Here we go again. Silver is on the move in chunks of up to 7% moves to the upside, yesterday, and as high as another 3.4% in European trading this morning. Silver reached a peak of $39.36 before JP Morgan’s earnings report brought in some sellers at 8 a.m.
Sprott Asset Management’s John Embry told King World News he believes that when the investing public comes into the precious metals market, in earnest, the price of silver could go hyperbolic. While the silver market is razor thin to begin with, adding the effect of the largest concentrated short positions in history will explode the price of silver, according to Embry.
“I totally agree with James Turk. I think the thing (silver) has been abused on the downside and it’s just like a coiled spring ready to explode,” he said. “I think silver will go back to those highs we saw before that May raid faster than most people can imagine.”
Unlike other beloved hard-money advocates Jim Rogers and Marc Faber, Embry is as fearless as James Turk and Jim Sinclair when he’s asked to put a price tag on the mercurial gray metal.
“We haven’t even really seen money start to significantly flow into hard assets, when that occurs and it will occur, it’s going to have an outsized impact on the price of these things,” explained Embry. “The gold price should be $2,000 within the next six months and I believe the gold/silver ratio will decline tremendously in that environment. I have no problem with $100 silver, none, and that might just be jacks for openers.”
The implications of Embry’s suggestion of a 20 to 1 ratio between the prices of gold and silver appear, on its face, extraordinary or apocalyptic. A move of 25% in gold that sparks a 150% in silver may be hard to take in for newcomers to the bullion market. But let’s consider the last gold and silver rally.
In August 2010, gold and silver traded at approximately $1,150 and $18, respectively. Eight months later, in late April 2011, gold reached $1,575 and silver spiked to nearly $50—a 37% and 175% moonshot, respectively, in the price moves of gold and silver.
As gold knocks on the door at $1,600, and for silver, at $40, a move of 25% in gold to $2,000 and another blast of 150% to $100 for the price of silver isn’t that crazy—it’s an aggressive call, but not a crazy one at all!
Embry cites an important point of leverage as an explanation for his enthusiasm for silver. Several competent analysts have worked the numbers (including Bill Murphy and Chris Powell of GATA), and have come to the conclusion that for every ounce of silver in known inventories there are approximately 100 paper contracts trading (a fractional bullion system, if you will) on various exchanges across the globe.
To put the ratio between the paper and physical silver market in better prospective, a 1 percent silver “reserve” betters Lehman Brothers’ ridiculously low (criminally low, some say) reserve of 1.6% just prior to its implosion. It just took one hint of a breakdown in confidence in Lehman that took it down so quickly—through its use of the over-the-counter derivatives market. The same scenario could play out at the Comex, according to Embry.
“What’s been fascinating, and what was unappreciated by me in the early stages, was the enormous number of derivatives that have been created in the financial system,” said Embry. “Because of the derivatives they’ve been able to keep this thing going for infinitely longer than any rational mind would have thought possible.
“Because the balloon was blown up so much, I just think the aftermath in its finale is going to be extraordinarily unpleasant.”