Silver Surges but Remains Undervalued Compared to Gold

Gold fell some 1.5% last week as investors tookgl profits with gold having been up some 10% in the previous three 3 weeks. But the short and medium term prospects look sound in the light of strong fundamentals and some important indicators – silver was up by another 4.2% last week and the gold mining indices were also higher (XAU +4.6% and HUI +2.3%). The mining indices are often a leading indicator and silver usually underperforms gold in the early stages of rallies and outperforms in the latter. Silver’s recent strength (up by some 15% since the start of the year) may be a prelude to higher gold prices in the coming weeks.

The recent sharp rally in the US dollar appears unsustainable and the USD Index was down 0.64% last week and US bonds also fell again – the 10-Year bond sold off again and the yield rose another 4.75% (from 2.9% to 2.979%). As ever, the bond market remains of fundamental importance and nervousness about the humongous size of the Obama bailout and stimulus packages and talk of central banks printing money to buy government bonds is not helping sentiment here. And government debt issuance is set to surge in the coming weeks and there is a real concern that there simply will not be enough buyers – meaning that bond prices may fall from their lofty heights and long term yields and interest rates begin to rise again.

The gold/silver ratio has fallen to around 70 ($905oz/$13/oz = 69.6) today from around 80 in mid January. The long term historical average is 15:1 and this is because it is estimated that geologically there are some 15 parts of silver in the ground for every one part of gold. It is important to note that silver, unlike gold, besides being a safe haven investment is also used in industry and it is believed that since the dawn of the industrial revolution some 95% of the world’s silver has been used up in industrial applications. Because of gold’s much higher value, it gets recycled and all the gold mined in the world ever is still with us but photography and other industrial uses makes silver like oil - when used it is gone forever.

The 1970s saw an average gold to silver ratio of around 25:1 and fell below 20:1 when silver rose to over $45/oz nominally. Thus it seems very likely that in the coming years, silver may well return to its long term historical average of closer to 15:1. This means that silver is likely to continue to outperform even gold in the coming weeks and months. Silver may return to its recent highs of over $20/oz in 2009 due to very strong supply demand fundamentals. It is also important to note that the CFTC investigation into artificial manipulation and suppression of the silver market could potentially lead to a massive short squeeze.

All investors should diversify within the precious metals allocation in their portfolio and own silver as well as gold. Gold remains the ultimate safe haven while silver is a safe haven but has the potential for very significant returns and growing wealth in the coming months.

Stock position: None.

Comments

[ROLEX18:]

I think the opposite, but already if one is bullish on Silver, dump Gold now cover at 500$ and from profits buy Silver.

Feb 09 04:26 PM

[Conan the B...:]

Its very interesting. If you view just the ratio, the ratio on both charts look like they are in the process of Multi Decade H&S formations.

Feb 09 04:42 PM

[Gold Barron:]

Silver is a vital precious metal in the 21st century industrial economies. Silver industrial applications of RFID tags, paint, glass, and water purification over the next few years will boost demand significantly once the economy turns. As the author states, silver is consumed, unlike gold. In the future there will be shortages and I would not be surprised if silver prices are over $100/oz.

Feb 09 04:47 PM

[Conan the B...:]

Gold Barron: Can you provide a single article or link thereto which says Silver is used in water purification by anyone or any company at any point in time, outside of an Experimental Lab?

Just one Article so that I can add that aspect to my list of things Silver is used for.

Feb 09 05:47 PM

[David H. Di...:]

For 25 years the US Space Shuttle has used silver to filter and disinfect the fresh water onboard. Grandmothers all over America used to put a silver dollar in the bottom of milk to keep it from going bad. If you eat with a silver spoon and a silver cereal bowl you will get fewer colds. Colloidal silver is used to treat dirty camping water. There are many more examples of the antibacterial and antifungal properties of silver.


On Feb 09 05:47 PM paultaut wrote:

> Gold Barron: Can you provide a single article or link thereto which
> says Silver is used in water purification by anyone or any company
> at any point in time, outside of an Experimental Lab?
>
> Just one Article so that I can add that aspect to my list of things
> Silver is used for.
>

Feb 09 06:12 PM

[EvilB:]

Here you go. Silver has been used for centuries to purify liquids, ex. water, wine.....that is why it is finding more and more medical applications as well.

www.waterpurificationd...

Feb 09 10:28 PM

[EvilB:]

Here is more.....

Silver is widely employed as a bactericide and algaecide. A doctor friend of mine told me that when there is an open wound or big burns, a silver compound is used on the dressing. Silver ions have been used to purify drinking water and swimming pools for generations.

www.kitco.com/ind/Ruff...

Feb 09 11:02 PM

[Conan the B...:]

I know about the Bacterial aspects, which should alone accelerate its use. I have nanosilver containers purchased from SharperImage a few years back which extend the lifespan of food placed inside.

This coincides with the Milk comment.

I will follow the link on the water purification aspect but suspect that Carbon filters are used predominantly in large projects.

Thank you all.

Feb 10 01:06 AM

[Conan the B...:]

Have visited both sites. Neither site gives more than bare bone details on silver as a Water Purification agent.

Do any of you know of a Manufacturer(s) which produce water purification systems based on silver usage?

Calgon Carbon, I own. It is my primary China play. But that is Activated Carbon.

Feb 10 01:28 AM

[EE:]

The military uses colloidal silver in burn units to prevent infection. Get this ,the EPA wants to label Colloial Silver as a pesticide so you can't have access to it. I have my own micro particle colloidal silver generator to make my own CS cheaply and use it instead of flu shots and other inocculations. This is why the drug industry wants to ban it thru its control of the FDA, EPA, FTC, etc. Go to thesilveredge.com and learn!

Feb 10 09:17 AM

[auto44:]

Paultaut your questions/comments have once again ignited a really good discussion. Thanks.

Feb 10 02:01 PM

[Conan the B...:]

Auto44: I like to have facts over and above "this is the way it is".

I "want/need" as much help as I can get. But my entire outlook at SA is to get Investment Ideas.

If no manufacturer exists which uses silver in the water purification process, then it is a Niche product without an investment future.

Space Lab, how about submarines? What do they use?

I have an airpurifier which is used on the Space Station. The manufacturer is not public. I don't mention it because it isn't an Investment idea.

We have one hell of a collective at Seeking Alpha, most have Investible ideas, few broach them.

Feb 10 02:52 PM

[Mr. Ed, Jr.:]

It was my understanding that silver is not used so much for photography now. Digital.

Feb 12 01:54 AM

[SpencerJones:]

There is an article titled "Big Business Moves Into Silver-Based Anti-Microbials in a BIG Way" at thesilveredge.com/bigb... that goes into more detail about the many ways silver is used in water purification systems such as on the Space Shuttle and the International Space Station, residential pools, YMCA facilities, Cincinnatti Zoo, and many others.

It also discusses Mexico's use of silver in some of their city water systems, as well as the use of it as a disinfectant by Big Business in the U.S. and Europe, including its use by American soft drink bottlers.

Aug 07 05:05 PM

[SpencerJones:]

There's another less detailed but still quite interesting article on silver's use as a water purification/disinfection agent (space shuttle, swimming pools) at this link: colloidalsilversecrets...

Aug 07 05:10 PM