The Gold Vs. Silver Dilemma

 |  Includes: GLD, PHYS, PSLV, SLV
by: Parsimony Investment Research

Based on global uncertainty and the devaluation of paper currencies through quantitative easing all over the world, we are physical precious metals bulls. The underlying thesis is simple...the world is awash with debt and politicians and central banks have a proclivity to print money.

Investors interested in obtaining exposure to precious metals must make the decision on which metal. We are biased to silver. Gold trades at $1,700 per ounce, while silver trades at $32 per ounce. The gold-to-silver ratio is approximately 52 to 1. Many longtime silver bulls, including Eric Sprott, believe the gold-to-silver ratio should be closer to the 15 to 1, approximately the ratio in the earth’s crust. Of the 46 billion ounces of silver mined throughout history, there is only approximately 1 billion ounces of silver above ground in bullion form. In addition, unlike gold, silver does have certain industrial uses.

Price per Ounce Makes a Difference

We believe that physical buyers prefer silver simply due to the cost per ounce. Given the substantial price difference between an ounce of gold and an ounce of silver, there are a lot more people who can afford an ounce of silver. This phenomenon is being proven out in the physical market. According to the World Gold Council, there is approximately 2 billion ounces of gold bullion, while there is approximately 1 billion ounces of silver above ground in bullion form today. Layering in market prices there is approximately $3.4 trillion of gold available (at current market prices), while there is only $32 billion of silver available (at current market prices). The size of the investment market for gold is therefore 106.25 times larger than that for silver. But in 2010, the U.S. mint only sold three times more gold (dollar terms) than silver (dollar terms). We believe this outsized interest in silver, relative to the investment market, indicates that physical buyers are interested in silver.

In addition, while high profile investors including David Einhorn, John Paulson, and Kyle Bass have touted the merits of gold in an quantitative easing world, we believe big money investors have not entered the silver market in large scale.

The physical markets for both gold and silver should determine the long-term price of the metal and we believe individual investors should continue to accumulate physical silver to diversify their wealth and help mitigate the loss of purchasing power from central bank intervention.

We own gold and silver in physical and ETF form, the SPDR Gold Trust ETF (GLD) and iShares Silver Trust (SLV). Investors interested in vehicles that retain physical metal should look into Sprott Asset Management’s Sprott Physical Gold Trust (PHYS) and Sprott Physical Silver Trust (PSLV).

Disclosure: I am long GLD, SLV.

Additional disclosure: We own physical gold and silver bullion as well.