Swapping Gold for Silver Has Historical Merit

Precious metals investors are very much in tune to the silver to gold ratio. The ratio, which commonly trends between 20:1 to as high as 70:1, should be used as a guide to determine which precious metals will rally and when. Today, silver is at the top of the silver to gold ratio at just over 62:1, so according to history, those who swap their gold today will see higher appreciation in silver in the months and years that follow.

Swapping for Greater Appreciation

We’ll have to travel in time back to 2003 to find a time when the gold to silver ratio was even remotely close to where it is today. In 2003, the ratio peaked for the last time at nearly 80:1. Since that time, gold has risen from $320 per ounce to $1240 per ounce. Silver, on the other hand, has risen from $4.80 to more than $20 per ounce. Silver racked up a 416% gain in seven years while gold lagged, but still beat any other market with a 387% gain.

Going back even further to 1992, silver was selling for an average price of $4 per ounce while gold traded at right around $350. That puts the ratio at roughly an average of 85:1 throughout the year. From 1992 to 1998, when silver reached its recent average ratio to gold, silver soared as high as $7.80 per ounce. Gold, however, stayed moderately flat, advancing no more than 20% and ending the year of 1998 exactly where it began six years prior.

Hold on for 40-50:1

History is ripe with examples where silver, once it tops out on the silver to gold ratio at 70:1, goes on to outperform gold in the long run. Investors buying silver here at roughly 62:1 still have plenty of appreciation ahead of them, especially if gold continues to trudge a few dollars higher each month to test new highs. However, even without advancement in the price of gold, silver investors should prepare for prices as high as $28-34 per ounce before even beginning to ponder a switch back to gold from silver.

Of course, much of this methodology relies on the continuous advancement of silver prices. Luckily for silver investors, the big institutions are cutting back on their shorts (as a requirement of new laws and regulations concerning proprietary trading desks) and will not have the same stranglehold on the market that has persisted since the day gold and silver holdings were legalized.

Now more than ever, appreciation in silver bullion prices is only a matter of time, nearly guaranteed as a result of a changing market structure and a sky-high silver to gold ratio. When investment bank activity shutters for good in October, expect a surge in prices never before seen. Silver’s previous seasonal autumn runs will look like blips on the radar, and many investors are positioned well to become filthy rich on the climb. If you haven’t already, consider swapping a portion of your gold bullion holdings for physical silver, as history is on your side.

price of gold : What really controls the price of gold?

If you were to ask your average person the question: “what drives the price of gold up or down?” they would probably give you an answer that has been told to them for years: the value of the U.S. dollar entirely dictates the value of gold. This is often one of the biggest misconceptions in the modern, globalized economy. While it may have been true twenty years ago that the value of the U.S. dollar (primarily due to inflationary cycles) was the sole indicator of the value of gold, it is no longer the case.

Today, everyone has their own theories as to what controls the price of gold. If the economy worsens, then the price of gold should increase. If the economy improves, then the opposite should occur. If interest rates are low, then gold will rise. If interest rates are high, gold will fall.

You get the idea, right?

Clearly, these all cannot be true—at least not simultaneously. History has shown us many instances where our commonly-accepted economic rationales for the value of gold simply do not hold true. For instance, there have been many periods where the strength of the dollar has improved, yet the value of gold has increased as well. Likewise, such as in 1989, interest rates were high yet gold was as well. Moreover, certain concepts of supply and demand—the very backbone of economic theory—don’t apply either. At the end of 2009, when the IMF released nearly 400 metric tons of gold for sale, the price of gold continued to rise. Despite an increase in readily available supply for consumption, prices did not fall.

What gives, then? What is the correct answer?

If we use the old macroeconomic adage of “if everything else is held constant, then this theory is always true,” each theory could be correct at any particular moment in time. Unfortunately for theories, the real world is a different animal entirely. There are, quite literally, hundreds of factors which can dictate gold prices. In this globalized economic world, almost every commodity has its value based to some degree on the value of every other commodity, with particular emphasis given to complimentary commodities (i.e., gold and precious minerals such as diamonds). World crises, domestic economic crashes, foreign economic crashes, foreign credit market collapses, domestic credit market collapses—these all would lend one to believe that the value of gold would increase.

There are, however, daily indicators of the value of gold. In addition to the value of the U.S. Dollar, it’s important to look at the price of other commodities which are essentially large enough to be their own individual markets, such as petroleum. On the grand scheme of things, the largest factor driving the price of gold may be civil and foreign conflict, but to judge this on a day-to-day scale becomes impractical.

Ultimately, it comes down to one reality. Every nuance of the world economy affects the price of gold. The difference, of course, is that gold sometimes does not act like other commodities with respect to economic principles. But this is because it isn’t just another commodity.

Gold is money.