Is Silver Undervalued

Posted by in Silver Bullion Blog on April 18, 2015 Comments off

..."the view from the top is incredible!"

…”the view from the top is incredible!” Photo credit:eriktorner via photopin cc

I decisively dislike sensationalism and exaggeration. For this reason, I am naturally skeptical when I hear experts say that silver is probably the most undervalued asset class on earth. Is there truth in this claim, or is this merely an exaggeration?

After much reading and research, it seems to me that the statement is not an embellishment at all. For example, the silver price is way below the inflation-adjusted price in terms of the price peak reached over thirty years ago. In January 1980, the silver price reached an all-time high of just under $50.oo per ounce. This price inflation adjusted over thirty years would mean a silver price of over $125.00 per ounce today.

But there is a catch: the $125 figure is calculated by using present-day US government CPI formula. John Williams of Shadow Government Statisticsrecently applied the CPI formula from January 1980 (when CPI formulas were somewhat more credible) to the $48.70 silver price in 2011 for a more accurate and credible inflation-adjusted representation. According to him, silver would need to hit $568 per ounce to match its 1980 equivalent (http://www.gold-eagle.com/article/time-admit-gold-peaked-2011).

Admittedly, the 1980 peak silver price was a bubble type blow-off top. Such a pronounced price adjustment is unlikely to occur in the short term without some sort of a globally significant geopolitical or economic black swan event. However, a price revisit merely to the previous $50.00 peak of April 2011 would mean a 140% price increase from the current price level of just under $20.00 per ounce. To put this into context of the South African Rand, a return to the previous high around $48.00 would mean that an American Silver Eagle, which is currently selling for R315.oo per oz, would cost you over R700 (without considering the Rand/Dollar exchange variable a few years ahead). According to many experts, that is no pipe dream; it is merely a question of when.

One ounce of silver can be bought for less than it costs to mine it. To say that silver is undervalued is therefore an understatement. Theodore Butler fromSilverseek.com expressed this same sentiment, writing that ‘silver is the cheapest investment asset to own and that it is likely destined, therefore, to be the best investment opportunity over time.’ In his article, he backs up his conclusions with research notes and some excellent charts showing silver’s relative value to other benchmarks like gold, platinum, copper, crude oil, Dow Jones Industrial Average, the US Dollar Index, and the 10 year US Treasury note (http://www.silverseek.com/commentary/worlds-most-undervalued-asset-13135). It is worth taking the time to read this piece.

In a nutshell, the price of silver does indeed seem exceeding undervalued and is set to resume its upward price run after a painful year of consolidation. Silver is merely catching its breath at base camp and will soon be on its way up Mount Everest. And those who made the climb in 2011 say, the view from the top is incredible