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???

2009 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).

2009 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...

2009 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.

2009 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.

2009 May 27 10:52 AM

[yellowhoard]

DBS if you like your silver spicey.

2009 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..

2009 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.

2009 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.

2009 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.

2009 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.

2009 May 27 11:27 AM

[SW Richmond]

Take delivery, the only self-fulfilling forecast.

2009 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.

2009 May 27 12:02 PM

[Mad Hedge Fund Trader]

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).

2009 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.

2009 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.

2009 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)...

2009 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.

2009 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).

2009 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.

2009 May 27 08:30 PM