What will the price of silver be in 2021?  You can find articles suggesting the price of silver will be over $1,000 and under $10. Perhaps this is the wrong question.

A better approach: The global financial system is increasingly unstable and fragile, more so than in 2008. The important question is: How will governments, central banks and financial systems respond to the ongoing crisis? Future prices for silver are dependent upon the answer to that question. I suggest three possible scenarios.

Scenario One – status quo: The next five years could look much like the last 20 years. Politicians spend too much money, debt expands exponentially, central banks monetize debt and desperately inflate and reflate bubbles to maintain their power and continue the transfer of wealth from the many to the few. This is “status quo” or “more of the same” and indicates that silver prices will rise substantially, but not in a hyperinflation.

Scenario Two – deflationary crash: Deflationary forces overwhelm the financial system and central bankers and politicians can’t or won’t reverse those deflationary forces. In that scenario most paper assets crash while the purchasing power of silver increases far more. Central bankers will do almost anything to avoid this scenario.

Scenario Three – deflation and hyperinflation: Deflationary forces temporarily crash the financial system (signs are visible in 2016-Q1), and eventually central bankers and governments inflate currencies, possibly to hyperinflationary levels in their heavy-handed reaction.  In this scenario silver prices will go into the stratosphere – perhaps $150, or $1,500, or $15,000 per ounce. The ultimate silver price in a hyperinflationary scenario is unpredictable since hyperinflationary forces feed upon themselves and destroy purchasing power unpredictably. Gold reached nearly 100 trillion Weimar Marks per ounce in 1923.  Gold, if currently priced in 1945 (pre-devaluation) Argentina pesos would be over 10,000 trillion 1945 pesos.  Hyperinflation is an ugly, destructive, and unpredictable process.

In Scenario One – more of the same – we can reasonably expect:

Politicians and central bankers will manage the crisis of 2016-2017 as they have most other crises (such as 1987, 1998, 2000, 2008) by increasing spending, addressing an excess debt problem with even more debt, and pumping more “funny money” into the global financial system.

1. Official US national debt increases more rapidly than its typical 9% per year compounded rate. (perhaps 10 – 12% per year)
2. Dollars, euros, yen and other currencies devalue against each other and against real assets. (currency wars)
3. Stock markets collapse further, and then, buoyed by central bank “printing” and currency devaluations, will rise.
4. Depressed commodity prices will move much higher as currency devaluations are aggressively pursued by central banks.
5. People and investors eventually realize that currencies are devaluing and they must avoid over-valued bonds, negative interest rates, crashing stock markets, and paper promises to preserve their savings. Silver and gold prices will rally much higher based on increased investor demand in a supply constrained market.

Given the above “status quo” scenario, the VALUATION model I developed for silver prices over the past century is relevant. The model is based on three variables, the official US national debt, the price of crude oil, and the Dow Jones Industrial Average. I used smoothed silver prices over the last century to filter out short term fluctuations to highlight the basic trend of silver prices.  Note the correlation of the “calculated silver” price with the actual smoothed silver prices.

This valuation model works well within a broad range of economic conditions, including stock and bond bull markets, bear markets, crude oil bubbles and crashes, various forms of Quantitative Easing, Democratic and Republican Presidents, wars, and occasional peace. The Excel calculated statistical correlation over 100 years is 0.95.

Using “status quo” assumptions for future increases in official national debt and crude oil, and a collapsing Dow Jones Industrial Average, (similar to the collapse of 2008) I created the following graph of “calculated silver” prices for the next several years.

This is a valuation model so prices can, for months at a time, drop below the calculated value by perhaps 30% and spike higher by 100 – 200%. Given the “calculated silver” price in the year 2021 of approximately $50 per ounce, a spike higher could easily reach $100 – $150 per ounce without hyperinflation. 

Regarding Scenario Three:

Hyperinflation and massive currency devaluations, which could occur, would invalidate the above “status quo” model and suggest that silver prices could reach four digits and higher. Crazier things than $1,000 silver have occurred and will happen again. Example: The price of gold in Argentina pesos, adjusted for devaluations since 1945, would be in the thousands of trillions of pesos per ounce.

CONCLUSIONS:

• How crazy will it get? The future price of silver is very much dependent upon the reactions of governments and central banks regarding the current deflationary pressures.

• Status quo response: $100 per ounce (or more) is plausible at some time in 2020 – 2022, if not sooner.

• Deflationary crash response: Silver will substantially increase in purchasing power, but the price in dollars, euros, yen, etc. is difficult to predict, depending upon the economic damage that occurs.

• Hyperinflationary response: The price of silver will be unbelievably high.