With the surge in silver prices, the gold:silver price ratio just made a 27-year low. The gold-to-silver price ratio, defined as the price of an ounce of gold divided by the price of an ounce of silver, closed Friday at 39.53. This means an ounce of gold is now less than forty times more expensive than an ounce of silver.
3-Yr Chart of Gold Silver Ratio
[Click all to enlarge]
My next chart shows that back in 1991, gold was over 100 times more expensive than silver. Since then, the gold-to-silver price ratio never went below 40 until this month, March 2011.
This chart also shows that the gold:silver price ratio at 39.53 is now at a 27-year low.
Chart of Gold Silver Ratio 1981 to Now
One of the safest and easiest ways to trade gold and silver is through an ETF. The fund managers buy and store the metal for you so you don't have to worry about storage costs or security. The major disadvantage is if the whole financial system melts down, you may lose access to your investment. For that reason, many who want to hedge for an "Armageddon type" event buy gold and silver bars and coins.
Comparison of SLV to GLD as of 3/13/11
GLD: $138.26
According to Seeking Alpha, the SPDR Gold Trust ETF has:
Expense Ratio of 0.40%
Average Bid Ask Ratio: 0.01%
Tracking Error: 1.06%
Concentration Risk of 100.00% (All assets in gold)
Yahoo! says GLD has Net Assets of $51.89B (Last month $57.21B)
SLV: $35.10
According to Seeking Alpha, the iShares Silver Trust ETF has:
Expense Ratio of 0.50%
Average Bid Ask Ratio: 0.04%
Tracking Error of 2.50%
Concentration Risk of 100.00% (All assets in silver)
Yahoo! says SLV has Net Assets of $11.48B (Last month $9.34B)
Some of the differences between the two expense ratios are probably related to the difference in storage costs. It takes far less space to store $1B worth of gold compared to $1B in silver.
"Collectibles Tax" a Downside of Owning Gold or Silver vs Equities
I don't want to give "tax advice," so I asked a friend to comment off the record about the tax considerations for buying gold and silver that my regular readers who only have experience with stocks and bonds might not know. Here is what he told me:
Gold and silver are treated as "collectibles" by the IRS in the United States. That means you do not get the long-term capital gains tax rate if you sell for a long-term gain. You will have to pay the 28% "collectibles tax." He recommended my readers buy GLD or SLV in their regular or ROTH IRAs. For taxable funds, he suggested the "Central Fund of Canada Limited" (CEF), which is about 60/40 gold/silver bullion. He said to register CEF with your federal tax return as a PFIT (it's Canadian and therefore a Passive Foreign Investment Trust).
As with anything dealing with taxes, check with your own expert tax advisor before taking the word of anyone you read on the internet.
Personally, I own a very small amount of gold hidden in the house for bribes if we see Armageddon. I also own silver coins for a similar purpose. For inflation protection, I own "treasury inflation protected securities" (TIPS) mutual funds (like the ETF TIP or managed funds FINPX, VIPSX) and Series I-Bonds, as well as individual TIPS. I also believe it is a good time to own equities, including SPY, the ETF for the S&P500, for both inflation protection and income. With the recent surge in TIPS, I took profits Friday in my IRAs, selling more than half my TIPS mutual funds. I may sell more of those funds and perhaps sell my individual TIPS which also have large gains.
Disclosure: I am long SPY. I am long mutual funds VIPSX and FINPX plus Series-I Bonds and individual TIPS bought directly from the Treasury.
