Why Silver is More Precious Than Gold
February 10, 2009
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RELATED TICKERS: CEF
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From the beginning of my contributions here at The Fool, I have expressed my conviction that silver offers far more upside potential than even gold for Fools seeking precious metals exposure. By no means do I advocate targeting exclusively silver in place of gold, but I maintain that silver makes the perfect complement to gold exposure, and ought not be overlooked.
See this 2-year chart comparing the relative performance of gold vs. silver, expressed via the proxy ETFs for convenience:
Now, at the worst levels of this precious metals correction (which is now over in every major world currency except the USD), the gold:silver ratio surpassed the 80 mark, which signalled to me that the time was right to be heavily weighted in silver. I created the 'silverminer' CAPS profile on 11/19/08, and the result has been fairly positive so far, but I mention this only to highlight the trend in play. You see, even at today's ratio of 70 following silver's recovery from $9 to over $13, I believe silver still has plenty of room to run to normalize this at least towards the 50 level for starters. Later in this precious metals bull market, I expect the ratio to approach 20:1. That would mean silver at $45 today at present gold prices, but I believe that ratio will be reached when gld is sugnificantly higher than where we are today.
If silver reaches the 20:1 ratio near my extremely conservative gold price target of $1,650, that would give us $82 silver. With long-term expectations like these, now you see why I remain so heavily allocated in precious metals.
Coming back to the near-term, though, I avoid speaking to the very near-term because absolutely anything is possible within a short timeframe when entire markets are manipulated to the degree that these markets are. That being said, the manipulation efforts must ultimately fail, and I expect gold to move very bullishly past last year's high and up toward $1,250 in a way that will surprise even many gold bulls. We could see some weakness before that occurs as last-ditch efforts to contain the price are executed, but I believe such an effect can not last long. At $1,250 gold, a 37% rise from today's price, I expect silver to trade well into the mid $20s, for a gain of more than 90%. This would of course correspond to a simultaneous drop in the gold:silver ratio to around 50:1.
See this long-term chart of historical gold:silver ratios charted alongside the silver price chartfor a reference. A target ratio of near 20:1 is my rationale for having heavy exposure to silver for the long haul, but I believe even Fools with a shorter time horizon can consider riding the mid-term trend from the current 70:1 ratio to about 50:1. I see a big year ahead for silver once gold breaks out in USD terms the way it has already in the other currencies.
I have said elsewhere that most ratios mean little in this chaotic environment, but the gold:silver ration will always be an important one for precious metal investors to follow, because ultimately these metals are called precious for a reason. Within the Earth's composition, it is estimated that gold and silver exist in a ratio of 16:1. Food for thought, if indeed markets always seek out true value over time.
Fool on!
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