Precious Metals: Today's Best Bet On Gold And Silver

Includes: GLD, SLV
by: Actionable Conclusion


The precious metals sector is one of the more difficult sectors to navigate.

Timing is more critical with the precious metals sector than with most other investment sectors.

The gold/silver ratio is reaching an historically extreme end of the spectrum.

Actionable conclusion: Long silver/short gold.

A Quick Stroll

I first invested in precious metals back in the late 1980s. I was a naive young lad and the metals beckoned. So I bought me some 100-ounce silver bars and stored them in a safe deposit box.

I have to confide, a gold bar, or even just a one-ounce gold coin is pretty damn impressive. Gleaming and glowing, it is easy to see gold's allure. But honestly, a 100-ounce silver bar is not that impressive. It looks like a big Snickers candy bar painted with a dull silver coating. At least the bars that I bought did. Perhaps that is part of the reason for the big discount that silver always has with gold. Gold is simply far more impressive.

Stuff Some Metals Enthusiasts Already Know

As many of you know, gold has always sold for more than silver, and with good reason. The supply of silver is greater than the supply of gold. Gold is simply rarer. Gold is more visually alluring. It has been deemed a universal currency for thousands of years. The demand by consumers, jewelers, investors, and just plain folk has always been stronger for gold.

The interesting thing to note is that the premium that gold garners relative to silver; it's constantly changing. Some years the premium is by a smaller margin and some years it is by a wider margin. This margin is often referred to as the "ratio"... the gold/silver ratio.

Back in the 1800s, the ratio was a relatively steady 16 to 1. The value of gold back then was only 16 times the price of silver. For decades on end, the ratio barely budged. As I understand it, back in the 1790s, the price ratio was fixed by law in the United States.

Then, right around the turn of the century, the ratio started to widen, and the ratio vacillated between 20x and 40x. This range was from around 1890 to 1930 or so.

Then, right around the time of World War II, gold spiked up to a high, right around 100x ratio. This was an anomaly that has not been reached since. The highest the ratio has been post WWII is around 90x. On both occasions, these rare peaks were not long lasting. The ratio would hold for a few months or more and then quickly come back down to Earth. Reversion to the mean in full glory.

Post WWII, the ratio has been in a very wide range with lows around 20x and highs nipping at 90x. Most of the time, the ratio has been between 40x and 80x.

In the last 30 years, the ratio has remained above 40x and maxed out around 90x. The average ratio for the 20th century is around 47. In the last few decades, the average ratio has been closer to 60.

I'm No Expert

Although I have invested in precious metals for almost 30 years, I am by no means an expert. There is much I do not know, and much I still have to learn. My dates and price ratios may not be exactly precise to the day and dollar, but they are indicative of the general reality.

I encourage SA readers to post any insight they may have to offer, any corrections, and especially to give the counterargument and perspective, as that is often most interesting and valuable.

Most importantly, you must take this article as simply one man's opinion. Food for thought. I have no idea what your portfolio balance is, what your financial situation is and your risk tolerance is. Before you invest, or bet, or gamble on the plays in this article, I would suggest that you do your own due diligence.

Personally, I have no idea if the metals are going up or down in the next week, or the next year... the same with the stock market, and the same with gold and silver. I am simply looking for value... for a discount. I have invested in both hard assets and in PM funds. I rarely enter into a position unless the metals have fallen to extreme multi-year lows. The last time I took a large long position in the metals was back in 1999 when gold was around $300/oz.

Since multi-year lows happen so rarely, for me, the ratio trade seems to be the way to go... at least at this juncture. As I type, the ratio is around 79/1. If someone told me that they were going to make a bet long silver and short gold, I would not talk them out of it... not at a ratio of 79/1.

On the other hand, I can understand waiting for a fatter pitch before entering into the trade. Although, if the ratio reaches 82/1, I think in most cases the trigger has to be pulled. Personally, I have not pulled the trigger yet, but at 79/1, I do have an itchy trigger finger.

Actionable Conclusion

At the current ratio of 79/1, I would consider making a one-unit bet long silver and a one-unit bet short gold. If the ratio rises to 82/1, I would make/add another one-unit bet long silver and one-unit bet short gold. If the ratio rises to 86/1, I would/add make another one unit bet long silver and a one-unit bet short gold.

One unit represents your smallest (or a very small) position. Five units represent your largest position. If you have an appetite for risk and the deep pockets to take a hit, perhaps a two-unit bet is the way to go.

I would consider long SLV, and short GLD. These are widely held ETFs. If any SA members have other suggested ways of going long silver and short gold, please advise.

Also, I would not use leveraged plays as they seem to more rapidly decay in price and thus profits can decay a little faster too. There may be some caveats to that statement, but as often the case there is merit to avoiding the leveraged plays.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SLV over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a long position in SLV, and a short position in GLD over the next 72 hours.