Should I invest in Silver or Gold? Silver over Gold? : Bad Credit Advisor

Should I invest in Silver or Gold? Silver over Gold?

Invest in silver over gold? I say, it's a wrong question to ask. Either metal will do well in the near future. A more appropriate question would be: which metal has more upside potential? Silver does. The current gold-to-silver ratio is just above 60 while the 'normal' ratio in the times of stable economy is around 50. The silver prices are currently depressed because of lock of interest from private investors, funds and central banks. This is about to change - at the times of unusually high inflation this ratio was as low as 15, history shows. A hyperinflation is upon us... So, for greater leverage you should invest in silver over gold.

Just observe these three events dating from a few months back to today: the Chinese government strongly 'encouraged' people buy Silver in addition to Gold, the world renowned investor Jim Rogers said he prefers Silver to Gold, and most importantly, the first Silver TV commercial aired today (at least I saw it first today)!

This is why we write this today... Because for the first time we saw The Silver TV commercial, specifically encouraging to buy silver bullion, not gold bullion, and this is in comparison to a multitude of gold commercials running for some time now. We believe this is a tipping point in silver's behavior - it signals that the general public interest in silver is about to increase. This commercial came only a day after an unusually huge (over 5% up) move in silver prices. What a 'surprise' ... not.

Now, we need to admit that historical price data only serves as guidance to what may happen in the future and is not a given. This means that any talks about gold:silver ratio being reduced to 15 at the times of high inflation is only a possibility and not a guarantee. What remains 100% predictable is human behavior: just as investors drove silver prices to the moon in the 70's they're expected to do at least the same this time around ;-) The chart below proves it - the gold over silver ratio is in the downtrend. Only this time there is less silver in the world than it was in the 70's, as we've learnt, and the inflation is a hyperinflation. How low will the ratio go is anybody's guess...

We believe the individual investors' lock of interest in investing in silver is mainly explained by two myths somehow supported by the media and industry analysts: (1) silver is not money and (2) silver, in contrast with gold, has mainly industrial use and thus is affected by economy (demand/supply ratio) more than gold, just like copper or aluminum. All these are close to nonsense.

Silver is money. Are you telling me that no one will exchange food or other goods for silver? Of course they will. And what about the Silver coins? Are you telling me those shiny round slices of precious metal have no value of money and that I cannot exchange them for paper money? You know it's not true. I can go to any coin shop or certain banks and exchange them for cash. Why do they call them Silver dollars then?

Silver prices always follow Gold prices. For the last three years that I've been watching Silver and Gold prices daily I've seen no real discrepancies in behavior between the two. Silver follows gold 99% of the time. At times silver moves slower than gold and at times it's faster than gold but it always follows it in parallel.
Then why the ratio fluctuates so much? Because silver market is much smaller than gold's (only a very few contracts traded daily) and this causes much larger moves in prices which in turn causes drastic changes in gold:silver ratio. On some insignificant days, silver gets almost no trades because all attention goes to gold first.

But the gold to silver ratio alone is not any indicator of the direction of the silver prices. Thankfully, gold is in the bull market and its price is going up, and so is silver ;-)

Just remember, by itself Silver is not a driver, at least it hasn't been in our life time. It has been my experience that it needs gold to move first. So far all these talks about it having its own life by being an industrial metal and the facts that the existing silver mines have been depleted and more talks about its demand/supply ratio affecting its price ... showed no signs of affecting The Price. It's a Gold's cheap copycat and nothing more... Without gold silver won't be of any interest to investors at all. This may change one day but not yet ... not yet. Still, it proves one thing though - Silver is money just like Gold, only cheaper money.

Tue Nov 17, 2009 10:11PM by Tony | More in Personal Finance | Comments (0)

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