Why Silver Beats Gold as a Precious Metals Play

I watch with subsumed glee as Yahoo Finance includes a price quote for gold in the Market Summary section on their home page. After all the financial turmoil that we've been through since the introduction of the internet, when did Yahoo Finance realize that a gold quote was necessary? The obvious answer is, "When the public demands it."

Well, when the public finally demands the price quote of gold on their finance homepage, it is probably too late to participate in gold on a level that could be considered meaningful. After all, at nearly $1000 an ounce, there isn't going to be a stock split in the price of gold. Or is there? (I've been pondering this possibility lately) In any event, gold is fast becoming an expensive asset in a world full of correspondingly deflating alternative "assets." What to do? What to do? Get out there and do your research on silver!

I say do your research on silver because if I told you that, regardless of the Hunt Brothers cornering the silver market in the 70's, the price of silver always outpaces gold on a percentage basis by a ridiculous margin, you'd probably laugh in my face. But as you should know, silver is the "poor man's gold" and coincidentally, there are more "poor" men than rich men can afford to buy.

When I first bought gold and silver back in 1996 (in bulk and never purchased again), I knew that I was getting a bargain. When I exchanged 75% of my gold for silver in 2008, I knew I was committing highway robbery. I've always noted that "gold bugs" were blinded by the historical significance of the yellow metal, while at the same time claiming that they were investors who used gold as a form of insurance against government mismanagement of paper currency.

The real deal is in the price of silver. While gold has run up 259% since I purchased it, silver has gone up only 266% in the same period. This means that silver hasn't appreciated as much as it historically should relative to the price of gold. Which begs the question, what should we expect silver to do relative to gold? I have my own calculations for the future price of gold and silver. But more importantly, let's look at what history has to offer us.

I like chopping everything into halves. This means that if the Hunt Brothers' cornering of the silver market brought the price of silver to $50 then the real price probably should have been $25. From this vantage we now have to choose a starting point. Where did the price of silver start out?

For illustrative purposes, let's start with the bottom of 1932 and compare silver with gold. At the low in 1932, silver was priced as low as $0.24 an ounce. Gold, on the other hand, was fixed at $20.67 per ounce. At the peak of the market in 1980, gold was selling at $800 an ounce while silver was selling at $50 an ounce. During the period from 1932 to 1980, gold went up 3,770% while silver went up 20,730%.

Gold bugs, ever clinging to their religion, would argue that silver was cornered so the $50 figure was a fraud. Gold bugs would also claim that if gold was allowed to freely float during the crisis of 1929-1932 then gold would have been much higher than the price of silver in 1932. These arguments demonstrate a lack of knowledge on how commodity markets work, basic economics and history in one fell swoop.

For the aforementioned reasons, I will calculate the change of silver from $0.24 to $25. Despite halving the figure, silver still achieves an astounding 10,316% increase from the low of 1932. Any way you slice it, the ratios are completely disfigured and in favor of silver. I could have started my pricing point in the 1950's, 1960's or the 1970's and the distortion would be the same but that would be an exercise in futility when talking to a gold bug. Their retort is always the same, "what about this?" or "You're being selective" or "You're biased" or etc. etc. etc. ad infinitum...

Back to me and my silver holdings: when the price of silver has moved in step with the price of gold, on a percentage basis, then I know that silver is underpriced as a precious metal. With this in mind, I converted a majority of my gold holdings into silver. I'm an investor, therefore I don't want to get myself caught up in the religious debates about gold.

So, if (note the size of the if) you're considering taking the dive into gold then move on to the alternative. I suggest that you avoid the numismatic varieties of silver. Instead, aim for junk silver of the half dollar denominations. Again, only buy precious metals as part of a balanced diet of physical real estate, stocks, bonds and cash.

In my opinion, gold and silver stocks are perpetual options on the price of gold and silver. Therefore, precious metal stocks are great for speculation but poor investment choices (gold stock highs and lows from 1924 to 1933). Be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out their dividend in actual ounces of gold. These are all gimmicks to lure investors in at a time when the rule of the day should be "head to the exits."

The most obvious choices for silver stocks are Silver Standard Resources (SSRI), Hecla Mining (HL) and Coeur d'Alene Mines (CDE). A better target for a play on the price of silver is the iShares Silver Trust ETF (SLV).

If you've read my blog at any length then you already know of the Dividend Achievers that have beat both gold and silver stocks without the added risk during the raging bull market in precious metals from 1970 to 1980. However, if you're a hardened equity speculator, you could nab select gold and silver convertible preferreds with decent payouts. Equities aren't my first choice for investing in silver but now you know some of the options available to you.

A Note of Caution for All Precious Metal Investors

As the price of the precious metals get higher, the less likely you'll get the widely quoted price when trying to cash in. Precious metal dealers, being business folk, will not be willing or able to take the risk of buying back your gold and silver at the highest quoted price. Therefore, even though gold was at $800 and silver was at $50 back in 1980, investors who tried to cash in at those prices were being turned away by dealers. This will be one of the signs that we're at a top in the market for precious metals.

When you read the following article on silver, you need to understand that I have a vested interest in the topic. Therefore, I theoretically should say things that only support the investment positions that I retain.

Unfortunately, I don't see (revealing my limitations) the value of the philosophy of "whose food I eat, whose song I sing." Additionally, it would be no contradiction that I would explore and write about the breadth of both sides of the topic of precious metals investing.

Disclosure: Holding gold and junk silver

Comments

[buybigtires:]

I agree with the buy on silver. Historically, it trades on an 18 or 15:1 ratio against the price of gold. Silver is extremely undervalued, more portable, and more affordable for the average investor (who doesn't have $20 that they can find to invest).

Get it, and get it now.

Sep 08 10:40 AM

[The Economi...:]

There is one more advantage silver has over gold. It's easier/cheaper to buy a small amount. The mentality of the buyer comes into play when they have to spend either 100 bucks or a thousand.

Its easier to part with a hundo.

Sep 08 10:55 AM

[Jaysan:]

I have a small investment in Silver Wheaton (SLW). It was announced today that Barrick agreed to sell 25 percent of silver production from its Pascua-Lama project in South America to Silver Wheaton.

CDE is up 14% so far today without any news announced. It has the highest composite ranking (82) by IBD among silver stocks discussed here. The other rankings are

SLW 75
SSRI 50
HL 37

Sep 08 11:42 AM

[Mike Kane:]

I agree, we have been recommending silver for a while now...investors price shop too, and when they see something trading at $17 that can protect their portfolio they will eat it up

Sep 08 11:45 AM

[NUCLEAR1929:]

its very simple indeed, silver is priced cheaper than gold and in the 1980's was trading at $50 (with inflation adjustment its like $130), so many small speculators who have no idea what the market is, buy what looks cheap to them
its same like speculators buy penny stocks

Sep 08 12:19 PM

[IndidnaJohn:]

My Rooster has owned Silver from about $7.40.
Don't let him outsmart you. Buy some Sliver to hold in hand(claw) today. Not a paper promise either but metal in your hand.

Sep 08 01:02 PM

[Bill S. Friend:]

Its about the historic ratios to me. If the silver to gold ratio was 14:1 the price of silver would be $71.38. If gold continues to increase while the ratio narrows silver would be a smart bet! Physical silver.

Sep 08 02:00 PM

[William M. ...:]

Nelson & William Hunt. Oh how it brings back memories. Oil and Gold soaring. Jimmy Carter puts up Solar Panels on the White House Roof (Regan takes them down) and a giant name Paul Voleker jacking up the prime rate (no wimpy Ben).

Your logic sounds good to me. Now here is the really scary part of that history lesson. Silver prices rose from $11 an ounce in September 1979 to $50 an ounce in January 1980. $11 to $50 in just 5 months! Silver prices ultimately collapsed to below $11 an ounce two months later. $50 to $11 in just 2 Months! Now here we stand 29 years later and Siliver is still under $20!

Sep 08 07:22 PM

[tripleblack:]

I bought SLV last week.

I like the fact that the author pointed out some of the difficulties selling the actual metal, particularly in quantity, and ESPECIALLY when trying to capitalize on a high price. It should be noted that storing, securing and transporting lots of silver can be a chore/expensive as well.

I share his view that silver has more potential headroom than gold right now.

Sep 08 07:49 PM

[isaac the t...:]

Check out AGQ- triple SLV etf

Sep 08 09:19 PM

[Slvrizgold:]

Here is a point that is often missed: ALMOST ALL THE GOLD EVER MINED STILL EXISTS ABOVEGROUND. However, since silver has been demonetized and become an industrial metal of choice, all of the once massive stockpiles of silver have been CONSUMED and DEPLETED in the last few decades, because silver demand exceeds silver mine supply by several hundred million ozs per annum. So in 1980, there were several billion ozs of silver floating around out there. Much much less today! At one time the amount of silver owned by the US govt (the people lol!) was an ELEVEN FIGURE NUMBER! Now they own ZIPPO. They can't even make 1 oz Silver Eagles fast enough to quench demand. They say "they can't get enough blanks" to mint them. BS. They don't want to push the silver market over the edge and cause a price spike, but its gonna happen anyway!

Sep 08 11:43 PM

[JoeSixPack:]

"Therefore, even though gold was at $800 and silver was at $50 back in 1980, investors who tried to cash in at those prices were being turned away by dealers. "

When this happens- barter with it. This is not about an "investment".

Sep 09 01:02 AM

[herd mentality:]

plus 1, for silver - but stop buying it everyone so I can have enough time to sell this bread I bought with food stamps at a loss to buy some bullion before it skyrockets in price. ;)

Sep 09 03:40 AM

[Jaysan:]

On Sep 09 01:09 PM Economics-Guru wrote:

> this market keeps going higher...it's insane

I hate to be a nag, but I have to keep reminding everyone that markets can remain irrational longer than you can remain solvent (Keynes).

Otoh, maybe the market is rational and your idea of what it should do is mistaken - check your premises (Rand).

Sep 09 01:42 PM

[lance sjogren:]

Long term I do expect silver to far exceed gold, although they have had a recent run so don't discount the possibility of short term correction.

In my view you don't necessarily need to make a choice. In my estimation, the biggest bargain in silver is Sabina Silver which has a deposit in northern Canada containing 230 million ounces.

With zinc and other base metals along with the silver, it is pretty decent grade for a deposit that will largely be open-pittable. (a little over 3 ounces silver per ton plus a comparable value in the base metals)

Oh, and by the way they recently acquired a 2 million ounce high grade gold deposit in the same geographic area.

All their minerals add up to an in-situ value of $9-10 billion.

The fully diluted market cap is about $130-140 million. They have about $30-35 mil cash, so fully diluted enterprise value (not including the cash they would get from warrants, etc being exercised) is about 100 mil.

So you have close to a 100 to 1 in-situ value to enterprise value ratio.

That means you are paying $10 per ounce of gold equivalent or $0.15 per ounce of silver equivalent.


Why so cheap? It is in a remote area of Nunavut province and there is a need for a port to be constructed at Bathurst inlet and a road built to the properties.

However, with their recent acquisition of the gold deposits, they are building a larger resource base on which to support the capital costs.

(although I hope that when the time comes they sell the properties to a large mining company rather than engaging in a "do it yourself" operation)

There are some other mineral deposits in the area owned by others that could help provide a broader resource base to fund infrastructure- e.g. the Chinese acquired two base metals deposits in the region from Oz minerals earlier this year.


It's the cheapest silver I know of, and you get some high grade gold and base metals thrown into the bargain.

Sep 10 11:10 AM

[lance sjogren:]

Forgot to mention.

Sabina has embarked on an extensive exploration program this year- they very well may be able to rack up expansions of their silver/base metals and gold deposits.

Also they acquired a large amount of additional property in the region as part of the acquisition of the gold deposit, rendering them the dominant property owner in the area, one which very well could prove to be a major mining region in the long term.

Sep 10 11:16 AM

[Sm00th_J:]

so what would you say has the most potential?
a good quality silver mining company like Silver Wheaton
or get rid of the buisiness aspect and invest directly metal price itself

Sep 14 10:22 PM