Gold:Silver ratio Revisited

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Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Gold:Silver ratio Revisited

I'm starting this topic because I know we have many gold and silver investors on the site, and the the breakdown in correlation between gold and silver in the past few days clearly has great significance.

Exactly what the significance is... well, that's a much harder question. I basically see two very plausible arguments:

The big move up in gold despite the fact that the DX was moving much higher at the same time is a strong signal that the market is now viewing precious metals as a safe haven investment. Gold understandably moved first, because investors in panic tend to opt for the most obvious choice available to them. But silver would actually have been the better choice because it's not nearing all-time highs like gold, and it has much more upside potential. Just as silver lagged gold in another large price move about a week ago, we should interpret silver's non-performance as an incredible buying opportunity. Gold already broke out and silver will be next. BUY BUY BUY silver!!! It is lagging Gold, creating the buying opportunity of a lifetime.

Or, equally plausibly...

The fact that in the face of a rising DX gold moved higher but silver, like other commodities including oil, showed poor performance is very telling. It shows us that gold will be seen as a monetary asset capable of reversing its historical inverse relationship to the DX, whereas Silver will continue to be seen as an industrial metal that happens to be rare. Precious metals speculators motivated by a negative view of fiat currencies should SELL SELL SELL silver. It is about to collapse in price as investors realize it will not be seen as a monetary asset, but it hasn't collapsed yet. The selling opportunity of a lifetime is to get out now while you still can!

I wrote those two scenarios to show how much room I think there is to subjectively interpret this market, all within the realm of plausibility. I'm convinced Gold will continue to move higher as the currency crisis that started in Greece spreads across Europe and beyond. Whether Silver moves with gold after a delay or craps out as people figure out gold is the real play is a complete question mark in my mind.

Thoughts?

Erik

 

Morpheus's picture
Morpheus
Status: Diamond Member (Offline)
Joined: Dec 27 2008
Posts: 1200
Re: Gold:Silver ratio Revisited

Erik. My investment group had this chat yesterday. It appears that gold is actiing more like "money" and silver is acting out it's commodity personality, with it's downside limited by it's dual personality as a monetary metal. We agree with the premise in #2 that silver is being a commodity right now. , except that we think Ag is in a lag mode. As Au continues to rise, the bastard sister we think will start to march in lockstep as an affordable alternative to gold. In other words, we think it's very possible that Ag's persona might flip to the monetary aspect as gold buyers get priced out. 

In fact, we're making moves in gold now with anticipation of plowing heavily into silver in the very near future. 

Just my unqualified 2 cents. 

 

* Disclaimer: I am not a professional advisor. If you take advice from me without consulting a professional investment counselor than you're a nincompoop. LOL ;) Disclosure: Gold, Silver, Mining stocks. 

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Gold:Silver ratio Revisited

Silver:Gold Ratio

Looks to me like the silver:gold ratio just hit the top of its range. The reason silver has underperformed gold is because we are in a deflationary environment. 

 

Morpheus's picture
Morpheus
Status: Diamond Member (Offline)
Joined: Dec 27 2008
Posts: 1200
Re: Gold:Silver ratio Revisited
JAG wrote:

Silver:Gold Ratio

Looks to me like the silver:gold ratio just hit the top of its range. The reason silver has underperformed gold is because we are in a deflationary environment. 

 

True. Silver struggles in deflation where gold rules the roost under either scenario. 

compinthegroove's picture
compinthegroove
Status: Silver Member (Offline)
Joined: Nov 8 2009
Posts: 113
Re: Gold:Silver ratio Revisited

Opinions abound.  Here's my take...

Gold is not a hedge against inflation.  It's a hedge against government.  Silver is not a primarily industrial metal that happens to have a history of being money.  Silver is a monetary metal that happens to have industrial uses.  If we accept the premise that the mainstream media does not tell the truth, we can set ourselves up to see through the spin.  No doubt some of you will disagree with me on this, but consider that 1964 and 1971 weren't that long ago.  Many here in the US remember having a gold standard and silver coins.

The recent rumors of a civil/criminal investigation into the dealings of JPM by the Justice Department have many in the blogosphere wondering if the recent price moves in gold and silver were the result of the bank being skiddish about flooding the paper markets with contracts to clamp the prices down.  Maybe, but I'm not holding my breath.  All the recent shenanigans going on in Washington don't warrant any trust that anything meaningful will be done.  This is just another side show to keep people at the circus.

I think that silver will outperform gold, but I have this feeling that we might not see it played out in the futures markets.  Gold is already too expensive for the average Joe, so he will turn to silver.  The average Joe won't bother with the futures market- he has neither the money nor the stomach for it.  He's going to go to the coin shop and buy whatever he can afford.  There are way more average Joes out there than rich folks, which would cause premiums to soar higher for silver than gold in the physical market once the average citizen loses faith in the currency.  To me it seems plausible that this is where we'll see the gold/silver ratio drop.

Comments welcome.

 

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