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XMFSinchiruna (27.56)

Why Silver is More Precious Than Gold

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February 10, 2009 – Comments (14) | RELATED TICKERS: CEF , SLW , CDE

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! 

 

14 Comments – Post Your Own

#1) On February 10, 2009 at 11:15 AM, Bays (30.10) wrote:

Thanks again for pointing me in the right direction with SLW....

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#2) On February 10, 2009 at 11:32 AM, kaskoosek (83.61) wrote:

One very importnant chart is missing.

Silver production versus gold production.

It will explain the discrepancy in the ratio.

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#3) On February 10, 2009 at 11:41 AM, 100ozRound (29.37) wrote:

My Silver Philharmonics and Maple Leaves arrive today!

 

WooHoo!

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#4) On February 10, 2009 at 11:48 AM, XMFSinchiruna (27.56) wrote:

kaskoosek

With all due respect, that has nothing to do with the behavior of the ratio over the past year. In fact, the number of base metal mines idled or delayed by the recent collapse in global industrial activity while gold's relative strength has kept gold miners operating full speed ahead (for the most part) should have acted in the opposite direction... bringing the ratio down rather than up above 80 at the height of the price weakness. 

Silver's dual role as an industrial metal as well as a monetary (precious) metal led to some increased weakness from the global downturn vis-a-vis gold, BUT... the lion's share of silver's bigger move downward has far more to do with the slingshot effect. Silver throughout modern history generally provides leverage (the natural kind) to price movements in gold to either direction. Often lagging gold's bull moves, it generally outperforms those moves before the trend reverses. The same is true to the downside, of course, and so it comes as no surprise for a 30% correction in gold to be accompanied by a 50% correction in silver, for example. 

By all means, post comparitive production figures if you have them handy, and I will be happy to comment on them. Be sure to consider comparitive demand too, though, which is another can of worms entirely (since gold is becoming more difficult for the average investor to afford). 

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#5) On February 10, 2009 at 12:32 PM, djemonk (< 20) wrote:

my extremely conservative gold price target of $1,650

That doesn't sound conservative.  I'll give you "extreme", though.

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#6) On February 10, 2009 at 12:46 PM, XMFSinchiruna (27.56) wrote:

djemonk

:)

Shall we meet back here in a year and see where we stand?

Permit me a brief little rant, and please don't take this personally on any level. This was just my gut reaction:

Dismissive comments that offer no counterpoint nor rationale do nothing for me. Debate if you wish; express your convictions for a reasonable target for gold and why, by all means; but I'm all done sitting idly by while the masses dismiss rational targets for gold as "extreme".

I took it in stride when people dismissed my $1,650 target back when gold was trading around $600 in 2007, but now that the entire global financial system has fallen to its knees and the dollar has been shot into twenty trillion pieces, comments like that will no longer be taken in stride unless they are accompanied by well-reasoned arguments to the contrary. 

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#7) On February 10, 2009 at 1:18 PM, djemonk (< 20) wrote:

Fair enough.  I've just been reading into gold miners' projections and gold analysts, and the bulk of them are targeting $1000/oz.  The only people I see going over about $1300/oz with their projections are goldbugs who have always been saying that and financial analysts who are jumping on board the gold bubble.

Yes, I said it.  I think we're seeing a bubble here.  The mania for gold reminds me very much of the housing mania over the past few years and the tech stock mania before that.  I don't know what bubbles were pre-1999 as I was in college then, so from my perspective I guess it was the beer bubble.  I liked that one.

When I start seeing poorly produced commercials with lots of bright colors and moving images talking about some form of financial investment, I get out.  I get out fast.  I was buying gold miners in 2000 instead of tech stocks.  Now I see the Cash4Gold commercials featuring B-list celebrities and blog-after-blog talking about the value of gold.  It looks like a bubble, it sounds like a bubble, and it feels like a bubble. I don't know what the price of gold will be when the music stops playing but I am confident that the music will stop playing.

I'm a big fan of silver as a precious metal, but I think it's wiser to be long on base metals once the current deflation-esque environment slows down. Gold is for traders right now, in my opinion.  And traders may do well.  I wouldn't be surprised to see gold go over $1000 this year but I wouldn't hold out for $1650. If we get to that level of systemic fear then measuring things in dollars may no longer be meaningful.

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#8) On February 10, 2009 at 4:16 PM, StatsGeek (29.27) wrote:

In a meltdown scenario where paper money is recognized as being worthless, gold's value (expressed in paper money) becomes infinite.

I don't think $1,650 is extreme.  Not even close.

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#9) On February 10, 2009 at 4:30 PM, jgseattle (31.26) wrote:

dj & Sinch

I agree with DJ that gold does have a bubble feel to it.  With the debate about deflation and inflation.  The amount of debt being created and the money supply being expanded people are fearful.  Could this be a bubble?  Yes.  However, if you think even a 10% chance is out there for a dollar debasement then the bubble may be justified. 

I hate putting my money (RM) into hedges but I have 15% or so of my portfolio in gold and silver plays.  (both stocks and bullion)  Will it prove to be a bad investment?  Never!  Because it helps me sleep at night while the economy determines where it will head with me being prepared.

 

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#10) On February 10, 2009 at 5:11 PM, Jimmy2008 (< 20) wrote:

I have more than 50% of my portfolio in PM, both in physical and stocks. So far, so good. I extect to keep purchasing power instead of making money.

It helps me sleep better, too.

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#11) On February 11, 2009 at 3:09 PM, tfirst (27.61) wrote:

Gold won't go up until the fed can print money faster than it is being lost. I don't think the presses have stopped since this whole thing began.

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#12) On May 30, 2009 at 8:00 AM, rich3800 (< 20) wrote:

Any predictions for the price of silver?

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#13) On May 30, 2009 at 8:08 AM, rich3800 (< 20) wrote:

dj,

When the music stops playing, there may just well be a civil war. :-( 

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#14) On May 30, 2009 at 9:28 AM, XMFSinchiruna (27.56) wrote:

djemonk

There's still time to shift your paradigm, but perhaps not much time.

For the record Cash4Gold wants you to SELL your gold, not buy it! So there's nothing supportive of bubble talk in that. Quite the opposite, the average joe who doesn't grasp the fundamental picture for gold in the context of a deteriorating USD is getting systematically fleeced.

You are absolutely mistaken about gold being appropriate for traders. Quite the contrary ... gold is NOT suitable for traders, but is rather recommended only for longer-term investors willing to look past near-term volatility in the knowledge of where gold is heading.

You're also mistaken about gold projections... there are scores of $1,500+ projections out there from brokerage houses, etc.

rich3800

I've been calling for $50 silver since I first started here on CAPS in 2006. I may collect a portion of profits at about $30, depending upon how the macroeconomic picture plays out.

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