The current price of gold and the price of silver – the silver:gold ratio – continues to hover around the 67:1 range which is way out of whack with the historical relationship between the two precious metals. It begs the question:
“Is now the perfect time to buy silver instead of the much more expensive gold metal?”
It is critical to step away from all the noise and clutter that passes for knowledge and take the time to gain perspective on where the price of gold and silver are in terms of the ‘big picture’, i.e., where they are in respect to their historical relationship with each other over the long, medium and short term and, based on those relationships, how they might perform in the future.
Gold
We are now in the very early stages of Stage Three with gold having gone up 24% in 2009 and up 13.3% in the first 6 months of 2010. As such there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year (from a $216.55 closing price on Jan. 1, 1979 to a closing price of $843 per ounce barely a year later on Jan. 21, 1980) and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks! A 289% increase in the price of gold from $1250 would put gold at $4,866. That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched.
Silver
Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle. The 49% increase in silver in 2009 attests to that in spades (albeit up only 10% in the first 6 months of 2010). During the last parabolic phase for silver in 1979/80 silver went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the current price for silver would represent a future parabolic top price of $155. Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.
Silver:Gold Ratio
How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time which is called the silver:gold ratio.
Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attests.
*Now is the best time to buy all things silver!
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