Turk: Gold and Silver To Reach $8,000 and $400 Respectively by 2015

The U.S. dollar
The U.S. dollar is on the edge of hyperinflation. Reckless spending by the U.S. government is causing it to borrow increasing amounts of money, which in the aggregate is more than the market is willing to lend to it.

Given its trillion dollar deficits, the U.S. is borrowing more than it can attract from global savings. If it cannot attract enough savings to meet its borrowing needs, rather than reduce its borrowing by cutting spending, it has to ‘print’ the dollars it spends. I expect it will become harder for the U.S. government to find buyers for its paper (too little demand). This is of course what “quantitative easing” is all about. The Federal Reserve in the year ahead will therefore continue to purchase government debt and turn it into currency, which will eventually cause the U.S. dollar to begin hyperinflating.

Gold
Gold will reach $2000 per ounce sometime during 2010 as the result of two forces:
a) the continuing purchases of government paper by the Federal Reserve as the dollar moves ever closer to hyperinflation
b) the growing demand for physical metal in preference to paper-gold.

Physical Gold
Investors and asset managers are now realizing that there is a difference between owning ‘physical’ gold and ‘paper’ gold in its different forms – such as ETFs. For most individuals, I recommend buying physical gold of which there are basically only two ways to do it a) you buy it and you store it yourself or b) you buy it and you have someone store it for you. Both alternatives have advantages and disadvantages.

If you buy gold and store it yourself, you have it in hand. But how much gold do you want to keep in the basement or buried in the backyard? Can you really get it insured? On the other hand, if you’re storing it with a company, you don’t have it in hand, which some people actually prefer. I actually recommend a combination of both. If you do store it with someone else, however, make sure they have independent third-party audits to prove that the gold you own really exists.

Paper Gold ETFs
I put gold ETFs in the category of paper gold. You don’t really own gold when you own an ETF – you only own a derivative that gives you exposure to the gold price, and this exposure comes with counterparty risk unlike physical gold which, as a tangible asset, does not have counterparty risk. [In addition, if] you own shares in an ETF you are paying 39 to 55 basis points per annum for the management fee on that gold whereas if you own physical gold and store it yourself, you don’t have any management fee or any costs of that kind from year to year.

Also, don’t view gold ETFs as an alternative to physical gold but as a form of paper gold that might be more convenient for trading than a futures contract or an options contract because it is still paper gold at the end of the day.

[The other thing to keep in mind is] that the market is now starting to understand that there is a huge amount of paper gold outstanding relative to the available stock of physical gold. Therefore, to keep supply and demand in the gold market in balance as the demand for the physical metal rises, gold’s price has to rise in order to entice present holders of the physical metal to sell and hold national currency instead [because,] after all, physical gold cannot be ‘printed’ by central banks to satisfy the demand for the physical metal.

What the Gold:Silver Ratio Means for the Future Price of Silver
As bullish as I am on gold, over the long term I’m more bullish on silver. The problem with silver is that it’s very, very volatile. The way you can view this volatility is calculating how many ounces of silver it takes to purchase one ounce of gold. In 2008, for example, at one moment in time it took 45 ounces of silver to purchase one ounce of gold yet after the Lehman Brothers collapse, it took 84 ounces of silver to purchase one ounce of gold. In the long run, however, the gold:silver ratio is probably going to move back below 20 from its current 60 – 70:1 range.

There’s about 10 times more silver in the earth’s crust than there is gold, so you would tend to think that if supply was the only thing that mattered, the ratio would be 10:1. Historically, the ratio has been around 15 – 16:1, and at the end of the last bull market, back in January 1980, it took 16 ounces of silver to purchase one ounce of gold. As such, given my bullish view on the precious metals and my bearish view on the U.S. dollar and other national currencies, I feel fairly comfortable in saying that we’re going back below 20 ounces of silver to purchase one ounce of gold.

[I am extremely confident that] silver will eventually exceed its $50 per ounce all-time record achieved in January 1980. [Indeed, with gold recently in excess of $1250 per ounce – and applying the 20:1 gold:silver ratio – silver could conceivably be priced above $62 per ounce already.] We need to start thinking about silver hurdling above $50. If it doesn’t happen in 2010, this important event – which is unimaginable to many – will, I expect, happen in 2011.

The major driving force behing silver will be, like gold, the demand for physical metal. The probability of a short squeeze in silver sometime this year is high than it is in gold. My guess is that a silver short squeeze is at least a 33% probability.

Conclusion
No one can predict the future so instead of relying on predictions [I suggest you] focus on undervalued opportunities and avoid overvalued assets and, as such:
1. avoid the [U.S.] dollar and other national currencies as well as the paper issued by governments. Given the huge deficits they are incurring and their refusal to make the hard decision to cut spending, a sovereign debt default in 2010 has to be considered a realistic possibility. It will come through either hyperinflation of the currency or a flat-out refusal [of a country[ to pay its debts.
2. continue accumulating the precious metals, and if you are so inclined to take the investment risk, the mining stocks as well.

Keep in mind that in an environment in which people are increasingly fearful about the downturn in the economy, the safety of banks, and the outlook for the U.S. dollar, anything is possible for gold [and silver] and if 2010 turns out to be the year when the biggest bubble of them all pops (i.e., the U.S. dollar becomes suspect), then the sky is the limit for gold [and silver].

Let’s assume I’m correct that somewhere between 2013 and 2015 gold reaches $8,000 an ounce and let’s also assume I’m correct that the ratio between gold and silver goes to 20 ounces of silver to one ounce of gold. Divide $8,000 by 20 and you get $400 per ounce of silver.

*http://www.fgmr.com/another-short-squeeze-in-the-precious-metals.html;
*http://www.fgmr.com/outlook-for-2010.html

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.
– Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
– Submit a comment. Share your views on the subject with all our readers.
– Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.