Sharp Rebound in Gold/Silver Price Ratio After a 30-Year Low

by: Kirk Lindstrom

The price of silver has plunged while the price of gold continued higher. This caused the gold-silver price ratio to rally sharply. 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 Thursday May 25, 2011, at 40.26. This means an ounce of gold is back over 40 times more expensive than an ounce of silver.

Last month I pointed out that the soaring price of silver caused the gold-silver price ratio to plunge below its 30-year, 1983 low of 31.57 to 31.44. (See Gold / Silver Price Ratio Just Below 30-Year Low) Amazingly, that turned out the be the low.

(Click charts to enlarge)

3-Yr Chart of Gold Silver Ratio

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 March 2011. Then in May 2011, the gold-silver price ratio got as low as 31.44 before rebounding back over 40.

Chart of Gold Silver Ratio 1981 to Now

This chart also shows that the gold-silver price ratio rallied back to 40.16 after falling below a 30 year low of 31.97 to 31.44.

How to trade

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 will buy gold and silver bars and coins.

Comparison of SLV to GLD as of 5/25/11:

GLD: $153.61 - (up 3.1% from $148.92 four weeks ago)

My favorite GLD Charts and Intraday GLD Chart

According to Seeking Alpha, the SPDR Gold Trust ETF has:

Expense Ratio of 0.40%

Average Bid Ask Ratio: 0.01%

Tracking Error: 1.00%

Concentration Risk of 100.00% (All assets in gold)

Yahoo! says GLD has Net Assets of $60.68B (As of April 30, 2011)

SLV: $36.92 (down 20.9% from $46.70 just four weeks ago!)

My favorite SLV Charts and Intraday SLV Chart

According to Seeking Alpha, the iShares Silver Trust ETF has:

Expense Ratio of 0.50%

Average Bid Ask Ratio: 0.03%

Tracking Error of 2.71%

Concentration Risk of 100.00% (All assets in silver)

Yahoo! says SLV has Net Assets of $17.3B (As of April 30, 2011)

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

Current Holdings: Personally, I own a very small amount of gold and sliver hidden in the house for bribes if we see Armageddon. I also own some silver and gold coins mostly as a collector but they would serve as currency in a disaster. 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 and used some of the funds to buy a new, individual TIPS with a positive return relative to inflation.

Considering for Purchase:

  1. If the base rate for 5-year TIPS returns to a positive level, I may buy the TIPS ETF TIP rather than repurchase the managed funds I recently sold.
  2. To avoid a possible "Collectibles Tax" explained in my Seeking Alpha article "Gold/Silver Price Ratio at 27-Year Low," I may take a position in the "Central Fund of Canada Limited" (CEF), which is about 60/40 gold/silver bullion but I have no specific targets at this date. So far, the tech stocks I would sell to raise "speculation cash" have done better than gold or silver, but I plan to take profits in them soon and may use the cash to purchase CEF if we see a significant market correction.
  3. Perhaps a commodities ETF like CRBA or CRBQ. Unlike gold and silver, I like how the stocks in those funds pay dividends.

For now, I am happy with my equity portfolio trouncing inflation with stocks like General Electric (GE), Intel (INTC,) Microsoft (MSFT) and Pfizer (PFE) that can raise their generous dividends while my fixed income allocation is safely in TIPS, iBonds and Cash. You can get as much as 1.15% with no risk for cash (see Best Savings Account Rate Survey) which is far better than someone who bought silver four weeks ago and is sitting on a 20% loss!

Disclosure: I am long GE, INTC, MSFT, PFE.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here