Citigroup’s call for the Silver Price

Here comes yet another prediction for the precious metals.  This time, Citigroup Global Markets chimes in with its price prediction for the most popular “thing” to front run the coming full-blown repudiation of paper money in our future—silver.

“If the final rally in the last bull market repeated then we can expect $100 over the long term,” Citigroup’s (NYSE: C) Tom Fitzpatrick and two other analysts wrote in a research report of July 15. “While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet.”

Fitzpatrick’s mention of January 1980, the month of panic, mania and silver’s meteoric rise to $50 on the backs of the Hunt Brothers, takes us back to a time when Jimmy Carter was president, Abba and the Bee Gees dominated the music charts, and a new home could be built for $76,400—though, the median-size of a new home back then was approximately 20% smaller than today’s, according to U.S. Consumer Financial Protection Bureau Special Advisor to President Obama, Elizabeth Warren.

Nevertheless, a comparison of some reasonable benchmarks between 1980 and today reveals some food for thought regarding the ultimate price silver can achieve during a riot rally soon to spark in gold’s kissing cousin.

In 1980, the Dow reached a high of $903.84 on February 13, 1980, and a low of $759.13 on April 21, 1980. The average close of the Dow 30 Industrials in January 1980 was $860, about the same price as an ounce of gold at that time, and 17 times the peak price of silver at $50.

For the same ratio to be reached between the Dow and the silver price, today, silver needs to climb to $735 per ounce, the Dow must drop significantly, or the two must meet somewhere in the middle—or, in the deep out-of-the-money hyperinflation scenario, the Dow and the silver price could add a bunch of zeros to today’s levels.

As the federal debt limit talks move into the bottom of the ninth inning in Washington, the Tea Party pushes Republicans to make the $14 trillion federal debt an issue during the upcoming 2012 political campaign.  Similarly, in 1980, Americans were up in arms regarding a federal budget nearing the, outrageous at the time, $1 trillion mark.  A few years later, Ronald Reagan became the first $1 trillion president during his first term in office (1981-84).

Using the federal budget as a comparative metric, the peak price of silver at $700 wouldn’t seem that crazy.  In fact, some pretty intelligent and steady-handed bullion analysts have suggested numbers not too far off that number.

In 1980, U.S. GDP reached $2.8 trillion, while federal spending topped $590 billion at the end of fiscal 1981.  Fast forward to today, and we find Washington spending $3.6 trillion, which includes interest on $14 trillion of accumulated debt.  The silver price when compared with federal spending and total federal debt (not including more than $150 trillion in unfunded liabilities, according to B.U. professor, Laurence Jacob Kotlikoff and economist John Williams), calculates to $305 and $250, respectively.

In terms of the Fed’s monetary base statistics, the monetary base in 1980 stood at $133 billion, compared with the $2.7 trillion at the close of business on July 17, according to Federal Reserve statistics.

“The price of silver would have to reach $980.57 before it is in 1980 bubble territory,” according to CQCA Business Research, the firm that posted on its Web site the calculations when comparing the Fed’s monetary base and a $36 silver price.

Using 1980s peak price of $50, the silver price of $1,325 would look like today’s gold price at the end of this bull rally.

Back to Citigroup’s research report.  The boys at Citi feel the nosedive decline in the silver price, which began in May, is now over, giving investors the green light to back up the truck and load it up with silver.  A less gutsy call than James Turk’s call for a bottom (presumably) when silver was still in free fall as it hit the $33 level.

“The move down from the April high this year has come to an end and the double bottom is a good platform for a turn back up,” the three Citigroup analysts said in their report.

At today’s price of $40 the ounce, silver has already soared 650% from the average price of $5.33, set in 1999.  If investors had hooked onto the likes of James Turk, Jim Sinclair, Peter Schiff, Richard Russell, and the raft of bullion experts and old hands frequently interviewed on King World News, the massive profits could have already been made in silver.

But, after reviewing the particularities between the years 1980 and 2011, Citi’s call for $100 silver isn’t quite going out on the limb.  Jim Sinclair’s call for $12,000 gold and, presumably, $600+ silver (given the historical ratio between the tow metals at their peak prices), is, indeed, a bold call—but not an unreasonable one.

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