Why I'm Dumping Gold Today

Includes: GLD, SLV
by: Jim McCraigh

I am selling some of my gold today for something better.

I'm doing this is despite the fact that the long anticipated QE3 arrived with a vengeance this week. Ben Bernanke announced an apparently open-ended program to buy $40 billion of mortgage-backed securities per month in an attempt to jump start the real estate market. He also announced that the MBS purchases will continue until the current unemployment picture improves.

Whether or not this will actually work is a topic for another time, but the message is clear: The dollar will ultimately be devalued as a result. As I have written before, this news is very good for the holders of gold. Gold as represented by the SPDR Gold Shares (NYSEARCA:GLD) was up 2.02% on Thursday. Not bad by any measure.

But as I looked down the page I saw something that caught my eye. The iShares Silver Trust (NYSEARCA:SLV) was up 4.36%! This encouraged me to look back over the last thirty days to see how gold and silver have performed relative to each other.

The charts showed a spectacular trend. GLD had risen a respectable 10% from $155.79 to $171.31. On the other hand, SLV had gone from $26.92 to $33.61, an increase of 24.9%!

There are two other reasons I'm swapping gold for silver. The first is the gold/silver ratio which stands at about 51:1 at this writing. This is down from about 58:1 on last August 13th. During the gold price spike in late 2011, the ratio fell to just 32:1. (If the gold-silver ratio is 16:1, you would have to trade 16 oz. of silver for 1 oz. of gold.) Over the past 1000 years, the gold/silver ratio has ranged somewhere between 10 and 16. As investors lose confidence on fiat currencies (paper money) and think of silver more as "real money", we will begin to revert back to that historical ratio. This means I'll potentially make a better percentage return on silver than on gold, even though the price of gold will rise more in terms of dollars.

Secondly, there is JPMorgan's huge silver short position. The bank has bet big on declining silver prices. They are now and will continue to be squeezed as the price of the white precious metal continues to rise. At some point, they will need to begin to cover. Then some of JPM's downward pressure on silver prices will disappear, allowing it to seek its true market price.

While I'm not selling all of my gold today, I am happy to trade some it it for more silver.

Disclosure: I am long GLD, SLV, PHYS. 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.