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Despite current headwinds, our ambitious 2017 silver price prediction shows the metal rising more than 30% by the second fiscal quarter.
In fact, Money Morning Resource Specialist Peter Krauth has identified four catalysts that will send silver prices climbing in the new year.
One of these catalyst isn't being talked about by most precious metal traders, but it could significantly increase the future demand of silver.
We'll talk more about Krauth's catalysts in just a moment. But before we do, let's look at why silver prices have been stumbling lately. It's important to mention what's been moving silver prices in the near term. That way, readers can better understand our long-term outlook.
We'll also share with readers why the current headwinds pulling back silver prices are only temporary…
Why Silver Prices Have Been Dropping Since August
Silver prices have been dropping ever since they hit an annual high of $20.59 on Aug. 3. As fall approached, investors rapidly sold the precious metal, fearing it would drop lower from its August high.
This self-fulfilling prophecy helped drive prices down nearly 11% between Aug. 3 and Nov. 8.
The unexpected victory of President-elect Donald Trump has also contributed to silver's downward trajectory. The U.S. Dollar Index is up nearly 5% since Election Day. And since the dollar directly competes with silver, this has created some short-term resistance for silver prices. In other words, since silver is priced in dollars, it now takes fewer dollars to buy the same amount of silver, which makes the precious metal look less appealing.
The appreciating dollar, however, will likely only affect silver prices in the short term. Krauth noted there have been periods where the dollar has risen, but it has done "nothing to hurt the silver price."
He pointed to the late 1970s, when both interest rates and the dollar were rising, yet silver and gold entered a bull market.
Like the appreciating dollar, the U.S. Federal Reserve's decision to raise interest rates on Dec. 14 has panicked silver traders. Despite the Fed only imposing a modest 0.25% rate hike, the price of silver has dropped more than 7% from $17.11 to $15.80 as of Dec. 21.
The markets were overwhelmingly expecting the Fed to raise rates, with a more than 90% probability, according to the CME Group's FedWatch Tool. Since a rate hike was already priced in, the markets weren't surprised, and silver lost some of its safe-haven appeal. Compare that to the rate hike last December, when the markets were only pricing in a 50% chance of a rate hike, according to FedWatch. The S&P 500 proceeded to correct nearly 10% between January and mid-February. At the same time, silver prices rose nearly 13%.
Lastly, Trump's victory has caused bond yields to soar, which has also been hurting silver prices. Krauth said traders have been selling off bonds "in a big way." Since Nov. 8, the 10-year Treasury yield has risen nearly 0.69 percentage points from 1.86% to 2.55% as of Dec. 21.
Along with the dollar, a higher bond yield also competes with silver, which pays no interest, Krauth noted.
Taking all of these headwinds into account, investors don't have much to look forward to in the short term. Silver prices are bottoming out and will likely continue to do so until the end of the year, Krauth said.
In 2017, however, silver prices have the potential to top this year's high of nearly $21, Krauth said. In fact, silver could start regaining its momentum as early as the first quarter of 2017.
And there are several catalysts that show us why…
4 Catalysts Fueling Our 2017 Silver Price Prediction
Silver Price Catalyst No. 1: Rising Inflation
Inflation will likely rise in 2017. And that's good news for silver.
Higher bond yields have historically signaled higher future inflation. And silver tends to do well when inflation exceeds interest rates. Silver acts as a hedge against inflation by nature, since it's seen as an alternative investment to the U.S. dollar.
"As we see inflation ramp up higher," Krauth said, "then that mindset settles in and people start thinking overnight that we're in an upward inflation cycle. When that mindset spreads, then people look for hedges for that. Six months away look for that being a strong factor."
Short-term rates are hovering around 0.5%, with inflation running around 1.7%, according to Krauth. That entails a negative return of 1.2%. As investors start to realize this negative return is only getting deeper, expect silver demand to increase, Krauth said.
Another signal of higher future inflation is the Fed's most recent rate hike. The Fed wouldn't have raised rates if it wasn't trying to "get ahead" of inflation, which is a lagging indicator. The Fed accounts for this when timing its interest rate hikes, while targeting its 2% inflation objective.
Silver Price Catalyst No. 2: Surprise Demand from India
On Nov. 8, the prime minister of India announced that its two most popular money denominations were declared void, according to Krauth.
"People were scrambling," Krauth said.
Shortly after the surprise announcement, gold prices in India took off, reaching nearly $2,000. India is one of the largest gold consumers in the world and has a cultural affinity toward the yellow metal, Krauth noted.
But now there are rumors that the Indian government could impose restrictions on gold, too.
And silver investors could stand to gain…
"There's been a rumor," Krauth said, "that people will flock to silver because the government might limit how much gold people can own."
While this is still a rumor, such a move from the Indian government could greatly boost silver demand.
"If you get one of these wild-card factors," Krauth said, referring to the Indian government, "we could see silver reach maybe $24 as of Q2 onward."
Silver Price Catalyst No. 3: Strong Industrial Demand for Silver
Industrial demand for silver is in "high gear," Krauth said. Besides being just a store of value, silver is also used for things like solar panels, batteries, semiconductors, and even nuclear reactors.
Silver has non-corroding properties that make it an essential component in nearly every industry. And since it's a nonrenewable resource, this gives silver its timeless, intrinsic value.
Silver Price Catalyst No. 4: Decrease in "Smart Money" Shorts
So-called "smart money" refers to silver producers who hedge with silver shorts to protect their downside. When these producers "pull back" on their shorts, Krauth said, that's a bullish signal. It's also one of the best signs we've seen a bottom for the silver price. And that's exactly what's happening right now.
Silver smart money shorts peaked to 109,000 on Aug. 2 – right around the time when silver hit its annual high. Shorts have since gone down to 75,000, however, as of Dec. 6. That's a decrease of 31%.
Silver producers seem to be reducing their bearish positions, which greatly supports Krauth's silver price prediction. Expect silver to reach its $19 range by the first quarter of 2017. Looking even farther ahead, silver prices could reach $22 past the second quarter of 2017… and even $24 if our second catalyst occurs.
Editor's Note: An incredibly rare gold market anomaly is shaping up in the markets as we speak – one that has occurred ONLY twice in the past 20 years. And it's about to happen again. Details here…