Silver Price Projection – For 2013

An objective and reasonable estimate for the price of silver at the next intermediate peak (estimating 2013 – Quarter 2) is $50 to $60 per ounce (current price is about $28). This is not a prediction based on wishful thinking and hope, but a best estimate based on rational analysis of data stretching back to 1975. The actual price for silver at its next peak could be higher or lower, and the peak might be earlier or later, but this price range and approximate time is, by this analysis, the most probable.

Until the last century, silver and gold had been money for thousands of years. During the long history of gold and silver, the price ratio of gold to silver has averaged, depending on analysis, around 15 to 20. Since 1975, it has been as low as 17 and as high as about 102. The ratio is low when silver is expensive compared to gold – which occurs at peaks in the price of silver, such as in early 1980. 

Silver is a smaller market and much more volatile in price than gold, so the ratio can stretch one way or the other depending on the degree of speculative fervor in the market or the degree of price depression and disinterest in precious metals, such as in 1991. Extremes in the ratio usually occur at highs and lows in the prices of both metals.  

How is this useful? 

Instead of working with the gold to silver ratio, invert it and use the silver to gold ratio. That ratio peaks with price peaks in silver and bottoms with price bottoms in silver. However, there is no simple answer as to what ratio is “high” or “low” since the ratio might be very different between the decade of the 1970s and the 1990s. 

There is, however, a technical indicator called the Relative Strength Index that is normalized between 0 and 100. The RSI can be used with any time scale, such as 5 minute price data, or 50 month data. The result is the same, a number between 0 and 100, with low numbers (such as 14) indicating a severely “oversold” condition and high numbers (such as 80) indicating a severely “overbought” condition.

The problem is that the silver market, while overbought, could rally further and become even more overbought, and the RSI of the ratio might rise even higher, say to 85, while the price of silver jumps even higher. If you had sold silver (when the RSI was 78), you missed some profit, and if you sold short, you incurred some losses. This is the dilemma of all traders: when to buy and when to sell. (Few people can buy at the lows and sell at the tops, so they need other tools to help time their trades.) I don’t know of any simple and fool-proof answer.

What I do know is that we can delve deeper into the above SI/GC ratio analysis and come to some high probability predictions that will give us a reasonable degree of safety and security in our quest to buy low and sell high.

• Run the same Relative Strength Analysis for the SI/GC ratio, but use a longer time scale – like 40 weeks. Further, average the 40 week RSI numbers over a centered 11 week period, using the current week’s number plus the 5 weeks both before and after the current week. The result is a smoothed RSI that is centered about the relevant week in the analysis. (Clearly the last few weeks in the series are not using the future RSI values.) This removes much of the short term “noise” – the weekly fluctuations that mean nothing in the long term.

• Calculate the 7 week simple moving average of the actual silver prices. This gives a short term average that is much more volatile than the 65 week moving average.

• Calculate the 65 week simple moving average (add the prices for the last 65 weeks and divide by 65) of the actual silver prices. This produces a long term trend for silver prices that has removed all but major fluctuations in price.

• Subtract the 65 week average from the 7 week average. Then divide by the 65 week average. This produces a percentage above or below the long term trend of the 65 week moving average for silver. 

         This is important because it measures a deviation from average in percentage terms, 

          but not in actual silver prices, which have varied over the past 12 years from $4.01 

          per ounce to nearly $50 per ounce. Further, it relates the percentage (over or 

         under) to a long term moving average, which accounts for both bear and bull 

         markets in silver prices.

• Examine the graphs of both the RSI and the percentage of price deviation. You will find that major lows in the RSI and percentage price deviation (PPD) occur approximately every 2 years, and similarly, highs occur about every 2 years, but the timing is not consistent enough that you would trade on these cycles. A chart since 1975 will not display well due to the amount of data. However, the following chart (data since 2004 is more manageable) shows the correlation between the RSI of the SI/GC ratio and the percentage of price deviation in silver.

• Graph the 40 week (centered) RSI of the SI/GC ratio against the percentage that the 7 week moving average of prices is above or below the 65 week moving average of prices (percentage of price deviation or PPD). The graphs of both are similar as to direction, highs, and lows. In fact the correlation since 1975 is 0.69 and since 1/1/2002 (silver bull market) is 0.85, a high degree of correlation.