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Is Silver a Good Investment? Analyzing Historical & Current Silver Price Forecasts for 2012

By Kurtis Hemmerling

investing in silver coinsSilver fell to $10 lows in 2008 and rocketed to almost $31 highs at the end of 2010.

So, what are some silver price forecasts and predictions for 2012?

Let’s look at both sides of the freshly minted coin to study heads and tails of this issue.

Reasons For a High Silver Price Forecast

Silver bulls have an easy argument rooted in simple economics: supply and demand drives market prices. What happens when supply goes down and demand goes up? Prices skyrocket!

Here are a few things that affect supply and demand in this market:

1. Industrial Applications
Silver is used in everything from cell phones and laptop computers to water filtration systems. This has a huge impact on current silver prices. Industrial use of silver rose 18.5% from 2000 to 2008. By 2008, almost half of all silver demand was industrial. This use of silver creates strong demand since the precious metal is largely consumed and not returned to the market for repurchase. If you disagree, be a good citizen and strip all the silver off your circuit boards before throwing your computer away. Also be sure to read up on some tips for proper electronic e-waste disposal.

2. Investors
According to The Silver Institute, investor demand has risen from 6 million ounces in 2003 up to 136.9 million ounces in 2009. Along with traditional silver investors buying bullion for their vaults, new silver ETFs (exchange-traded funds) have greatly increased the amount of silver buying in the market. When silver ETFs go up in value, the fund managers must go on the open market and buy more physical silver, thus lowering the available supply.

3. Production Costs
While companies are trying to increase production and start up new mines, the cost of mining goes up with inflated prices such as expensive oil. Easily obtained silver is in scare supply these days. This added cost of mining helps maintain higher prices. Furthermore, from 2006 to 2008, governments decreased the amount of silver sales, and scrap supplies also declined.

4. Gold
Some analysts point to the historical correlation between the price of gold and silver as being a potential for higher prices. If you divide the price of gold by the price of silver, the ratio is currently around 47. In the past, this ratio has spiked as high as 14, which would translate into a current silver price of over $95 per ounce! Some even think we will see a time when gold and silver will be on par. While this may be a long way off, the average analyst forecast in London Bullion Market Association is pennies below $30 per ounce.

Reasons For a Low Silver Price Forecast

Even low silver price predictions are relatively high when looking to past decades. One analyst, who is a member of  the London Bullion Market Association, forecasts $20 per ounce this year.

Why might some prognosticators feel that a correction is just around the corner?

1. The Economy Is on the Mend
If the US economy and dollar improve quickly, this may have a negative effect on gold prices, which is used as an alternative currency for hedging. While silver may somewhat follow gold down in price if investors shed some of their holdings, the industrial uses of silver should also help create a counter balance.

2. Investors Unloading
Most hawkish analysts have a short-term rationale against silver prices correcting: investors selling silver bullion (or silver ETFs which would have the same effect) could theoretically flood the market, temporarily justifying a lower price.

Some bearish investors call for an average price of $21, with lows to $16. They feel that if the industry expresses its displeasure over high prices and finds suitable alternatives to silver, it could have a far-reaching negative effect.

Where to Find Analyst Reports on Silver

In a market that changes its opinions as rapidly as Lady Gaga changes looks, investors interested in precious metal trading should stay alert to any big change in valuation outlooks. Where can you find silver analyst forecasts and reports?

Final Word

So, what is the final word on Ag? While price volatility is anticipated due to the surge of investor interest, most silver price forecasts are calling for an average price of $29.88, with a range from $16 to $50 per ounce.

Do you have a stance on the forecast for silver? Share your thoughts in the comments below!

(photo credit: Shutterstock)

Kurtis Hemmerling
Kurtis Hemmerling is a personal finance enthusiast that has been putting his passion into writing since 1998. His goal is to demystify the investment world to benefit the readership of Money Crashers.

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  • http://silversylvester.blogspot.com/ Patrick

    With the looks of things so far Kurtis you are right. Silver has been quite volatile since the start of the year. Last weekend alone Silver was slightly over 24 dollars. Now is at around 29.50. Keep your eyes on the Precious Metals Guys it will be an interesting year indeed.

  • Kurtis Hemmerling

    Thanks Patrick. With silver breaking above $30, and some Bills being submitted trying to re-establish some form of gold or silver backed financial system, there are many reasons why it will continue to be a volatile and bumpy ride. I’m looking forward to seeing if the silver price forecast of $50 is touched at any time in 2011.

  • Marko Duran

    Silver should continue to perform strongly, there is uncertainty in the Middle East, the U.S. Fed is still easing (although unlikely a QE3 will happen) lots of wealth managed money is piling into silver, it has good baseleve support between $33-$35 dollars and money from overseas are accumulating positions.

    Marko

  • Silver

    It’s $43.00+ and it’s only April.

  • suraj man singh basnyat

    Now price of precious metals rising. It most be rising another 4-6 percentage and start to declines 12-15 percentage in June.

  • Kurtis Hemmerling

    The highest range of the 24 well-known analysts covered at LBMA is $50. My guess is that there will be some sharp revisions upwards pretty quick. I just read of some banks that predict an average price of $41 for the year. They are usually quite conservative and just provide a range based on current values, plus a minor bull or bear sentiment.

    Keep in mind that historically as silver goes parabolic, the risk goes way up for sharp downsides. I would be very cautious about taking up a long-term position at this point.

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