Silver Prices Will Go Parabolic Soon. Why Silver Prices Will Reach Triple Digit, Record Highs.
Updated: Oct 30
In 1980, the spot price of silver rose over 1000% from its 1976 lows, and rose nearly 500% in 2011 from the lows of the 2008 financial crisis.
Silver did not get the same level of attention until almost a decade later, but now we are seeing the same forces of 1980 and 2011 slowly happening right now.
Silver prices are about to go parabolic in the short-to-medium-term. There are multiple scenarios that can play out, but the outcome is the same. Silver spot prices have been trading in the $18.50 to $22/oz range for months now, and using history as a guide, $60 to $100/oz of silver is not out of the question in the near future.
There are only two major factors that investors need to watch in the meantime: the Federal Reserve’s eventual pivot in its battle against inflation and China’s economy.
THE FED'S PIVOT
It should not be news to anyone that inflation rates have skyrocketed around the world due to governments responding to the 2020 coronavirus pandemic with massive economic stimulus (stimulus checks, low interest rates, deferred student loan payments, etc.).
There seems to be no such thing as “free” money, however. The resulting inflation is forcing the U.S. Federal Reserve to raise federal interest rates in an attempt to control inflation by crushing economic activity and consumer demand. High federal interest rates make it more expensive for businesses to raise capital in order to expand operations and consumer debt becomes more expensive.
Recent remarks by Federal Reserve chair, Jerome Powell, have indicated that he will force a much deeper recession if necessary in the United States in order to rein in inflation. Many people like to compare the current situation in the U.S. to the 1970’s economy where the then Federal Reserve chair, Paul Volcker, raised the fed funds rate to over 20% in 1980 to battle double digit inflation. Some worry that Powell may also raise federal interest rates to 20% (current fed funds rates are at 3-3.25% at the time of this writing); however, this does not seem to be neither likely nor possible.
Back in the late 1970s or early 80s, shortly after the U.S. removed the gold standard, the United States’ debt was relatively manageable at a debt-to-GDP ratio of around 30-33%. We have not seen a ratio that small since. Today, the debt-to-GDP ratio is over 120%. About 30% of U.S. debt today has been created since the 2020 pandemic. Similar to how raising federal interest rates makes debt more expensive for consumers and businesses, the Federal Reserve raising rates also makes it increasingly more difficult for the U.S. to service its own debt payments. I speculate that any interest rate remotely close to 10 or 20% would force the country to allocate too much of its GDP to debt payments now or in the future given its cash burn.
As the simple chart below shows, in every Federal Reserve quantitative tightening cycle since 1980, the Federal Reserve interest rate reached a lower peak. It may not be a coincidence that these interest rates consecutively reach lower highs over time as the U.S. debt steadily increases.
If this historical trend continues, then it’s possible that the Federal Reserve may be forced to pivot from this tightening cycle and cannot raise interest rates much higher than current levels.
The Fed is at a dangerous junction--raising the fed funds rate too high will be costly for U.S. debt payments, but lowering interest rates can make inflationary forces uncontrollable.
Ever since the 2008 financial crisis, the market has been used to quantitative easing programs for most of the past decade, but the 2020 pandemic shows what happens when a black swan event suddenly strikes an already overleveraged financial system.
From here, there are probably only two scenarios. Both scenarios are bullish for silver.
First, the Federal Reserve simply loses the battle against inflation over the next few years perhaps because inflationary forces are too strong, or because the Fed was unable to raise interest rates high enough. High inflation rates remain stubbornly persistent, or worse, become hyperinflated. The value of finite, physical assets such as gold, silver, and real estate skyrocket as the strength of the fiat dollar crumbles in a lost decade of stagflation.
Second, the Federal Reserve is able to raise interest rates sufficiently enough somehow, or external inflationary forces subside. Inflation rates decrease slowly closer to the Fed’s 2% benchmark. Companies’ quarterly earnings reports improve and the country recovers from the current recession eventually. Once the economy recovers, there will be more demand for goods and services sparking a boom for global manufacturing and the next catalyst for silver’s upcoming, record-breaking high prices.
In the event that the Federal Reserve succeeds in lowering inflation rates closer to its 2% benchmark and federal interest rates are then lowered, the economy will recover and global manufacturing will increase to meet demand.
What many people do not realize is that while silver has a long monetary history, over 50% of silver demand is industrial. Silver is increasingly becoming one of the world’s most important industrial metals since it has the best thermal and electric conductivity of all the elements and is also the most reflective metal. In our modern digital age, the demand for silver can only increase as it is critical for all electronics such as computers and smartphones or anything with a semi-conductor.
It’s possible that any clean or renewable energy revolution will not be possible without silver as electric vehicles require up to 3 times more silver than hybrid or gasoline powered vehicles; nearly every electrical connection in an EV uses silver. Solar panels would not be as efficient or work in the same way without silver. Silver’s reflective and conductive properties make it a critical component of residential and commercial photovoltaic solar panels.
Looking ahead, China will be a great indicator or barometer of returning global industrial demand and global recessionary headwinds subsiding. Many people are not aware that China produces nearly 30% of global manufacturing output. It is not surprising, then, that nearly 20% of global silver demand comes from China.
The coronavirus pandemic created a unique situation where global production was not meeting the needs of the market. Government pandemic stimulus put a lot of money in consumers' pockets, but there were not enough goods for people to buy to meet this demand. Manufacturing slowdowns and supply chain disruptions in China from the “Zero Covid” lockdown policies resulted in a fraction of Chinese production compared to before the pandemic.
As governments around the world continue quantitative tightening to fight inflation and force a global recession, manufacturing and silver demand will continue to dampen as consumer demand wanes.
However, the global economy will recover eventually as inflation is controlled. It is not a coincidence that the silver peak prices in 1980 and 2011 happened towards the end of the respective recessionary periods as economies began to rebound and equities began a new bull market.
Just as in 1980 and 2011, silver prices tend to skyrocket upwards mainly because silver supply gets crunched due to sudden increased manufacturing demand. The same supply/demand imbalances will be true once our current economic situation improves.
Silver stackers need to watch China’s economic developments as the world’s largest manufacturer and silver consumer. History shows that after years of recession and suppressed silver demand, when economic recovery suddenly happens and China fully reopens its manufacturing sector, prices go parabolic before silver miners have time to react to silver shortages.
WE'VE SEEN THIS BEFORE
2011 silver prices were a combination of speculative industrial demand for the metal, as well as investment demand from the outright fear of hedging against insolvent governments towards the end of the financial crisis.
In 1980, silver went from a 1976 low of $3.91 to a high of over $49 partially because the silver market was cornered by the billionaire Hunt brothers, who at one point owned one-third of the global supply of privately owned silver.
We are seeing the same scenario play out today. Silver has gotten more attention the past two years as Youtube and Reddit communities emphasize silver shortages and fundamentals. Reddit forums such as “Wallstreetsilver” strongly vocalize the silver drain from the COMEX, the commodities exchange for trading metals. The exchange held over 100 million ounces of physical silver just a year ago, but apparently only currently holds 38 million ounces.
Much of the 1980s silver squeeze is attributed to just three billionaire individuals, however this was before the internet. The ongoing Gamestop/AMC stock saga of early 2021 shows the power of online communities and social media collaboration. Millions of retail investors are gathering, and the upcoming silver squeeze could be magnitudes more than 1980.
Silver prices going parabolic seems inevitable in the near future; history doesn’t always repeat, but it tends to rhyme. Now is the time to accumulate ounces of physical silver before silver prices easily reach triple digits.
Don’t miss out.