$50 silver sooner than you think?

In mid-July, my column discussed the huge increase in short sales of silver commodity contracts on the COMEX during June and into early July. The net increase of 240 million ounces of paper silver owed to buyers of these contracts is equal to about 30 percent of annual global silver production.

Taking into account the large number of short positions already outstanding on the COMEX, this would appear to put the overall physical silver market at a high risk of a major supply squeeze. Any kind of physical supply squeeze could quickly push up the spot price of silver by a lot.

With all the other financial and political crises around the world threatening the U.S. dollar and other currencies, a reasonable person might have expected the price of silver to have climbed much higher since the end of May than the 9.2 percent increase as of last Friday’s COMEX close.

Why didn’t the price of silver rise much more since the end of May?

To give you part of the answer, let me go back to a radio interview I did with Eric Sprott, the long-time head of Sprott Asset Management in Toronto. When gold and silver prices were much higher earlier in this decade, Forbes judged Sprott’s net worth high enough to qualify him as a billionaire.

During the interview, I asked Eric what lessons he had learned in his four decades in the investment business that he wished he had know when he started. His answer surprised me. He said that he was surprised how long it could take the market to reflect in prices the factors that reasonably should drive them upward or down.

The precious metals market in particular has demonstrated this frustrating delay in prices reflecting free market trends. In 2013, for instance, the worldwide demand for physical silver jumped about 17 percent over 2012 levels. A huge part of this increase was fallout from the attempt by the government of India to discourage gold imports. When gold imports were restricted and higher taxes were assessed on them, the citizens of India shifted their demand from physical gold to buying physical silver.

With such an increase in physical demand, silver’s price should have been rising by the end of 2013. Instead, the price of silver fell almost 36 percent during the year. A significant part of this movement in the opposite direction could be due to manipulation by governments, central banks and their trading allies. I personally think that to be true. Still, manipulation would not be the only reason that silver’s price plummeted last year.

Over the past 40 years, prices in the precious metals markets have often moved opposite to what any careful analysis would lead someone to expect. At the least, it has taken longer for bull or bear markets to develop. After silver touched $50 in January 1980, a lot of people expected or wished for prices to soar to that kind of level all through the following decade. But, because of the spike in price, an extraordinary amount of physical silver was dumped onto the market. It wasn’t until about 1990 that this surplus was absorbed and the annual demand for physical silver started exceeding new supplies from mines, recycling and government sales.

Even though there were consistent annual supply deficits for the next 20 years, the amount of available inventories kept the price of silver in check. It wasn’t until 2006 that the price of silver again passed $10 to stay. So, anyone focusing only on just supply and demand or looking back at the $50 price in 1980 as a target that would be reached during a boom time in the market, was sorely disappointed over how long it took silver to even break above $40 in early 2011.

Like most every other hard money advocate, I am frustrated how long it has taken for precious metals prices to surpass January 1980 highs, adjusted for the increase of consumer prices over the past 34 years. Depending on which analysis you read, the price of silver will have to reach somewhere in the range of $125 to $250 to have the same purchasing power it did in January 1980.

My confidence that silver will surpass those levels has more to do with the continuing decline in the U.S. dollar more than it has to do with the silver market. After all, the value of the U.S. dollar has declined 98.3 percent against an ounce of gold since the Federal Reserve was created in 1913. In my mind, the dollar is nowhere close to how low it will go. More than that, I consider that the U.S. dollar is at high risk of failure.

When do I think all of this will come to pass? Longer than would seem to me to make sense. I am comfortable predicting that silver is likely to top $50 per ounce by the end of 2015. It could happen long before then and there is a chance that my forecast could be premature. But when the prices of silver and other precious metals start their major increases, they might happen so quickly that people will not have time to jump into the market at the last minute.

How fast could the dollar fall? Last year, the citizens of Cyprus went to bed one night. The next morning the government imposed currency restrictions that had the effect of reducing the wealth of most people by one-third up to 50 percent. It was never possible for Cypriots to dump their currency to buy gold and silver before they took this hit. Could this happen in America? The possibility is high enough that I don’t like to think about it.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns).His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).