$150 Silver Price Target: Don’t Miss Out On The Major Bull Run In Silver Prices (SLV, AGQ, GLD, ZSL, PSLV)

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September 16, 2011 9:07am NYSE:AGQ NYSE:GLD

Martin Hutchinson: Silver prices (NYSE:SLV) had an  exciting run-up in the year ending in April – they almost tripled, briefly  touching $50 an ounce before settling back down to the low $30s.

Now, silver prices  are back above $40 an ounce. That may have you feeling the urge to sell – but  don’t.

Resist the  temptation to sell silver because this  recovery is for real, and it has much further to go.

In fact, I  anticipate silver prices will peak at $150 an ounce within the next 12-18  months.

The reason is  simple: With central banks around the world pushing lax monetary policies,  prices for all commodities – gold (NYSE:GLD) and silver in particular – will invariably  rise.

We’ve already seen  this happen with gold hitting a record high $1,923.70 an ounce on Sept.  7. And when gold goes higher, silver quickly follows.

That’s reflected in something called the “gold/silver  ratio,” which shows how many ounces of silver it takes to buy one ounce of  gold. Traditionally, this ratio acts as a price barometer for the two precious  metals. And if you look at it right now, it’s easy to see that $150 silver isn’t far in the offing.

The Gold/Silver Ratio

Gold  and silver prices traditionally move together because both are considered  stores of value in inflationary times. And while we think of gold as the  premier store of value, remembering the 19th century gold standard, other  societies – notably the Spanish empire in the Americas, Imperial China and  Mogul India – used the silver standard and are hence more focused on silver  when inflation threatens.

In the 19th century  and before, silver and gold prices maintained a fairly steady relationship to  each other in a ratio of 16 to 1. Silver depreciated against gold in the 20th  century. However, it also acquired industrial uses, which is something gold  never did (the two metals are chemically very similar, but silver is much  cheaper and hence more suitable for industrial uses).

The gold/silver  ratio briefly approached 16 to 1 in the 1980 precious metals bubble (silver  peaked at $50 per ounce, gold at $875) but then fell back beyond 50 to 1, with  gold trading around $250 an ounce in the late 1990s, while silver was below $5  an ounce.

Gold was the first  to take off after 2000. And by 2010, gold traded well above $1,000 an ounce  while silver traded at $12-$14 an ounce – a ratio of close to 80 to 1. This was  unsustainable, and it resulted in the price rise of 2010-11, which at its peak took  silver to $50 an ounce and about a 30 to 1 ratio to the price of gold.

Going forward, we  cannot expect the gold/silver price ratio to reach 16 to 1, as it almost did in  1980.

There are two reasons  why.

First, the use of  silver as an industrial metal falls off sharply when the price spikes. That  frees up silver supplies while investment demand for gold soars. With a more  elastic supply, you would expect silver’s price peak to be dampened rather than  exaggerated.

The second reason is  that the 1980 silver price spike was caused by the Hunt Brothers’ attempt  to corner the silver market. No such attempt is visible today.

So the peak ratio of  silver to gold is much more likely to reach something closer to 25 to 1.

The peak in gold is  yet unknown, but for supply/demand reasons it seems likely to be above $2,500  an ounce – today’s equivalent of the 1980 peak, adjusted for inflation – but  less than $5,000 an ounce – the 1980 peak adjusted for growth in world gross domestic product (GDP) or money supply.

That would suggest a  silver price peak between $100 and $200 per ounce, with $150 an ounce the most likely outcome.

Ultimately, the market  won’t turn bearish until global monetary policy tightens. In fact, it will  probably be some months after policy is reversed before precious metals change  course. That was the case in 1980, when peak prices for gold and silver lagged  by more than three months Paul Volcker’s first decisive move to tighten money supply.

With the November  2012 U.S. Presidential election looming large on the horizon, we probably have  at least another year of rising prices. However, we may not have as much as two  years.

So, all things  considered, I’d keep any silver holdings at least until prices reached $150 an  ounce.

Actions to Take: Keep your  silver holdings at least until the white metal reaches $150 an ounce. If you  don’t already own silver here are a few ways to get in on the action.

The simplest way to buy silver is the iShares Silver Trust (NYSE:SLV), an  exchange-traded fund (ETF) that invests in bullion directly.

Another way to play silver is through silver mining  companies. These have lagged silver prices in the past year but can be expected  to catch up as the earnings bonanza from higher prices manifests itself. You  should look for companies that are increasing silver production and trading at  a reasonable Price/Earnings (P/E) ratio.

I like Pan American Silver Corp. (NASDAQ:PAAS) with a P/E ratio of  17.25.

Hecla Mining Co. (NYSE:HL), which  has a historic P/E ratio of 26 but a prospective P/E ratio of 12, is also  attractive. So is Silver Standard Resources Inc. (Nasdaq:SSRI). Silver  Standard has a historic P/E ratio of less than 5 and a prospective P/E ratio of  17, but that includes the profit from the sale of a mine, and rapidly expanding  output as new mines open.

On the other hand, I’m not so taken with Coeur d’Alene Mines Corp. (NYSE:CDE) whose  largest mine is in Bolivia, not a country I trust.

Related ETFs:  ProShares Ultra Silver (NYSE:AGQ), iShares Silver Trust (NYSE:SLV), SPDR Gold ETF (NYSE:GLD), Sprott Physical Silver Trust (NYSE:PSLV), ProShares UltraShort Silver (NYSE:ZSL).

Written By Martin Hutchinson From Money Morning

Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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