Silver Prices

Silver prices are coming off a volatile year thanks to a 4% rise in the dollar after the election and December rate hike. The silver price fell 26.8% in the last five months of 2016 following a big 41% rally from January to July.

But the most important thing to remember is that the silver price ended up with a 14.2% gain last year.

And we see the price of silver posting an even bigger yearly gain in 2017. That's why Money Morning Resource Specialist Peter Krauth – a veteran of the precious metals market with over 20 years of experience – just outlined his silver price targets for 2017.

Before we discuss where silver prices are headed in 2017, it's important to know where silver prices have been. Last year's gain was the first yearly rise since 2012.

That's because silver prices have just started to creep out of one of the longest bear markets of the last 40 years…

The Tumultuous History of Silver Prices

This chart below shows how the price of silver just recovered from one of the longest bear markets ever…

Before their 2016 rebound, silver prices suffered for over four years. After peaking at $51.33 in April 2011, prices dropped a staggering 73.2% to $13.76 by Dec. 14, 2015.

But that four-year bear market was nothing compared to the crash 18 years earlier…

The worst crash in the history of silver prices happened on Tuesday, March 27, 1980. That was when the U.S. silver price plunged 64% in one day. It's now infamously known as "Silver Tuesday" because it was an unprecedented event in the precious metals sector.

The culprits behind the silver price crash were brothers Nelson and William Hunt. The two attempted to corner the silver market by buying both physical silver and silver futures with loaned money. But they ended up defaulting on their loans, which crashed the entire silver market and started a bear market that lasted until 1993.

Luckily, silver prices in 2016 bounced back from the December 2015 low of $13.80 when the stock market took an unexpected dive…

From Dec. 31, 2015 to Feb. 11, 2016, the Dow Jones Industrial Average and S&P 500 fell 10.2% and 10.5%, respectively. These six weeks were the worst market start to a year in over 10 years. The selloff mainly came on fears of a slowdown in the Chinese economy. China's benchmark Shanghai Composite Index dropped 24.1% during the first two months of 2016.

But silver's safe-haven appeal during market volatility led to a big jump in silver prices. Front-end silver futures scored an 8.2% gain in January and February 2016.

The metal surged 36.4% from February to its peak of around $20.35 on July 29, 2016. From there, the price of silver gradually fell as the stock market reached new highs, urging investors to buy stocks rather than safe-haven silver. As the Dow Jones gained 7.1% from July to December, the silver price fell 21% to $16.08 over the same period.

Silver prices have started to rebound. As of Jan. 10, they're up 4.8% to $16.85 from that December low.

And Krauth says these gains will continue throughout the year. Right now, he predicts the price of silver will reach $22 by Q2 2017. That would be a 30.6% gain from the current price.

Here are five reasons why we're confident in our bullish silver price prediction…

Bullish Factor for Silver Prices in 2017, No. 1: Rising Indian Demand

India will be largely responsible for the silver price rally this year. That's because it's been the world's biggest silver importer for two years now.

The metals magazine Coin World reported that India imported 340 million ounces of silver in 2015. That surpassed the United States, which was formerly the world's largest silver importer with 193 million ounces.

While India's imports are expected to remain strong in 2017, they could be even stronger if the Indian government approves a divisive new policy…

In an effort to fight corruption, the Prime Minister of India Narendra Modi demonetized – or made invalid – India's two most common banknotes, the 500- and 1,000-rupee notes. This meant that 86% of all cash circulating in India immediately became worthless. The move severely affected banks as they faced cash shortages, which subsequently affected the country's small businesses.

But the decision sent local gold prices in India soaring to $2,800 as citizens raced to convert their rupees into gold. This sharp spike in gold demand has sparked speculation that Modi will limit gold ownership in India.

If Modi enforces this policy, the only other precious metal on the market will be silver. And Krauth says this could send silver prices above his $22 target to $24 per ounce by Q2 2017.

"There's been a rumor that people will flock to silver because the government might limit how much gold people can own," Krauth said in December. "If you get one of these wild-card factors, we could see silver reach maybe $24 as of Q2 onward."

Bullish Factor for Silver Prices in 2017, No. 2: Inflation

Inflation will also fuel the price of silver this year. And inflation is set to keep rising as the stock market keeps pushing higher.

On Jan. 6, the Dow Jones Industrial Average reached an all-time high, coming within less than a point of 20,000. Investors have been waiting for it to hit the milestone ever since it crossed the 19,000 mark on Nov. 22. As of Jan. 10, the Dow has gained 6.9% in the last two months.

You see, inflation naturally increases when the stock market rallies. That's because the dollar rises when stock prices rise. But too much growth in the dollar is bad because it lowers the dollar's purchasing power.

For example, let's say a pen costs $1 right now. The latest November 2016 data shows the inflation rate at 1.69% annually. That means the $1 pen will theoretically cost $1.0169 (or $1.02 to the nearest cent) by November 2017.

Because inflation increases prices, it encourages people to spend less and generally harms the economy. This can lead to a sharp market selloff if investors decide to panic over an economic slowdown. As a safe-haven asset whose demand rises during market volatility, silver stands to benefit from rising inflation in 2017.

That's because high inflation usually makes people think it's only going higher. According to Krauth, this public mindset urges people to invest in silver.

Bullish Factor for Silver Prices in 2017, No. 3: Reduced Short Selling

The number of short bets on silver has fallen dramatically since August 2016. Its continued decline will lead to positive sentiment in the silver market and, in time, translate into higher silver prices.

The people making silver short bets are called "smart money" hedgers. These are money managers, silver producers, and silver traders who bet against the silver price to cover any potential losses. These big-time players have a lot of cash on hand, which allows them to make small shorts on their own product just in case the silver price falls.

According to Commitment of Traders (COT) reports, the number of short contracts on silver peaked at 109,000 on Aug. 2, 2016.

That was when silver prices hit a 2016 high of $20.92. From there, the number of shorts fell to 100,818 in late September 2016 then to 75,000 by Dec. 6, 2016. That's a huge 31.2% drop in four months.

As traders start to bet more on a silver price rally than a silver price drop, overall sentiment in the market will improve.

Bullish Factor for Silver Prices in 2017, No. 4: Strong Demand

Despite the dip in silver prices at the end of 2016, demand for silver bullion remained strong.

The U.S. Mint reports that sales of American Eagle silver coins stands at 3.75 million in just the first 10 days of January. With a total of only 5.95 million coins sold in January 2016, we're on track to see a big year-over-year increase in January sales.

This strong 2017 demand follows a solid year for bullion sales. The Mint reported total 2016 sales of 37.7 million coins. While that's down 19.8% from the 2015 total of 47 million, it was enough for the Mint to sell out of its 2016 American Eagle edition on Dec. 6 – more than three weeks before the end of the year.

But a more important indicator of strong bullion demand in 2017 is the Sprott Physical Silver Trust ETV (NYSE Arca: PSLV).

PSLV is a Canadian exchange-traded vehicle that holds physical silver at a secure third-party location. It lets people own physical silver without the hassle of properly storing it and keeping it in good condition. Any rise in the PSLV price essentially equals a rise in silver bullion demand.

And PSLV has posted strong gains so far in 2017. On Jan. 10, it closed at $6.39 – the highest level in four weeks. It's up 5.1% year-to-date, nearly outpacing silver futures' gain of 5.4%.

Bullish Factor for Silver Prices No. 5, in 2017: Low Gold/Silver Ratio

The continued retreat in the gold/silver ratio will attract more investors to the silver market in 2017.

The gold/silver ratio is one of the most useful metrics in the precious metals sector. It's used to calculate the values of gold and silver relative to each other. To find the ratio, you simply divide the gold price by the silver price. For example, a ratio of 60 means it takes 60 oz. of silver to buy one ounce of gold. A lower gold/silver ratio indicates silver is higher in value.

And the ratio saw a big drop-off in 2016…

It peaked at 80.57 in March 2016 – a high that's only been touched three other times in the last 20 years. But from there, the ratio plunged 10.6% to 72.03 by December 2016. It's since fallen even further to 70.84 by the start of 2017.

And Krauth sees the ratio falling much lower this year. In fact, he says it could fall to as low as 60 sometime in 2017.

"Since the precious metals bull market began about 15 years ago, the ratio has averaged about 60 overall," Krauth explained. "I think we're likely to get much closer to that level in 2017, with the silver price catching up to gold."

A lower gold/silver ratio will be one of the best indicators of a silver price rally in 2017.

FAQ No. 1: What Causes Silver Prices to Fall?

There are several factors that can drag silver prices lower. The two biggest influences are interest rates and stock market performance. When interest rates rise, silver prices usually fall because higher interest rates increase the value of the U.S. Dollar. A valuable dollar makes commodities like silver that are priced in dollars more expensive to users of other currencies.

Similarly, a stock market rally usually pulls silver prices down because investors only buy silver as a hedge against market volatility. When stocks rise, investors spend more money on these more liquid assets than silver.

FAQ No. 2: What Drives Silver Prices Up?

Conversely, low interest rates and declining stocks push silver prices higher due to the metal's appeal as a safe haven. Metals like silver are considered safe havens because they're used as market insurance rather than big profit opportunities. Silver prices will either move sideways or increase when the stock market dramatically dips. These hedging qualities are what make silver a strong long-term investment.

FAQ No. 3: Are Silver Prices Going Up in 2017?

According to Money Morning Resource Specialist Peter Krauth, silver prices will soar to $22 by Q2 2017. However, if India decides to restrict gold imports, the price of silver could reach even higher to $24 an ounce by that time.

Here's a complete breakdown of our silver price prediction for 2017…