$1,500 Gold Is Just the Beginning

If you presume that the most astounding phases of gold's decade-long run are already behind us, I urge you to think again.

Gold's breezy run through $1,500 offers a convenient round-number mark to reflect upon the incredible strides made in the course of the metal's historic secular bull market to date. I remain confident, however, that any further strides will remain woefully underappreciated by the vast majority of investors, analysts, and economists alike.

I will here again state for the record, in no uncertain terms, that fortunes remain to be made in gold, silver, and the myriad companies that succeed in discovering and mining those metals. And here yet again, I suspect, most investors will continue to miss out on these gains because they do not share my sense of certainty in that outlook. Since each investor must operate within their own comfort zone, I merely suggest to those who have watched the entire run from the sidelines that perhaps their perspectives regarding gold and silver have not served them well thus far.

There is still time to adjust your thinking. When gold last moved through the $1,000 threshold, in September of 2009, I minced no words in declaring that gold remained "dirt cheap" in relation to where it was heading. Here at $1,500 per ounce, I will repeat that very same characterization with undaunted certainty. I look forward to gold reaching the next major threshold, my $2,000 price target for gold.

As for silver, Fools will note that silver's breathtaking ascent already has my $50 price target firmly within its crosshairs. In fact, my call for silver to triple in price from $15, where the metal could be purchased on September 2, 2009 when this article appeared, has already been vindicated. Had I thought I could state the target seriously at the time, without suffering even greater dismissive ridicule at the hands of silver skeptics, perhaps I would also have referenced my $100 price target for silver more publicly ... which I have shared with members of the CAPS community through my blog and my stock pitches. The time has come to share my $100 silver price target with you all.

Generational trends do not reverse course overnight
Particularly during the final quarter of the 20th century, the world was confidently engaged in a process of eschewing the time-tested wisdom of incorporating a modicum of precious metal exposure into a model portfolio. Gold and silver became the laughing stocks of the financial world, and the U.S. dollar was widely perceived as the unassailable global reserve currency that would seal gold's fate as a "barbarous relic."

My oh my, how the tides have turned. Today, it is the U.S. dollar that is suffering a worldwide crisis of confidence. Leading bond fund PIMCO won't touch U.S. debt with a ten-foot pole, and S&P finally moved an inch toward reality this week when it placed the United States' credit rating on alert for a possible downgrade. Safe-haven seekers and central banks the world over are finally initiating a move into gold and silver to protect against further deterioration of the purchasing power and the credit worthiness of the major fiat currencies, but for the first several years of this bull market such adaptations to the prevailing allocation models could scarcely be observed.

Even today -- for all the cautionary fanfare surrounding surging gold and silver investment demand from China, India, and other parts of the world -- I submit that we have barely scratched the surface in terms of adjusting prevailing asset allocation models worldwide to adequately reflect the fully resurgent currency role and safe-haven status of gold and silver. The University of Texas' endowment made waves this week when it revealed a move to take physical delivery of 664,300 ounces of gold bullion. At $1,500 per ounce, that stash is worth nearly $1 billion, or about 5% of the endowment's total assets.

Keep in mind: the announcement made headlines because it remains patently uncommon for large-scale institutional investors to approach anything in the neighborhood of a 5% allocation to gold. As the metal continues its advance toward $2,000 and beyond, you can bet that additional big-money players will climb aboard in similar fashion; but to date these remain the exception rather than the rule. James Rickards, Senior Managing Director for Market Intelligence at Omnis, offers his professional view:

Gold has had a great run, it has had a 10 year run and it's hitting some new all-time highs recently, and so people naturally worry about whether it's going to turn around and collapse, is it a bubble? It is absolutely not a bubble, and the reason I say that is that when you talk to institutions, I'm talking in the $100 billion and up category, they either have no gold or they are allocated like 1%, 1.5%...If anything they are under allocated and they are catching up.

Turning again to silver, hedge fund manager Eric Sprott points out in his latest missive that the consensus estimate for silver calls for an average price of $29.50 for 2011, followed by a 25% decline from there in 2012, and another 9% slip to $20 by 2013. And that's their revised consensus forecast, with earlier forecasts coalescing around an expected $18.65 average price for 2011! The degree to which Wall Street failed to foresee silver's unrelenting surge may spawn a chuckle or two, but the implications for investors run deep. Sprott adds:

We don't mean to bash the silver analyst community, and there are several whom we highly respect, but it is important for silver investors to appreciate that these price forecasts are being plugged into financial models that dictate equity valuations. These models are used by traders, bankers, analysts, and portfolio managers to derive valuations for silver stocks and create asset allocations for portfolios. To anyone questioning current silver equity valuations, we would ask: what price assumptions are you using? Of course we as allocators of capital are thankful for this phenomenon, as it allows us to buy our favourite silver stocks on the cheap, knowing full well that the herd will be following behind in due course as those backward-looking forecasts get ratcheted higher.

If gold has reached $1,500 per ounce before the big-money institutional investors have even managed to incorporate the metal into their allocation strategies to any significant degree, and silver has exploded to $45 per ounce before the mainstream has even begun to take it seriously, what sort of additional upside potential must you therefore ascribe to the sector as massive capital flows finally begin to find their way into gold and silver?

If you share my strong conviction that the impact of those capital flows will prove utterly astonishing to unsuspecting onlookers, then I urge your renewed consideration of a sensible allocation to gold and silver. Yamana Gold (NYSE: AUY  ) has still barely moved a muscle in terms of approaching what I consider fair value for the shares, and I believe my top pick for 2011 -- Gammon Gold (NYSE: GRS  ) -- has yet to see the full value of its enormous silver reserves reflected in its share price. Among junior producers with plentiful potential to appreciate with ongoing exploration successes, Claude Resources (AMEX: CGR  ) and Northgate Minerals (AMEX: NXG  ) continue to pique my interest. On the silver side, I consider the formidable trio of Endeavour Silver (NYSE: EXK  ) , Great Panther Silver (AMEX: GPL  ) , and Alexco Resource (AMEX: AXU  ) destined for legendary status.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Alexco Resource, Claude Resources, Endeavour Silver, Gammon Gold, Great Panther Silver, Northgate Minerals, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (6) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 20, 2011, at 8:38 PM, Jbay76 wrote:

    Bravo Chris! Another great article. You have definitely opened my eyes to the world of PM's. I was looking at Impact Silver Corp today and was floored by their findings in their March 2011 release and was wondering what your take is of these guys?

    In any case, I am def. in for the long haul, buckled in and ready to go!

    J

  • Report this Comment On April 21, 2011, at 8:30 AM, GCshipbuilder wrote:

    It is also worth noting that Great Panther Silver (GPL) mines significantly more gold than silver. Don't ask me who picked the name. I assume that is just coincidence that the mines are producing the amounts of gold that they are.

  • Report this Comment On April 21, 2011, at 12:15 PM, XMFSinchiruna wrote:

    nocemployee,

    That is not the case. If you check Q1 production, you'll see Great Panther produced 410,640 ounces of silver, and 2,310 ounces of gold during the quarter. The gold production is a terrific bonus, and contributes meaningfully to the company's low cost structure, but by comparative market value it is far less than the silver component, and properly classified as the byproduct of a primary silver operation.

  • Report this Comment On April 21, 2011, at 2:19 PM, vkmo wrote:

    Pretty soon, my foolish estimate is: 1 share of GPL will be worth 1 oz of silver ($44++?) and in a few years achieve the price of 1 oz of gold ($1500++?)

  • Report this Comment On April 21, 2011, at 3:49 PM, XMFSinchiruna wrote:

    vkmo,

    I've been about as bullish on GPL as anyone out there. It's one of my largest holdings, and I've been long the stock for several years running, but I think you may have gone juuuust a bit over the top with those predictions. :) The first number is conceivable, though I will remain a bit more incremental with my price expectations than that. The second number is just not in the cards, in my opinion.

  • Report this Comment On April 24, 2011, at 7:29 AM, pettiepie wrote:

    silver still has 29.00 to be even to gold 1600 gold 80.00 silver bye end of year sit back watch bulls run or jump in

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