DON'T PANIC OVER SILVER'S RECENT PERFORMANCE, A MAJOR RALLY IS COMING
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Out Look On Silver
Investors shouldn't panic about silver's lackluster performance against gold as the market is following a very familiar pattern according to one market analyst.
In a commentary on Seeking Alpha, Victor Dergunov, founder of Albright Investment Group said that history has shown that silver often underperforms gold at the start of a new bull market.
Dergunov's comments come as silver prices continue to hover near the bottom end of a four-month trading range. May silver futures last traded at $16.44 an ounce; meanwhile, June gold futures last traded at 1,313.40 an ounce. Both markets are relatively unchanged on the day.
He added that he sees three significant factors that will eventually push silver out ahead of gold. He said that he is expecting silver prices to push past $50 an ounce ultimately.
"Silver is going to go up, it is going to go much higher, probably eclipsing former highs and permanently establishing a far higher trading level," he wrote in his commentary.
Dergunov said that an elevated gold/silver ratio is the first reasons why he is bullish on silver.
Although gold is also trading at the bottom end of its well-established trading channel, the yellow metal has held up better with the gold/silver ratio hovering just below a multi-year high. The ratio indicates that it now takes nearly 80 ounces of silver to equal the price of one ounce of gold, the historical average of the ratio is around 50 points.
"Historically, a low gold to silver ratio often registers around the top of a bull cycle, and a high gold to silver ratio frequently occurs before a major advance in gold and silver takes place," Dergunov said. "During the last 20 years, every time the ratio hit 80, it coincided with a major bottom in the price of silver."
Dergunov added that he also expects to see higher silver prices as inflation pressures start to creep higher. He noted that last month, the government's Consumer Price Index showed annual inflation at 2.4% with core inflation at 2.1%, both higher than the Federal Reserve's target of 2%.
"Once inflation becomes "hot," and I am confident that it will soon, investors are likely to begin to accumulate silver at an accelerating pace," he said.
Not only is inflation pressures increasing, but Dergunov warned that the Federal Reserve will continue to remain behind the inflation curve. He explained that the Federal Reserve can't raise interest rates too fast in the face of higher inflation because that could have negative impacts on economic growth.
Last week the Federal Reserve said that it expects inflation to run near its "symmetric 2 percent objective over the medium term." For many economists, this is a signal that the central bank is comfortable with inflation rising above its target in the near term.
The third pillar behind's Dergunov's optimistic outlook is a weaker U.S. dollar. Despite the greenback's recent surge in momentum that has pushed prices to its highest level for the year, Dergunov said that he still sees the currency in a long-term downtrend.
"The greenback faces several significant challenges going forward," he said. "Burgeoning twin deficits of government spending and balance of trade coupled with continuously rising and accelerating inflation are likely to weigh heavily on the dollar going forward."
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