Is The Gold / Silver Ratio Signalling A Switch?

December 5, 2010 | By | Reply More

Gold IngotSpot gold spent the week meandering upwards until Friday when it surged through $1400 an ounce to close at $1414 an ounce a rise of $27 from the low of the day. Meanwhile silver, true to form, rose even faster, from $27.00 an ounce to end the week at $29.36, up 8.7% compared to gold at 3.7%.

Historic Ratio

The gold/silver ratio spent most of its time at under 50, just lower than the forty year average of 54. Back in January 1980 silver hit a peak of $50.00 an ounce eventually averaging out for the year at $20.98 an ounce (remember the Bunker Hunt Bros trying to corner the market). The average ratio for that year was just 29.29.

An attempt to corner the silver market is hardly likely to be repeated so that 29.29 ratio must be thought of as a “one off”  not likely to be repeated whereas a ratio in the mid forties has some historic precedence as favouring gold over silver.

Switching from silver to gold

The reason we have brought this to your attention is that we are considering the merits of switching our silver holdings into gold when and if the ratio moves into the 46 to 48 range. Our long term silver exposure has profited at more or less twice that of our gold due to its volatility and smaller market but of course that makes it more vulnerable if the present and long standing upward trend stutters or reverses.

Insurance

That difference in volatility would result in a larger potential downside for silver than gold. The switch when  the ratio is below the forty year average should result in a measure of insurance and get out time should the ratio drift back above 55 or so.

Long term Upward Trend to Stay in Place

Here we have to be careful not give the wrong impression as we do not think that the longer term upward trend for both precious metals is vulnerable, particularly in view of this weeks events.

Fiat Currencies Undermined

The fact that gold and silver have continued their ascent in the face of the Dollar see sawing up and down is strong evidence that confidence in the Dollar, Yen, Euro and Pound continues to ebb with no light at the end of the tunnel that their respective governments are likely to alter their determination to continue to undermine the value of their currencies.

Gold in Demand

Heightened tensions in Korea and the Middle East, the Chinese lifting the ban on private investment in gold sector stocks, ETFs etc, India back in the picture with increasing demand for gold at current prices, worsening outlook for housing, jobs etc in the US and not forgetting the debacle of the Irish bail out soon to be followed by Spain, Italy, Portugal and now some previously unheard rumblings from Belgium, are continuing to put the Euro in serious jeopardy.

Nearly forgot to mention that China and Russia have now committed to their own currencies in trade between the two, more than the tip of the iceberg comes to mind!

Gold Favoured by BRIC and other Wealthy Nations

The other factor that is persuading us to consider switching is simply that gold is the metal that is being stockpiled as a hedge by Governments with cash to spare, particularly now US and other treasuries are swamping the market with their deteriorating currencies.

Options

We had hoped to pick up some $28 Feb calls in the Ishares Silver Trust (SLV) a couple of weeks ago when we saw the ETF drift through $25 so put our order in at $24.50 but missed out by 30 cents or so.That’s the trouble with trying to follow our own advice by buying when there is a pullback in an uptrend, you can so easily lose out by hanging on in for that bottom price.

At least we have some SLVApril $24 calls that stand us in at zero and some $28 Feb calls showing a nice profit thanks to this weeks silver price action that we bought when it dawned that $25.00 was not going to be breached again in a hurry.

The long term trend remains in place for gold and silver, our advice is to continue to buy when the eventual pullbacks occur but try not to repeat our mistake by waiting to long for a bottom. Not easy by any stretch of the imagination but remember “the trend is your friend”.

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