Silver & Gold In The News

With the global economy struggling to sustain even a modest recovery, the U.S. Federal Reserve pledging further quantitative easing if needed, and the dollar and several other leading currencies showing unrelenting weakness, there have been plenty of reasons for precious metals to rally of late - and gold and silver have done just that.

Gold has set a series of all-time record highs over the past five weeks, topping $1,350 an ounce for the first time ever as the dollar slipped to its lowest level since early January. Silver, while still well short of the $50-plus-per-ounce record it set when the Hunt brothers tried to corner the market in 1979, spiked to its highest price in 30 years and almost five times the sub-$5.00 levels it traded at from late 2000 to 2003.

The combination of bullish fundamentals, strong technical patterns and the persistent price advance has pushed coverage of gold and silver from the pages of specialty metals newsletters and Web sites to headline status in the mainstream media, stoking soaring investor interest in the process.

And, according to most analysts, the continuing bullish outlook is warranted. Morgan Stanley (NYSE: MS) issued a new report predicting 2011 gold prices could average anywhere from $1,315 an ounce to $1,512 an ounce.

A number of other sources have forecast gold prices reaching $2,000 to $2,500 in the next few years, and a few - including Money Morning Contributing Editor Martin O. Hutchinson - have made a recent case for the yellow metal skyrocketing to as much as $5,000 an ounce.

Silver backers have been equally positive, if somewhat more conservative price-wise. "The medium-term outlook for silver remains positive ... and we therefore raise our medium-term price target to $25 an ounce," said Bank of America Merrill Lynch metals strategist Michael Widmer.

However, David Morgan, one of America's most respected silver analysts, warns that the metal's recent price surge begs for some caution on the part of those just entering the market.

"I've been bullish on silver for a long time and I remain solidly bullish over the longer term," says Morgan, founder of and publisher of The Morgan Report, "However, the market has been rising steadily for more than two months (since a brief dip to $17.40 on July 28) and it is significantly overbought at current levels."

Morgan notes that there are a lot of professional traders - as well as numerous regular investors who got in early - sitting on some massive profits just waiting for the optimum time to cash in. [Note: The standard Comex silver future represents 5,000 ounces, meaning the December contract's move from the late July lows to a recent close of $23.18 would be worth more than $28,000.]

"If they sell, their inclination will likely be to turn right around and go short, which could trap some of the late-comers into bailing out as well, sparking at least a moderate short-term correction," says Morgan.

How big a correction?

Morgan's best guess, based on his current overbought assessment, is at least 10% - which would carry the December futures price back to $20.90 or so.

In spite of that possibility, Morgan still believes investors who don't yet have a silver position should take the plunge - largely because of the increasingly bullish fundamentals, the upcoming period of highest demand for precious metals (due to Asian buying for cultural reasons and Western jewelry purchases for holiday gifting) and the fact that silver has historically lagged gold in rallies, then made up the difference with large late-stage advances.

The latter factor can be somewhat measured by the silver-to-gold ratio - the number of ounces of silver it takes to buy one ounce of gold. At the height of the financial crisis in late 2008, that ratio soared to a whopping 75:1, then lingered in the 68:1 to 72:1 range until August of this year. The recent silver price spike dropped the ratio to just over 58:1, but it still has a long way to go to reach what was considered "normal" in the past - around 35:1 prior to 1980, with monetary norms as low as 16:1 earlier in the 20th century.

According to some calculations, silver would need to rally another $5 to $7 an ounce just to "catch up" with the gains already recorded by gold - and even more should gold continue to rise. To be precise, if gold rises to $1,500 an ounce in 2011 (as Morgan Stanley estimates), and the silver-to-gold ratio drops to 50:1, silver would have to climb to $30 an ounce.