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2016 Silver Predictions and Outlook

Will Silver Rally in 2016?

Written by Geoffrey Pike
Posted February 2, 2016

silverjpgIt is always tough to make predictions, especially when timing is involved. Still, it is always helpful to analyze where something may be overvalued or undervalued due to factors that the marketplace may not be taking into account.

We can make predictions (educated guesses) without having to be exactly right. And we can adjust our strategy as time goes on and as new information becomes available. Therefore, let’s look at silver and its prospects for 2016.

First, it is always good to take a look back to see where we came from.

In the last 40 years, silver has had two big bull runs, surrounded by even bigger bear markets. In the late 1970s, silver skyrocketed in price. The Hunt brothers supposedly tried to corner the silver market, but new government rules put a stop to that idea. Worse for the Hunt brothers, Paul Volcker put a stop to the bubble activity.

The silver price per ounce topped out at almost $50 per ounce briefly in early 1980. After that, it was a devastating bear market for two decades. Then the 21st century brought some renewed hope to silver bulls. The price went up almost to its 1981 high in 2011. Then it came back down and now sits around $14 per ounce.

In other words, silver has been a bad “buy and hold” investment. It is incredibly volatile. This can mean big profits and/ or big losses.

Silver is referred to as the poor man’s gold. Investors looking to buy precious metals in physical form (as opposed to stocks, ETFs, futures contracts, or certificates) can more easily enter the silver market with the lower price. It is easier to pay $20 for a one-ounce silver Eagle than it is to pay $1,200 for a one-ounce gold Eagle.

While the silver price is somewhat correlated to the gold price, there are some major differences. Silver is not bought and sold by central banks. Silver is also used as an industrial metal more than gold. And silver is far more volatile.

In addition, when there is a major war or instability in the world, investors tend to seek gold. It is a hedge against disaster. Silver does not get the same attention.

For these reasons, silver is more sensitive to the economy, especially when price inflation is low. As of right now, price inflation – at least as dictated by the consumer price index – is relatively low. And while the economy seems to be doing better, it has seen better times before.

In the short-term, the silver price is going to be quite sensitive to overall economic conditions. A recession will likely be bearish for silver in the short term, especially as industrial demand decreases.

This is not a situation like the 1970s where the economy was weak. At that time, there was double-digit price inflation and the dollar was getting hammered.

The Dollar Factor

Most commodities have suffered in terms of U.S. dollars in the last few years. The U.S. dollar has been incredibly strong compared to the other major currencies of the world. This is more a reflection of the weakness of other currencies than it is of the strength of the U.S. dollar.

So while silver still would have been down over the last several years in most other currencies, it has been worse for American investors who are pricing silver in dollars.

At this time, there is no sign that the dollar is going to give up its gains. The economies in Japan, China, and Western Europe are all struggling. And they all have the same Keynesian solutions, which mostly involves more debt and more money creation. The dollar could certainly fall just because it is overbought, but it doesn’t look like it will give up any substantial gains over the near term.

Of course, the dollar, as compared to other currencies, doesn’t matter if the dollar itself is depreciating. Investors tend to go to hard assets – especially precious metals – when they fear their money is going to lose significant purchasing power.

If the Federal Reserve decides to start more money creation as it did from 2008 to 2014, then this will change the ballgame completely.

The 2016 Economy

As of right now, it looks as though the Fed will finally raise its key interest rate, even if it is a small token hike. This could put a damper on the economy. There are already a lot of misallocations built up from before and the Fed’s tighter policies may expose the bubble activity that has already taken place. Oil has already crashed from last year.

There are many signs that the economy is weakening. If this continues, then the weakness in silver is likely to continue. For this reason, I am not recommending that anyone go heavy into silver right now. Gold is going to be your safer bet at this time.

Silver will bounce around a bit, just as the economy bounces around. But in the short run, I am not a big buyer of silver. If you don’t own any, then you can buy small amounts on price dips.

With all of that said, if the economy gets so weak that it enters into a recession, then it will be time to convert some cash into silver. This may sound contradictory at first because the demand for silver as an industrial metal will be down.

However, if the economy gets weak enough, then the Fed is going to reverse course yet again. It will stop tightening. It will not hike interest rates. It may go back to another round of money creation. QE4 anyone?

When the Fed starts its next round of money creation, I think investors are going to realize that the Fed will always step in during economic trouble. I think we will finally start to see an economy resembling more like the 1970s than 2008. We may not see double-digit price inflation, but we will see accelerating price inflation with investors seeking more hard assets.

To predict silver is to predict the economy and the Fed’s reaction. The first half of 2016 is probably going to mean continued bearishness for silver. If the Fed starts its next round of QE by next year’s election, then we may see silver start to recover before the end of the year.

The Fed’s next big move in money creation is going to change the attitude of a lot of investors. And the next bull run in precious metals is going to favor silver more than any other. It is going to be one of the most profitable investments at some point.

For 2016, you should not be selling your silver. You should have enough cash that you can buy it when the bargains are there.

If silver goes down some more – as I expect – then you can use the dips as entry points. The price has already been beaten down quite a bit from its 2011 highs, so there is not a huge downside left. It isn’t a stock that is going to go bankrupt.

The worst is over for silver, but it doesn’t mean the downturn is completely over. Use your cash to dollar-cost-average into silver in the latter part of 2016. Buy on the dips. You can sell several years down the line during the next mania phase. We are still a long way off from that.

It would not surprise me to see silver go down to the $10 to $12 range in 2016. But I don’t expect it to stay there for a long time. We may see it back around $15 by the end of 2016. That is why you should buy on the dips.

If the Fed starts another round of digital money printing before then, we may see even higher prices. The silver price is going to depend on the economy and how the Fed responds. Adjust your plans accordingly.

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