The Devil's Metal Beyond $50... The $80 Silver Call (SLV, SIVR, AGQ, SLW, PAAS)

The recent rise of silver and gold is hopefully the last wave of the new buyers hedging against inflation and buying protection against uncertainty in hard assets over paper money.  Sadly, that might not be the case at all.  New asset buying has literally driven the sellers away.  A large silver pullback this week barely lasted and now we have the Devil’s metal back above $48.00 per ounce.  One research call this week and one event may be the driving force, and there is a call for $80.00 silver.

A report this week from Bank of America Merrill Lynch is calling for the possibility of $80.00 silver.  Be advised that this is a technical research piece more than a fundamental forecast.  Sometimes technicals match up with fundamentals, and sometimes they become runaway… Our interest is how it would impact the silver stocks out there as well as how it would impact some of the key ETF products.  What is interesting is that this comes on the heels of the iShares Silver Trust (NYSE: SLV) filing to sell up to almost $2.2 billion in new trust shares to buy more silver as demand remains high.  Silver at $80 would probably generate a move in the iShares Silver Trust (NYSE: SLV) to $78.00 or more if the move is fully up to $80.00 per ounce.  

We would also look for a $78-ish handle on the ETFS Physical Silver Shares (NYSE: SIVR) exchange-traded product.  Imagine what $80.00 silver would do for the double leverage ProShares Ultra Silver (NYSE: AGQ) exchange-traded product.  Due to intraday and future contract tracking, the number is harder to peg but that could easily be over $700.00 per share if that occurs.  Pan American was just raised to Buy with a $48 target this week at Jefferies.

This would also be a boom for Silver Wheaton Corp. (NYSE: SLW), although it is down 1.8% at $41.27 today and its 52-week trading range is $17.00 to $47.60.  We saw one call where Scotia raised its target to $58.00 in Silver Wheaton.  Pan American Silver Corp. (NASDAQ: PAAS) is also lower today by about 1.7% at $36.35 versus a 52-week trading range of $22.21 to $43.06.

Before you accuse us of being bubble chasers in silver, there are other crazy calls out there.  We started highlighting $50 silver a couple of weeks ago.  The ultimate commodity call was yesterday from T. Boone Pickens on oil.  He is the perma-bull and expects prices to run higher from here.  But he gave one ominous figure with a large outlier scenario… Pickens noted that if Saudi Arabia were to somehow go off-line due to regional unrest and strife as was seen in Egypt and elsewhere in northern Africa and the Middle East then you could see $300 oil.  BofA/ML noted:

• “Silver is a key 2011 trade idea within our continuation of the secular bull market
  for commodities theme.”
• Looking for a retest of the 1980 highs near $49/$50
• With the sharp downside reversal off this high, the risk is for a
  near-term buying climax for silver.
• Longer-term pattern is bullish, shorter-term backing and filling is not ruled out… but a buying opportunity.
• Additional support is in the mid to low $30s.

First and foremost, if BofA/ML is correct then this will be a huge win for anything tied to silver.  It will also be a huge loss for the public.  If the $80 call is right, Ben Bernanke won’t be able to hide behind any “transitory” comments in defining inflationary pressure.  You can see the BofA/ML chart below.  There is an old market saying that “higher prices ultimately take care of higher prices.”  That will ultimately be the case in silver, gold and oil.  The question is at what price on each?

It is also sad to bring this up. If you really do see $80.00 per ounce in silver, then you’ll have some making the calls that silver should hit $100.  Remember the old Goldman Sachs $200 Super-Spike call in oil?  That was full of suppositions, but it is the one call that most investors remember the most.  If you see $80 silver, you can imagine what the price of gold would be… $2,000? $2,500?  $3,000?… the guess is yours.

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JON C. OGG