Endgame, Silver Price $464.90 per ounce?

By Dominique de Kevelioc de Bailleul

Who among the silver bugs wouldn’t salivate at the thought of the silver price reaching $465 per ounce at the endgame of this global currency regime?

Well, if we can dream a bit, based first, an a reasonable assumption that Goldmoney’s James Turk’s estimate of the gold price of $11,000 (based on his Gold Money Index. Read about it, here. Graph on KWN’s website, here.) will pan out as a pretty accurate one, and with a little help from a statistical program and a rudimentary knowledge (stressing the word, rudimentary) of least-squared analysis and curve-fitting techniques, a little math of what the silver price will look like at $11,000 and a ‘fair’ value for silver on the way up the golden (in this case, silver rainbow) rainbow can be estimated. Sign-up for my 100% FREE Alerts!

Using data from the SLV and GLD ETF’s, from Apr. 28, 2006 (first day SLV data was available) to the present, curve-fitting the data with the knowledge that as gold prices rises, silver prices rises faster over time—another reasonable assumption—we can plot a least-square line through the data to project (oh, the best of intentions, without regard to Nassim Taleb’s fine work on those dreaded ‘Black Swans’) a reasonable silver price.

The Black Box

The formula that appears to fit the data reasonably well, for those mathematically inclined to know about issues surrounding least-squared analysis, is y=a*x^b, where ‘y’ equals the silver price output, ‘a’ calculates to a coefficient equal to 1.5318690640999211E-03, ‘x’ equals the gold price, and another coefficient ‘b’, calculates to 1.3577678746161117E+00.

As ‘x’, the gold price, increases, the power ‘b’ increases the rate for the silver price, ‘y’. Among the hundreds of formulas that can be used to ‘fit’ the data, the ‘scaled power’ functions may be a good place to start as a foundation of analysis. Adjusting for the disparity in price on the GLD and SLV of 2.8 percent and 2.6 percent, respectively, the spot price is estimated.

Now for the drum roll; cranking the formula, using 1,395 data points, we get the following mean estimates:

Gold = $1,000 Silver = $17.92 Ratio = 55.80
Gold = $1,500 Silver = $31.08 Ratio = 48.26
Gold = $1,750 Silver = $38.32 Ratio = 45.67
Gold = $2,000 Silver = $45.93 Ratio = 43.54
Gold = $2,500 Silver = $62.19 Ratio = 40.20
Gold = $3,000 Silver = $79.65 Ratio = 37.66
Gold = $5,000 Silver = $159.38 Ratio = 31.37
Gold = $10,000 Silver = $408.47 Ratio = 24.48
Gold = $11,000 Silver = $464.90 Ratio = 23.66
Gold = $12,500 Silver = $553.02 Ratio = 22.60

The graph of the data, below, shows the plot from Apr. 2006 to the present:

Note that James Turk’s estimate for the gold price (probably will be revised higher as central banks inflate their balance sheets) of $11,000 calculates to a silver price of $464.90 and a ratio between gold and silver of 23.66. Jim Sinclair’s $12,500 target price for the gold price calculates to a silver price of $553.02 and a ratio of 22.60.

According to Wiki, in 1970, prior to the US scraping the gold standard in 1971, the gold to silver ratio averaged 22.0. Today’s mining data and above-ground supplies of silver look much different from Jan. 1980, so an average ratio of 22.0 during the year of the summit most likely will not turn out to be a reasonable one. And the manic spike could take the ratio anywhere. Right?

As the gold price knocks on the door of $1,800, the above least-squares equation suggests today’s silver is under-priced by more nearly $6.00 per ounce. Sprott Asset Management’s Eric Sprott may be correct, based on the above quick-and-dirty formula, a silver price closer to between $39 and $40 wouldn’t be unreasonable here.