Panic Investors: Gold or Silver?

By Brad Zigler

"If you're going to measure inflation in terms of gold," went the plaint, "why not silver or platinum?"

Why indeed?

There's a lot of ink, er, electrons devoted here to talking about gold as a store of value. Gold's a precious metal, after all. But so is silver. We're plainly biased in gold's favor when it comes to talking about monetary value. Search the archives for the last article on the silver/oil ratio written (go ahead; I'll wait) and you come up with bupkes.

There's plenty of stuff written about the gold/oil ratio, though. We've been tracking it with greater interest since it showed signs of bottoming this summer. The metric reveals investors' relative taste for the two commodities. Gold was ascendant through the beginning of 2007, but began a long slide in relative value through June this year. Yesterday, however, marked a breakout as the gold/oil ratio rocketed above its 200-day moving average, propelled by the force of the Lehman Brothers-Merrill Lynch-AIG implosion.

Gold/Oil Ratio

And what of silver? Has silver also bottomed and resurged against oil?

In a word, nope. 

Precious Metals Vs. Oil

In fact, silver diverged from gold's path in August and trended lowered, reflecting a tectonic shift in the gold/silver ratio. The ratio, which lollygagged in the 52-to-1 area for much of the spring and early summer, bolted into the 70s as fear became the market's currency.

Gold/Silver Ratio

And that, dear reader, is why we're biased. Gold is more "money like" than silver; because demand for the white metal is partly industrial, and therefore subject to relative glut, it's not quite the repository of value that gold offers.

Comments

[Umm, yeah:]

While the reasoning 'sounds' good, I have to admit that seeing the Gold/Silver ratio go parabolic like in that chart makes me think that it's going to swing back to the previous ratio.

2008 Sep 17 12:51 PM

[Umm, yeah:]

@JBP

Actually, I wouldn't mind seeing CLH 'root for the same team' as me, considering how often he was cheerleading the strong dollar & weak gold.

2008 Sep 17 12:53 PM

[Alan Young:]

"seeing the Gold/Silver ratio go parabolic like in that chart makes me think that it's going to swing back to the previous ratio."

Hmm, good point. Applying that reasoning to the separate prices would mean that Si should rise, since that's what has driven the divergence the most.

2008 Sep 17 01:32 PM

[dlaw:]

HAHAHA!!!

Congratulations, Goldbugs!

GOLD MADNESS has struck!

Get while the getting is good!

2008 Sep 17 01:52 PM

[D Johnson:]

The parabolic rise in the gold/silver ratio cannot be sustained -- which is why I sold all my gold yesterday and bought silver.

2008 Sep 17 01:53 PM

[agneaux:]

I'm betting that Silver will rise again, but I think Gold will, too. Silver should rise faster, however, pushing the gold/silver ratio back toward its long-term average of 16:1 (which we haven't seen in a very long time, of course). I have around ten times as much SLV as GLD, but I have them both. The Federal Reserve note is toast, methinks.

2008 Sep 17 03:44 PM

[dlaw:]

Of course people like Agneaux can't explain the price of the dollar index, but why think when you can FEEL?

2008 Sep 17 04:01 PM

[huskerbob:]

D Johnson - I would like to do the same, but where were you able to buy silver? Not available in any significant amount here in Phoenix.

2008 Sep 17 08:18 PM

[johngonole:]

Obama offers no real solutions only the promise to do more of what is causing the problems.

2008 Sep 17 08:52 PM

[Rabbito:]

McCain offers no real solutions only the promise to do more of what is causing the problems.

2008 Sep 17 10:25 PM

[Zeb:]

Palin offers no solutions, but in a pinch maybe Jesus will help her.

2008 Sep 17 11:30 PM

[GMiki1:]

The current high ratio does argue that silver will zoom in terms of percent over gold. I hold both, but converting gold to silver isn't a bad idea. (The physical has to be ordered from those dealers who have it.)

From all I have read about silver, too, it's a bit eccentric in how it operates--it's a smaller market in terms of $$$. Silver bugs love it much more than they love gold because, frankly, it can work itself into a frenzy much faster, and because 10 times the current price is a rational possibility, whereas 10 times the current price of gold is less realistic, even given what we're seeing before our eyes.

In short, I wouldn't disrespect the potential for nice gains by way of gold.

2008 Sep 17 11:54 PM

[bearfund:]

Gold is money, nothing else. I like silver just fine, own some myself. It's good. Gold is better. As safe haven assets, the ordering from worst to best is Treasury bonds and notes, Treasury bills, silver, gold. That's exactly what you saw today - the back of the curve up a little (but way off yesterday's high), the front up a lot, silver and gold exploding. The only reason silver outpaced gold was that it's been beaten up so badly. Own both, but never forget that in extremis, gold is the only game in town. You won't make anything on it, but it'll hold its value through anything.

2008 Sep 18 12:30 AM

[BxCapricorn:]

Even if you don't invest in gold or silver, you have to frequent the websites dedicated to this investment, to round out your education on how financial systems work. Most of the "gold bugs" were years ahead of the average investor in spotting the October 2008 market crash (oops, gave it away again) and some of their ideas provide hours of entertainment. It's also fun to watch CNBC when gold and silver rises, to see the "talent" stutter and psycho-babble.

2008 Sep 18 03:40 AM

[BxCapricorn:]

One more thing. When you're watching the Discovery Channel and some treasure hunter brings up gold coins, do you ever notice how disappointed everyone on deck is? They realize that if it had been paper money, properly contained, the value of the "find" would have been so much greater. Gold, all covered with barnacles and sea water, is dam near worthless.

2008 Sep 18 03:44 AM

[BxCapricorn:]

www.ecb.europa.eu/pres...

Now this is an excellent example of why gold and silver are moving upward.

2008 Sep 18 03:49 AM

[User 30121:]

Hey D Johnson: HOW MUCH GOLD did you sell? Moreover, WHERE did you get silver and HOW MUCH did you pay? No BS, please.

I have 300 oz gold, willing to turn into silver bars. Any takers????

2008 Sep 18 12:50 PM

[ChicagoMark:]

In bull markets silver outperforms. In bear markets gold outperforms. When there is a major sell-off silver will get hammered harder than gold. When prices run up, silver will move quicker.

Silver is the "poor man's gold" and has been money for as long as gold. Right now physical silver stocks are vastly less than gold. Eventually, that will have to correct itself.

2008 Sep 18 01:29 PM

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2008 Sep 26 11:57 AM

[Ken Owusu:]

Ken Owusu

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2008 Oct 06 06:38 PM