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How low can gold and silver go?

A word of warning – if you’re a gold or a silver bug, you’re not going to like what I have to say.

Gold looks absolutely awful.

It’s up the proverbial creek and there’s no paddle in sight.

Silver looks even worse.

Just how much more ugly can all this get?

What’s the worst-case scenario for silver?

We’ll start with silver.

Last week, Reuters reported that silver holdings in exchange-traded funds (ETFs)  were at all-time highs.  That is incredibly bearish – and it was worrying me a few weeks back .

Bear markets do not end when record numbers of people own the asset in question. Bull markets end that way. Few people owning the asset means there are more potential buyers out there. A lot of owners means there are a lot of potential sellers.

If those people holding silver in ETFs decide to sell, they could seriously hurt the price ­– just as the introduction of the ETFs brought in a lot of buying pressure in the late 2000s.

For all of silver’s volatility, its chart is actually quite symmetrical. This chart shows silver since 1970. From the 1980 high ($50 per ounce intraday) to 2011 is an enormous saucer shape.

There are pivotal prices to which it keeps returning – $50 is the high (of 1980 and 2011). Other key price points include $4, $8, $10, $15, the $17-22 range, $26 and $36.

I’ve illustrated some of these on the chart below, which shows silver from its 2001 bear market low to now. But these have all proved pivotal price levels as far back as the 1970s bull market.

There’s a chance that Monday’s price of $17.50 is the low. But I don’t believe the rout ends until ETF holdings are much lower.

I think silver will hit $15 before it is over. If that doesn’t hold, $12.50 and $10 are the next lines in the sand.

We could even see $8. If we do, just about every silver mine in the world that’s still left would be loss-making.

What about gold?

If there is one overriding message to take away from all the articles I have written this year for MoneyWeek, it is to manage your risk. If there is another, it is this: the more something tests a price, the less likely that price is to hold.

The problem I have with gold is that the $1,180 number is approaching again. That was the point at which gold found support twice in 2013. I really don’t want to see that level tested again. I’m worried it won’t hold.

If it fails, the next line of support for gold is, as I see it, $1,050 – the 2008 high.

When I wrote my new year’s predictions piece , I suggested a low for the year of $1,050 and a high of $1,425. So far, the high has been $1,392. If $1,180 doesn’t hold, it might be that I’ve called the low.

After $1,050 the next big levels of price support for gold are $850 and $730. I would be surprised to see either. But you never know. Trends can go on for a long time – much longer than anyone expects – and we’re in a downtrend for gold and silver.

It’s not just gold and silver, by the way. Most metals look decidedly dodgy and are re-testing old support levels – platinum, copper, iron ore. Oil looks weak too. In fact the entire CRB (the commodities index) is

re-testing lows once too often for my liking. Recent US dollar strength is a big factor in all this, but the sector was weak anyway.

What we can learn from the gold-silver ratio

Below – courtesy of Nick Laird of Sharelynx  – we see how many ounces of silver it has taken to buy an ounce of gold since 1950. This is known as the gold-silver ratio.

It currently takes 68 ounces of silver to buy one ounce of gold.

At silver’s $50 peak in 1980, just 15 silver ounces were needed to buy an ounce of gold. (The ratio of gold to silver in the earth’s crust is about 17:1, by the way. The above-ground stock ratio is slightly different, as the silver has been mostly consumed, while the gold has been hoarded).

The all-time high in the 1990s was 95:1. I bet if you told people in 1983, when the ratio was at 35, that it was going to 95, they would have laughed you. Silver had never in all history been that low before. Well, that is how loathed an asset can become.

As you know, silver is more volatile than gold. It outperforms both to the upside and the downside. So, at the end of bear markets, the gold-silver ratio tends to spike up. It does the reverse in bull markets.

The ratio hit 82 in 2003. It actually spiked to 88 on an intraday basis in 2008. It’s currently at 68 and it’s been in a rising trend since 2011. I suggest it’s going back to 80 – at least.

If the gold-silver ratio was 80, then $15 silver gives us a rough target price for gold of $1,200. Maybe then $1,180 will hold. At $10 silver, and a ratio of 100, we get $1,000 gold.

So, despite my overwhelmingly bearish article, the conclusion I draw is that gold will stay above $1,000, even if silver plummets from here.

So what do you do? Investment decisions you make from here should be based on your timeframe and circumstances. The MoneyWeek house view is that gold is a good diversifier for your portfolio and a good insurance holding, so you should have about 5% of your money in it regardless.

If you have more than that, and you’re long-term holder of physical metal – there’ll be another bull market, though we’re a way from it yet. Gold is extremely frustrating to own, yes, but probably not worth selling now unless you need the money. Silver I’m more cynical about.

If you’re a trader, I’ve suggested some price levels above. You’ll have your own ideas. But for goodness sake, manage your risk!

PS Of course not everyone agrees with me – former MoneyWeek writer David Stevenson thinks just the opposite. He believes silver could be about to start a record climb. I can’t see it myself – but David is convinced. Click here  (capital at risk) to read about the three irresistible forces David believes could push the price of silver through the roof. 

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