Precious Metals Are On Sale! Or Are They?

Includes: DBP, GLTR, JJP, WITE
by: Derrick Lilly

The recent and ongoing pullback in silver, platinum and gold looks like a sale, but is it?

I'm generally very active in the physical precious metals markets and also dabble in miner stocks. However, as of late I have taken a bit of a hiatus from the markets as a whole - trying to enjoy the summer as much as possible. But, I started feeling a bit out of touch, and considering I have sizable investments in metals and other equities, I decided to check on things. Metals have had quite a pullback, and while I am not entirely surprised, I immediately started thinking, "What's cheap right now? Gold? Silver? Platinum?"

So I started doing some digging on my usual forums and reading articles such as this one and this one. Then, I decided to do some more homework to see if gold, platinum or silver are actually "cheap" right now based on their historical ratios.

Here's what I came across….

(As I am writing this, spot for gold is $1,617; platinum is $1,459; and silver is $28.86.)

Seeing platinum down in the $1,400s and more than $150 below spot gold I was like, "Wow, bargain." After all, platinum is some 30 times more rare than gold, has limited sources, and is desirable to many. So I looked at the historical ratios.

From the charts I readily found tracking the trends from 1972 through 2011, the average gold to platinum ratio across those 39 years was approximately 1.36 oz. gold to 1 oz. platinum. Strong support is at an even ratio of 1:1. Platinum generally has bottomed when approximately 0.75 oz. gold buys 1 oz. of platinum. An indicator of a platinum bubble forming is when it reaches 2 times the price of gold or more. An indicator of a gold bubble forming is when it reaches 1.5 times the price of platinum or more.

Right now, approximately 0.90 oz. of gold buys 1 oz. of platinum. Not exactly "cheap" yet, but not a bad deal either.

So next I wanted to look at silver and gold. Admittedly, I've been more of a silver bug for the last couple of years - it's always more "affordable" for my budget, and there are many coins I like to collect. But, since I am re-entering the market, I thought it might be time to be a bit more strategic.

On to the numbers: From 1975 to 2012, an average 57.4 oz. of silver has bought 1 oz. of gold. Over the last 2 years, that average has come down to 50:1. Over the last 5 years it goes back up to 58:1. Over the last twenty years, 63:1. On the discussion forums I visit and in many of the articles that are bullish on silver, the "historical" ratio of 16:1 is often mentioned, desired and wished for. The Coinage Act of 1792 did declare a ratio of 15:1 and pre-1900 the average was 16:1, but unfortunately, that ratio just isn't applicable in today's markets. Today, it's estimated that gold is 19 times more rare than silver, so we can be bullish and say the ideal ratio would be 19:1, but even that seems unattainable for now. If we take the average ratio going all the way back to 1687 to now, we would get 27:1. Sounds more reasonable to me, and still bullish, but the last 36 years are still against us.

Right now, approximately 56 oz. of silver buys 1 oz. of gold, which is just about right based on the average ratio for the last 36 years (approximately 57:1).

Well, these results really left me disappointed; nothing looks cheap! Platinum compared to gold looks pretty fairly valued, and silver compared to gold looks spot on. So the question of where to put more fiat can only be reasonably answered in two ways in my opinion: Put the fiat into gold, or evenly spread it across each (unless you are over/under exposed to a particular metal).

Going forward, I think my strategy will be as follows:


  • Hoard when 0.7 - 0.8 oz. gold buys 1 oz. platinum
  • Accumulate when 0.8 - 0.9 oz. gold buys 1 oz. platinum
  • Hold when 0.9 - 1.4 oz. gold buys 1 oz. platinum
  • Swap when 1.5 - 1.75 oz. gold buys 1 oz. platinum
  • Liquidate when 1.75+ oz. gold buys 1 oz. platinum


  • Hoard when 63+ oz. silver buys 1 oz. gold
  • Accumulate when 57 - 62 oz. silver buys 1 oz. gold
  • Hold when 34 - 56 oz. silver buys 1 oz. gold
  • Swap when 20 - 33 oz. silver buys 1 oz. gold
  • Liquidate when 19 or less oz. silver buys 1 oz. gold


I feel like gold will always be an essential part of any portfolio. I plan to accumulate it as I swap out of other metals when the ratios indicate it is a good time or buy outright when it appears the most stable and fairly priced.

For the near-term, it's going to be very important to watch the economic indicators and government actions. I feel that the ever-growing amount of debt around the globe is going to increase demand for gold, and silver to a lesser extent. However, I think any rise in silver will be tempered by contracting economies and industrial demand to some extent. Platinum is the wildcard. It's rare, it is desirable, it has some industrial demand, but it doesn't have the same investment or monetary/hedging demands as the others. While it looks to be on sale compared to gold, I currently think gold is a better buy. Moving forward, I think gold will be the least volatile of the bunch. It is still viewed as somewhat of a safe-haven despite the recent swings, it is clearly regaining monetary support, and investment demand remains strong.

I encourage everyone to do their own due diligence and make the decision on what is best for their budget, risk tolerance and objective. If you want to trade, look at the ETFs out there. If you want to invest, get physical.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long physical gold, platinum and silver due to my addiction to coin collecting.