels, but the stocks supporting the nine-year old bull-market are more than a little sickly. Thanks to years and years of artificially low interest rates, investors have seen their once-reliable fixed income investments decimated. Where should those looking to boost their retirement savings park their money in a low-growth environment? Riskier investment like the stock market!
And that’s the fuel that has been propelling the stock market higher: low interest rates, not strong fundamentals. And stocks are seriously overvalued. How overvalued?
According to the Case-Shiller cyclically adjusted price-to-earnings (CAPE) ratio, which is based on average inflation-adjusted earnings from the previous 10 years, the S&P 500 is overvalued by 73%. The CAPE ratio is currently at 27.80, while the 100-year median is around 16. This means that, for every $1.00 of earnings a company makes, investors are willing to spend $27.80. The ratio has only been higher twice: 1929 and 1998/99. (Source: “Online Data Robert Shiller,” Yale University, last accessed January 4, 2017.)
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This is not the only ratio to suggest that stocks are significantly overvalued. The market cap to GDP ratio, which compares the total price of all publicly traded companies to GDP, also shows that stock valuations are in nosebleed territory.
A reading of 100% suggests that U.S. stocks are fairly valued. The higher the ratio over 100%, the more overvalued the stock market. The market cap to GDP ratio is currently at 127.3%. That ratio has only been higher twice since 1950: in 1999 (151.3%) and in late 2015 (129.7%). It was only at 108% before the 2008 financial crisis.
Should the U.S. economy not respond to Trump’s economic vision, or should the U.S. economy simply start to slow down even further, overvalued stocks will suffer. The U.S could slip back into a recession and stocks could crash or experience a major correction. Either event would send investors running to precious metals like silver and gold.
4. Global Economic Conditions Deteriorating
The U.S. is not an economic island. Nor is the stock market. U.S. companies will not be able to rely on foreign sales to help prop up revenue and earnings. Unfortunately, more and more U.S. companies are relying on foreign sales for growth. In fact, it now looks like S&P 500 companies will soon rely on foreign sales for the majority of revenue.
The percentage of sales in foreign countries for S&P 500 companies has increased for the last seven years, from 46% in 2009 to 47.9% in 2016.
That’s good news if the global economy is firing on all cylinders, but it isn’t. China is underperforming, as is Japan. And Europe, the world’s biggest economic region, is on the verge of meltdown.
French Prime Minister Manuel Valls said that the European Union (EU) is in danger of collapsing unless Germany and France, the two biggest economies in the EU, work harder to stimulate growth. (Source: “Europe at risk of collapse, claims French Prime Minister Manuel Valls,” Independent, November 17, 2016.)
In the third quarter, the eurozone’s economy increased by a princely 0.3%. The European Commission (EC) cut its GDP forecasts for the euro region on fears of political uncertainty and global trade. In 2016, Europe’s GDP is projected to grow 1.7% and fall to 1.5% in 2017. In 2015, it climbed two percent. (Source: “Economic Forecasts,” European Commission, November 9, 2016.)
Germany, the strongest economy in the EU, has been reporting consistently weak GDP data. In the third quarter, Germany eked out 0.2% GDP growth, its weakest increase in a year, and half of what it reported in the second quarter. Germany’s economy is projected to grow just 1.6% in 2016 and fall to 1.2% in 2017. (Source: “Gross domestic product up 0.2% in the 3rd quarter of 2016,” Destatis, November 15, 2016.)
France, the second-biggest economy in the EU, saw its GDP rise 0.2% in the third quarter. The mainstream media would point out that France’s GDP doubled in the third quarter, but that’s the joy of math.
The odds of France reaching the government’s 2016 GDP growth target of 1.5% is virtually impossible. To do so, France will need to report third-quarter GDP growth of 1.2%. (Source: “French GDP increased by 0.2% in Q3 2016,” Insee, October 28, 2016.)
In 2017, S&P 500 companies will not be able to rely on foreign sales as much as they have. And it doesn’t look like they’ll be able to safely rely on U.S. sales either.
All of these factors are bullish indicators for silver and point to silver prices trending significantly higher in 2017.
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5. Black Swan Events
You can’t really predict Black Swan events. That’s the joy about Black Swan events; they’re something you can wax eloquently about in hindsight and remind people how much they could have made “if” they’d made astute investments in the unexpected.
What we learned in 2016 though is that black swan events can help send silver prices higher and lower. Brexit was widely expected to end up with the U.K. voting to stay in the EU. This didn’t happen. The unexpected vote to leave the EU shook the markets and sent silver prices soaring.
Many mainstream media sites declared a Trump election victory impossible. Pundits predicted that, if hell froze over and Trump won the election, financial carnage would follow: stocks would slide, and silver and gold prices would soar. This didn’t happen either. Wall Street digested the Trump victory and decided it would be good for the U.S. economy, and stocks soared. Now stocks continue to climb while precious metals like silver and gold tumbled.
Not all Black Swan events are good for silver. But there could be some events in 2017 that help send silver prices soaring, even if just in the short term. But that’s the joy of investing: taking advantage of opportunity.
The U.K. is set to begin the process of leaving the EU by the end of March 2017. There are also a number of elections in 2017, any number of which could produce surprising results. Elections to watch in 2017 include Hong Kong’s chief executive election on March 26; France’s presidential Election, with the first round on April 23 and the second round on May 7; Iran’s presidential election on May 19; and Germany’s federal election on October 22.
There are also a lot of geopolitical unknowns. America’s relationship with Russia and China is strained. North Korea’s blustery, intellectually challenged leader says his country is close to test-launching an intercontinental ballistic missile (ICBM), which could, in theory, put the mainland U.S. within its range. There are also ongoing concerns about tensions in the Middle East and terrorist attacks in many areas of the world. Further, Venezuela could default on its debt obligations and Russia could push further into Ukraine.
Technical Indicators Suggest Silver Prices Will Soar
Wall Street is optimistic and the U.S. dollar is strong but, because of economic weakness, silver prices will climb over the coming months. The initial rise in the silver price trends will not be random.
1. Gold-to-Silver Ratio
To understand how high silver prices will climb in 2017, investors should pay attention to the gold-to-silver ratio. The ratio shows how many ounces of silver are needed to buy one ounce of gold.
The gold-to-silver ratio is important because silver has a strong historical relationship with gold. According to the gold-to-silver ratio, silver is seriously undervalued right now. Silver is currently trading near $16.50 per ounce while gold is trading hands at $1165.30 per ounce.
The gold-to-silver ratio is currently at 70. This means it will take 70 ounces of silver to buy one ounce of gold. Five years ago, the ratio was at 55. This suggests that silver is undervalued. For the ratio to recalibrate to historical norms, gold prices either need to fall or silver prices need to climb.
Because of all the reasons mentioned, it seems more likely that the silver price trends will be for the price to rise in the coming months. Silver has even greater growth potential than gold. For silver to return to its long-term ratio average of 55, it would need to climb 27% to around $21.00 per ounce.
2. Correlation Between Silver Prices and the S&P 500
Another indicator suggests that silver prices are undervalued and selling at a huge discount. In addition to gold, silver has a tight correlation with the S&P 500. Whenever the correlation between silver and the S&P 500 gets extremely negative, a bottom falls into place. Conversely, when the correlation becomes extremely positive, tops are made in silver prices.
Chart courtesy of StockCharts.com
In 1976, the five-year correlation between silver prices and the S&P 500 hit -0.90. This is near to where a bottom in silver prices was formed. A few years later, the silver price increased by close to 1,000%.
The same thing occurred in 1992. The correlation between silver and the S&P 500 again was close to -0.90. Another bottom formed. Silver prices climbed over the coming years, and silver bulls realized gains in excess of 1,000%.
Third time’s a charm? The correlation between silver prices and the S&P 500 is again near -0.90. It’s never an overnight jump but, if history is any indicator, silver prices could climb more than 1,000% in the coming years.