What Is Even More Enticing than Gold? Silver

The dollar is out. The U.S. dollar index has fallen 5% in the last week.

Treasury bonds are quickly falling out of favor. The yield on 10-year Treasury bonds has climbed from 2.5% to almost 3.5% since March signaling inflation fears and an unwillingness to fund ballooning government borrowing.

Gold is hot. Gold prices are back on the rise and gold stocks have done even better.

Is this a sign of things to come?

Well, if you take a look at the mainstream headlines, you’d think so.

An editorial headline on Bloomberg proclaims, “Dollar is dirt, Treasuries are toast, and AAA is gone.”

Even CBS News is warning, “Inflation could be coming to a U.S. dollar near you.”

To me, it seems just like a typical overreaction in the short-term.

Yes, the long-run trend for the dollar is down as the Fed keeps printing more and more of them and monetizing government debt. And yes, the prospects for gold get brighter and brighter with each passing week.

But there’s no reason to lose your head here. It’s going to take a few years for all this to play out. And the window of opportunity is still wide open to buy precious metals, real assets, and assets not denominated in the dollar (like ADRs).

That’s why, despite the strong interest in gold at the moment, I encourage you to continue to look for value in the sector. Right now, there seems to be some exceptional value in an asset which is so undervalued, it could outpace gold by 400% or more.

I’m talking about Silver.

When Gold Climbs, Silver Soars

In the past few weeks gold has been getting a lot of attention. With all the big money finally taking a liking to gold, the attention is justified. Remember, a turn in the big money’s attitude towards gold must happen before gold can break through the $1,000 mark and stay there.

The excitement surrounding gold’s surge has only pushed silver further onto the back burner. (You don’t hear about any major hedge funds loading up on silver do you?) And that’s the point. Gold is hot and silver is – in a relative sense - not.

So if you want to find an investment which isn’t so hot but still has a lot of potential in an inflationary environment, you’d want to look at silver. When you do, it won’t take long to realize silver – at current levels – could easily trounce gold in the months and years ahead.

That’s right. Silver has a much brighter future than gold. All you have to do is look at the silver / gold ratio to see how potentially lucrative the situation has become.

Ratios Don’t Lie

We’ve looked at a few ratios in the past. The reason is because ratio analysis can help identify value even in volatile markets. For instance, we looked at how the gold / oil ratio was signaling oil was a buy back in January. Oil prices are up almost 50% since then.

We looked at gold / gold stocks ratio back in December. We saw that gold stocks were significantly undervalued relative to gold. Since early December, gold is up a respectable 22% while gold stocks – as a group - have rebounded 70%.

That’s the value of ratio analysis. They can quickly show you how undervalued some assets are relative to others. And if you’re able to find them at extreme points, you can get into a trade or investment with less risk and greater upside.

Right now, the gold / silver ratio (the measure of how many ounces of silver can be bought for an ounce of gold) is at an extreme and working its way back to historical norms.

The chart below shows the gold / silver ratio is slowly working its way back to a much more normal level:

As you can see, the gold / silver ratio hung around 50 for most of 2008. Then the credit crunch threw everything out of whack and now it’s slowly working its way back to normal. But this chart doesn’t show the real upside in silver. That comes from the long-run average.

Over the long term, the gold / silver ratio has averaged about 30. That means one ounce of gold would buy about 30 ounces of silver. Today, with silver at $14.60 an ounce and gold at $953, the gold / silver ratio is 65. In other words, an ounce of gold would buy 65 ounces of silver. That’s more than twice the long-run average.

Silver prices would have to double just to be in line with the long run average.

Silver Slingshot

But here’s the kicker, when gold races, the gold to silver ratio gets flipped around. During the last precious metals bull market in the late 70s and early 80s the gold / silver ratio hit lows of 15.

That means if gold goes nowhere (granted, chances are pretty slim of that), silver could easily shoot up to $50 an ounce. That’s a 400% move for silver without gold moving up a single dollar.

Here’s the thing though, gold isn’t staying where it is. Over the next few years, gold is going much higher. And silver is going to go even higher. Silver will slingshot past gold.

Think about it. With a gold / silver ratio of 15…

At that ratio, silver would be at $66 when gold hits $1,000.

$1,500 gold = $100 silver.

$2,000 gold = $132 silver.

So if you expect gold to do well, you’ve got to expect silver to do even better.

According to the historical relationship between gold and silver, if gold does well, silver will do exponentially better. In past gold bull markets, silver prices zoomed past gold in relative terms. There’s no reason to expect this time to be any different.

In Search of Value

In the end, precious metals have been one of the few sectors which have maintained an uptrend through all this. As the long run prospects for the U.S. dollar continue to worsen, I expect the uptrend to continue. However, I expect this to take a longer time to play out than most.

Just take a look at what happened earlier this week. The Financial Times reported China is continuing to buy U.S. Treasuries. Granted, they’re switching to short-term durations, but they haven’t even come close to invoking their “nuclear” option yet and probably won’t for a long while.

We’re in the midst of a slow and steady decline of the dollar. The Fed is printing dollars to fund the growing government deficits and there haven’t been any significant inflationary consequences…yet.

That will change and it’s not too late to get prepared. Now is the time to buy precious metals and precious metals miners for your portfolio. Right now, with the gold / silver ratio indicating silver as undervalued and gold a hot topic, silver is a bit more enticing.

Comments

[walkman0088:]

Year to date SLV has outperformed GLD???

May 27 08:27 AM

[Beach Bubba:]

buy, buy, buy....as Cramer would say.

I own SLW, PZG, and some wild cards. I feel real good when I look at my small hoard of silver eagles, and old 90% coins. I love the older silver content Mexican coins that one can buy with almost no premium in Mexican shops and markets(in Mexico).

May 27 09:42 AM

[nobby73:]

What is very important to make sure silver prices do rise is for people to invest in the physical stuff, either self-storage or physical silver EFT. The non-delivering short sellers need shaking up a bit...

May 27 10:35 AM

[Hot Richard:]

If you haven't bought silver (and gold) by now, then you probably shouldn't be investing your own money.

Do your research on delivery. I'd estimate that about 20% of the brokers out there have real issues with delivery of silver and gold.

May 27 10:46 AM

[Vuke:]

Smaller bars make great diving weights. Unfortunately it's hard to get any bars under 1,000 oz. now. Something is fishy.

May 27 10:52 AM

[yellowhoard:]

DBS if you like your silver spicey.

May 27 10:55 AM

[TurtleTrader72:]

I can understand why it would be easy to compare gold and silver as they do seem to be related as commodities. However, strictly from an investment perspective this is not enitrely true. Unlike silver, gold is more of a currency investment than a commodity. People invest in gold when they start to lose faith in paper currencies (mainly in the US dollar). Gold is considered to be the universal currency and when people start to question the true buying power of paper currencies gold is where they go. Although i cannot comment on the investment potential of silver, I don't think that comparing it to gold has much relavance. Just my opinion, take it for what its worth..

May 27 10:59 AM

[CPST1:]

In the 70's and 80's there were extraneous factors that contributed to the rise in the price of silver. Mostly an attempt to corner the market as written in the book, "The Silver Bears"

Today, if there was a massive sell off of gold then what asset, or resource could be considered as valuable?

If a comparison is drawn to the price of gold to that of the demand for oil, then one might consider the aspect of exchanging the sale of oil for the purchase of gold. Considering oil cost $2.50 a barrel to produce it seems reasonable to buy gold from the sale of oil and purchase currency only when and where it is needed.

May 27 11:11 AM

[silverwood:]

I believe there are very strong forces in silver market desperately trying to keep its price suppressed. One example is the silver users association. It is in their best interests as users of silver to keep a cheap and plentiful supply of silver available. Silver has the greatest potential to become a mania driven market as it is more affordable than gold therefore allowing small investors to get involved. I've been interested in silver for over 30 years, and I see more and more talk on the internet about owning silver. Silver's story is that of the snowball rolling down a hill and that snowball has only just started to roll.

May 27 11:18 AM

[Jeff Nielson:]

Good commentary, but it leaves out a key "piece of the puzzle". MOST above-ground stockpiles of silver have LITERALLY been "consumed".

This means that the amount of AVAILABLE silver in the world (versus the amount of gold) hasn't been lower in THOUSANDS OF YEARS.

Most "industrial" uses of silver use silver in TRACE amounts, so this silver can NEVER be recovered/recycled. In the production of athletic apparel (alone) more than 1,000 TONS of silver is permanently consumed each year.

Also, there have been more NEW, silver patents than for ANY other metal - meaning this consumption-trend will likely ACCELERATE in the future, until silver finally shrugs off manipulation, and moves to a triple-digit price.

May 27 11:25 AM

[yellowhoard:]

Silverwood,

So, I'm guessing your name suggests what I think it suggests?

You know, you're supposed to see a doctor if that condition lasts over 3 hours.

May 27 11:27 AM

[SW Richmond:]

Take delivery, the only self-fulfilling forecast.

May 27 11:55 AM

[Larry House:]

I don't know if the author is right or not, but I do agree with him. I am out of gold, but I continue to add to my silver bullion holdings. I see silver as sort of the poor man's gold. I think it makes sense to hold silver and gold for years to come.

May 27 12:02 PM

[Mad Hedge F...:]

Enticing it is. I can’t think of a better reason to keep a core long term position in gold and silver than the prospect of the US losing its triple “A” rating. The chatter about this yesterday took the barbaric relic up to a two month high of $958, a mere $50 from an all time high. Quite honestly, I never understood why the American rating has stayed this high for this long. If any other entity had increased their debt from $5 trillion to $11 trillion over the last eight years, then boosted it to $13 trillion over the last three months, their rating would have been slashed ages ago. Like to the level of Zimbabwe. Is it any surprise that gold demand soared by 38% in Q1, according to the World Gold Council? And now the Russian Central Bank is allowing other banks there to pledge gold as collateral. Keep your gold position so you don’t miss the inevitable gaps up, as well as miners, like Barrick Gold (ABX).

May 27 12:04 PM

[blacksilver:]

silver has a much better chance to double then gold,maybe even triple.a little bit of both couldn't hurt.dam silver gets heavy.

May 27 12:52 PM

[Jake2:]

Beach Bubba: "I love the older silver content Mexican coins that one can buy with almost no premium in Mexican shops and markets(in Mexico). "

No premium? Let's see: the gas to get there; the doctor's bill to cure the swine flu you've contracted; and the undertaker's bill to bury you after you've been gunned down in the street by a drug lord. Not bad, but not good either. "Buy, buy, buy!" as Cramer would say.

May 27 01:12 PM

[Plebian:]

"Gold is considered to be the universal currency and when people start to question the true buying power of paper currencies gold is where they go."

FYI: Silver has had more wide-spread use as 'money' throughout human history than even gold. The words for 'silver' and 'money' are equivalent in lots and lots of human languages. The ratio of physical silver to physical gold available from the Earth's crust is about a 10 to 1 ratio. Silver is being consumed by man at a rate which will make it 'gone' in as little as 15-20 years ('peak silver'). World central banks presumably do not hoard silver (but they certainly hoard gold)...

May 27 01:18 PM

[doubleguns:]

Funny take and true!! however the info about this silver might be good for the few that are going there because thier wife wont back out.

Maybe this post will help!!!!


On May 27 01:12 PM Jake2 wrote:

> Beach Bubba: "I love the older silver content Mexican coins that
> one can buy with almost no premium in Mexican shops and markets(in
> Mexico). "
>
> No premium? Let's see: the gas to get there; the doctor's bill to
> cure the swine flu you've contracted; and the undertaker's bill to
> bury you after you've been gunned down in the street by a drug lord.
> Not bad, but not good either. "Buy, buy, buy!" as Cramer would say.

May 27 02:01 PM

[5142152-337:]

SUPERB article! GREAT posts!

All one has to see/hear is the SILENCE on CNBC, etc, when it comes to gold and silver. Those media whores STILL think Obama will make it all better with his stimulus band aid! When you see/hear those whores touting gold and silver that will be the time to SELL!

In the meantime, buy all you can get your hands on...the PHYSICAL kind...if you want to be CERTAIN you're not getting ripped off by the EGB's (elitist greedy bastards).

May 27 04:19 PM

[Spartacuss:]

Oh yes, and the saltwater will tarnish those bars too. Just make sure you use too many of them and sink to obaminal depths and then we will wonder what ever happened to you. Uhhh, no I guess we wouldn't.


On May 27 10:52 AM Vuke wrote:

> Smaller bars make great diving weights. Unfortunately it's hard to
> get any bars under 1,000 oz. now. Something is fishy.

May 27 08:30 PM

[Spartacuss:]

Nuttin' new here...heard it all before and even before that. Which is not to say that I disagree with the premise...but it is like Glen Beck, you have to like him and his boyish, impish style...but then that is veneer and the meat and potatoes of it have been served and served and served...same is true about the metals. Gosh guys, how about something fresh out of the oven? And come to think of it, what is that smell?

May 27 08:35 PM

[isaac the t...:]

AGQ- Double silver ETF. Load up on call options and you're looking pretty.

May 27 11:37 PM

[Mad Hedge F...:]

You don't need to convince me. Take a look at the chart below and you have to wonder if silver is going to break out of its recent tedious range to the upside. The trigger could be a selloff in global stocks from their recent heady nine week run. The metal is at the low end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1m and is currently 65:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon’s mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit when the world shifted from silver based films to digital photography. Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That means were are setting up for a classic supply demand squeeze. I think we could run from the current $15/ounce to the old high of $50/ounce in the next economic cycle. Since silver can trade with double the volatility of gold, this forecast could prove conservative.

May 28 12:21 AM

[Ridge Hill ...:]

fortuna silver is my silver investment fvi.to

more than 50% in cash in the bankj growing production and big cash flow under the radar

May 28 05:57 AM

[dirtyharry:]

The author maintains that the normal ratio is for gold to be 30 times the price of silver. I expanded that exact chart out to 20 years, and couldn't find such a relationshp. In 1998 and in 2006 silver was 41 oz and 42 oz to one ounce of gold, respectively. This would suggest his facts are off a bit. In October 08 one ounce of gold could buy 88 oz of silver. I'm confused as to why he's claiming a relationship of 30 to 1.

On the long term graph, the current ratio of 65 is roughly in the middle. It seems to me silver could go either way based on the last 20 years. When using platinum against silver inthe last decade, the ratio has been as little as 62 oz to 1 oz of platinum, and as high as 157 oz to 1 oz of platinum. Right now 1oz of platinum can buy about 76 oz of silver yet in April it could buy 102.6 oz of silver. This actually suggests that silver is EXPENSIVE at the moment, and the real buy is platinum (PTM).

May 28 08:58 AM

[HardRock:]

June 12th da date folks.......Gold movin' over $1000USD
see da chart here!......seekingalpha.com/user/...


I agreeds wit da author...........but comin's sooner than later

>As the long run prospects for the U.S. dollar continue to worsen, >expect the uptrend to continue. However, I expect this to take a >longer time to play out than most.

May 28 09:00 AM

[Investor Nirav:]

so are you shorting gld against slv?

May 28 03:25 PM

[socphd71:]

(1) Isaac the terrible wrote:

"AGQ- Double silver ETF. Load up on call options and you're looking pretty.

AGQ is at an all-time high. The ETF was introduced on 1 Dec 2008. There are not many options outstanding nor were many traded today. Since silver is far from an all time high, why is AGQ? Why buy options in a small market? This is strange advice.

(2) What does it matter how much gold and silver are in the earth's crust, or what the ratio is? What matters is the cost to mine an ounce compared to the price the mining company can get.

May 28 08:57 PM

[GaryCamaril...:]

What the 800 pound Gorilla would like to point out to yall silverbugs is there are major differences establishing gold and silver prices. As silver is refined, huge amounts are left in the "tailings".Any trully signifigant increase in silvers price simply results in more intensive processing of the tailings being thrown and, PRESTO more silver FLOODS the market. Garycamarokie

May 28 11:35 PM

[Plebian:]

Another tidbit on why silver has been so 'low' compared to gold...

Enter the 'Silver Users Association', which was formed in fairly recent times--historically speaking. As one can imagine, it is in the SUA's interest to have plenty of silver available at cheap prices. So, wouldn't they want to keep silver 'low'? Are there any other 'Users Associations' for any other widely used commodity out there? If not, why not?

Usually, there are 'cartels' on commodities that gang up to keep prices high (eg, OPEC with oil), but silver is the only thing with an 'anti-cartel' or 'users cartel'. Doesn't anyone find that strange?

In addition to being an extremely important metal for military use, silver is also the most high-tech and 'greenest' metal on Earth (used in the latest batteries, solar panels, etc, etc). Plus, it's gaining widespread use in health-care and for water-purification purposes, due to its well-documented anti-bacterial, anti-viral, and anti-fungal properties. What other element on Earth is as multi-faceted as the 'magic metal' Silver?

May 29 01:31 PM

[doubleguns:]

Plebian, it is unfortunate that by the time that the world figures out all of the useful properties of silver they will have pissed away the vast majority of this NOW very scarce metal.

Your last paragraph says it all.

Most are totally ignorant of the significance of this metal and they piss it away every day.

WE will rue the day when the shortage keeps us from achieving some phenomenal achievment because we pissed it all away.

Shame full!!

May 30 02:23 AM

[Gls.:]

There are obviously 2 camps regarding the world of Silver.

Camp 1.
Those who believe that there is only so much above/below ground physical that is continually dwindling down in amount.They prefer to hold physical and go long.

Camp 2.
Those who feel that the term "awash in silver " still holds merit today as it did over a half century ago.They revel the need to frolic in throwing around paper by running silv. prices up and shorting it down.Their intention is to never even see the physical much less touch it.
----------------------...
There is one thing for certain - due to the very strong nature of world industrial usage/demand , coupled with the ever increasing world industrial breakthroughs and discoveries for new uses...
I don't think that it takes a rocket scientist to figure which camp to be in ! By all indications one will be enjoying filet mignon over the fire while the other will be roasting weenies !

Sep 23 04:04 PM