As Gold/Silver Price Ratio Continues Plunge, What to Purchase

Includes: CEF, GLD, SLV, TIP
by: Kirk Lindstrom

With silver prices continuing to make new highs while gold has not made a new high, the gold:silver price ratio plunged to a new low dating back to 1983! The gold-to-silver price ratio, defined as the price of an ounce of gold divided by the price of an ounce of silver, closed Monday at 37.99. This means an ounce of gold is now less than 40 times more expensive than an ounce of silver.

3-Yr Chart of Gold Silver Ratio
(Click to enlarge)

My next chart shows that back in 1991, gold was over 100 times more expensive than silver. Since then, the gold-to-silver price ratio never went below 40 until earlier this month, March 2011.

Chart of Gold Silver Ratio 1981 to Now

(Click to enlarge)

This chart also shows that the gold:silver price ratio at 38.29 is now at a 28-year low.

The 30-year low for the gold:silver price ratio is 31.97, reached almost 28 years ago during the first half of 1983.

One of the safest and easiest ways to trade gold and silver is through an ETF. The fund managers buy and store the metal for you so you don't have to worry about storage costs or security. The major disadvantage is that if the whole financial system melts down, you may lose access to your investment. For that reason, many who want to hedge for an "Armageddon" type event buy gold and silver bars and coins.

Comparison of SLV to GLD as of 3/30/11

GLD: $138.36
According to Seeking Alpha, the SPDR Gold Trust ETF has:
Expense Ratio of 0.40%
Average Bid Ask Ratio: 0.01%
Tracking Error: 1.06%
Concentration Risk of 100.00% (All assets in gold)
More here
Yahoo! says GLD has Net Assets of $51.89B (As of Feb 28, 201, Last month $57.21B)

SLV: $36.43
According to Seeking Alpha, the iShares Silver Trust ETF has:
Expense Ratio of 0.50%
Average Bid Ask Ratio: 0.04%
Tracking Error of 2.50%
Concentration Risk of 100.00% (All assets in silver)
More here
Yahoo! says SLV has Net Assets of $11.48B (As of Feb 28, 201, Last month $9.34B)

Some of the differences between the two expense ratios are probably related to the difference in storage costs. It takes far less space to store $1B worth of gold compared to $1B in silver.

Current Holdings: Personally, I own a very small amount of gold hidden in the house for bribes if we see Armageddon. I also own silver coins for a similar purpose. For inflation protection, I own individual TIPS "treasury inflation protected securities" and Series I-Bonds. I recently sold my managed TIPS mutual funds (FINPX, VIPSX) after the recent surge in TIPS had the spread for the 5-year near record negative lows.

Considering for Purchase:

#1 If the base rate for 5-year TIPS retuns to a positive level, I may buy the TIPS ETF TIP rather than the managed funds I recently sold.

#2 To avoid a possible "Collectibles Tax" explained in my SeekingAlpha article "Gold/Silver Price Ratio at 27-Year Low," I may take a position in the "Central Fund of Canada Limited" (NYSEMKT:CEF), which is about 60/40 gold/silver bullion but I have no specific targets at this date.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.