Gold VS Silver

Contrarian Profits reports that bullion banks increased their net short position by a staggering 21,939 contracts.
(emphasis mine) [my comment]

Gold o.i. was exactly as expected...with the bullion banks going short against every long...effectively stopping the gold rally in its tracks. The bullion banks increased their net short position by a staggering [but not surprising] 21,939 contracts. The bullion banks are now net short 204,226 contracts...20.4 million ounces. The full-color COT graph for gold is linked here.

We are now sitting with a COT structure that is bullish to very bullish for silver...and very bearish for gold [perhaps, but I believe that gold might become even more overvalued in regards to silver in the short run]. This situation has only existed a few times during the last ten years. Ted suggested [and not for the first time] that maybe 'da boyz' are trying to permanently separate silver and gold prices so that silver will rise independently of gold [Not sure I buy this argument]. That's possible...but we'll have to wait and see if it pans out that way.

SLV (silver ETF)


GLD (gold ETF)


From comparing the 3 year charts of GLD and SLV, it appears that silver prices have been much more successfully suppressed then gold prices.

Since gold and silver hit their highs in March 2008, gold has mounted three convincing attempts break higher, while silver on the other hand hit a new three year low. Historically silver has traded at around one fifteenth the price of gold, which would make silver very undervalued today. On the other hand, if silver is so undervalued, why is it struggling so much compared to gold? Or, perhaps a better question, why has the suppression of silver been so much more successful than the suppression of gold?

Maybe commercial demand for silver has been hit harder than it was for gold. In any case, I own both gold and silver, and I expect all precious metals to do very well over the next year. Silver will probably catch up to gold at some point, but it might not happen in the very short term.

A final conclusion that can be drawn from these charts is that gold, not silver, is more likely to ultimately break the COMEX. My bet is that buying by Swiss ETFs, Goldmoney, Bullionvault, etc is creating more stress for gold than silver, probably because the average investors is buying mostly gold.

Gold/Silver Ratio





Warning: the gold/silver ratio could rise higher in the short term

A lot of precious metal investors, including many readers of this blog, believe that silver is undervalued compared to gold and are buying silver. While I agree 100% that silver will rise against gold in the long run, I think it might be a different story in the short run. Consider the following:

1) Most investors are not familiar with gold/silver ratio, and don't realize that silver is undervalued.

2) Gold is regarded as less risky than silver market because:

A) Market for gold is larger and more liquid than silver market
B) Gold prices are less volatile than silver
C) Gold is better known than silver

3) Average investors will expect gold to do better than silver. In popular culture, gold is the undisputed king of precious metals ("gold standard", gold reserves, gold medals, etc...). For example, think about movies that deal with precious metals. How often is gold used vs silver? (Goldfinger, Die Hard 3, Three Kings, Pirates of the Caribbean, etc...)

4) Gold is seen as the traditional inflation hedge.

Because of these four reasons, when the dollar starts collapsing, the gold/silver ratio will probably head even higher as money floods into the gold market. Panicking investors, who have never owned precious, are likely to buy the familiar "safer" gold rather than the unfamiliar silver. It will probably look something like the panic into treasuries which happened in September/October of 2008, when investors poured into the "safest" US debt while ignoring other AAA-rated bonds. As a result, I expect the gold/silver ratio to continue moving higher until panic over the dollar reaches a peak.

After this initial panic-driven spike in the gold/silver ratio, silver will rise against gold over the next two years as the average investor becomes more familiar with precious metal markets and realizes how undervalued silver is.


Conclusion:
When the dollar collapses, gold will be the new "safest" investment. The gold/silver ratio is likely to head higher (maybe around 100) and then slowly fall over next two years as the dollar panic subsides (to under 50). Of course, this isn't guaranteed, as silver IS undervalued in relation to gold.

I would recommend owning both gold and silver right now. However, if the gold/silver ratio does head higher like I expect, that will be the true opportunity to switch from gold to silver.

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26 Responses to Gold VS Silver

  1. Anonymous says:

    Wow Eric,

    Nice post and thanks for your honesty in this post.

    It should people like Numonic, and Jimmy.

    Much respect to you Eric for this post.

    The Anonymous Coward

  2. Anonymous says:

    err, that was:

    It shouldhelp people like Numonic, and Jimmy.

    I know that Jimmy has been question things of late.

    Also Numonic, well you know Numonic.

    heheh

  3. gold has a use for jewelry and electronics. Does silver has so many uses?

    How about Gold up 18 today!

  4. Jeff Burton says:

    re movies

    Rise of the Silver Surfer
    Silverado

    and of course "The Silver Screen"

  5. Anonymous says:

    @Willcox

    Silver is a strong industrial Metal and has many uses. Look here for details: http://en.wikipedia.org/wiki/Silver

  6. Anonymous says:

    Keating

    Silver has many more uses as a metal than gold. The usage of silver is increasing with stuff like electronic devices and its antibacterial properties.

  7. Robert says:

    except probably they'll all pile into GLD and the price of gold will stay the same. :/

  8. Anonymous says:

    AG / Silver has huge industrial use (example those shinning skyscappers with reflective glass windows) when so called economic recovery happens - demand may outpace rising supply.
    Issue is hard to find/invest in real silver as retail investor with low overhead cost. obviously sore value in AU is much more than AG for size of my safe. enjoy all - silverbullet;-)

  9. Wejn says:

    Eric,

    I don't buy your "average investor doesn't know about silver" argument.

    During Y2K panic there was substantial explosion of premiums on junk silver (old out of circulation US silver coins -- 90% silver, 10% base metal (copper?)).

    That is IMO still deeply rooted in US system -- silver once was money. Just as gold.

    And even in other countries/cultures, for instance Mexico, silver played the role of money. And is still viewed as such.

    OTOH, situation in Europe is dire in this regard. And having to pay 19-20% VAT on silver certainly doesn't help (gold is VAT exempt all across EU).

    But, I think you underestimate the industrial use of silver AND the fact there ain't that much silver around as govt-owned stockpiles.

    Gold is dug out of the ground to be stored in vaults (except for tiny percentage processed as jewellery and for industrial purposes), silver is actually consumed in bulk by various industries. Best conductor of heat, best conductor of electricity, has anti-bacterial properties (ever wondered what "holy water"'s made of?), etc.

    Without silver you wouldn't have many of the high-tech luxuries we're so accustomed to (computers, cellphones, hi-tech batteries, guided missiles, etc). And it's disappearing fast. Apparently, silver's first element from periodic table to become extinct by 2020, according to US geological society. And recyclation ain't viable at today's prices.

    In closing:

    Everybody focuses on gold when thinking about precious metals. Which is exactly why it'll fly.

    Mainstream investors never buy anywhere near bottoms, do they?

    That's good enough reason [in itself] for me to prefer silver.

    Oh, and don't get me started on rare earths. ;-)

  10. dashxdr says:

    Eric I have a suggestion. Can you make it so anonymous posting on your blog is disabled?

    That would keep out the riff raff that has nothing insightful to contribute anyway.

    Just a suggestion.

  11. Anonymous says:

    @dashxdr

    Like you ever contributed anything, pff.

    Just because people with differing opinion come on here and voice that opinion doesn't mean they are wrong - all because you believe different from them.

    Besides, you should be willing to accept all viewpoints - its how a community thrives and grows.

    Learn some tolerance...

  12. dashxdr says:

    Here's the deal about anonymous posting.

    How can a corrupt regime destroy freedom of speech? I mean, when anyone can say or write anything?

    One way is to flood the communications networks with noise. So the voices of reason are drowned out.

    Imagine an army of people, paid by endless floods of fiat currencies, whose sole job is to spread noise and chaos on the internet.

    The same way the gold and silver and commodity (and pretty much every "market") is manipulated, how about manipulating public communications networks also?

    Get lots of anonymous people to write pro-Obama / socialist articles. Get lots of anonymous people to praise the government's spending programs. Get lots of anonymous people to preach the glory of collectivism.

    Yeah, maybe that's how one could do it.

    So perhaps eliminating anonymous posting might be a good idea...

  13. Numonic says:

    Well the way I look at it is Gold and Silver are practically the same as far as their commodity value(industrial uses) and you can get allot more ounces of silver than you can gold for the same amount of money today, so why not buy silver? That's the way I see it. I mean rarity is one thing but if gold and silver have the same uses then it really makes no difference how rare one is to the other. If you can do everything with silver that you can do with gold, then it doesn't matter which one is more rare. Certainly the money should be rare to have value but we're talking about gold vs silver and I'm just saying they are both practically the same as far as commodity value so I'm going to try to get as much as i can for my buck and the best way to do that is by buying silver. If you ask me which one do I think will have more value, I think the ratio will be very close as both have all the same uses. The fact that gold is one of the few yellow metals may have an effect and cause gold to be in more demand as far as jewelry and decoration but I think the era we're moving in will be more focused on gold's industrial uses more than anything else and since silver shares those same uses, I see the ratio of silver to gold as being very close. So I'm buying silver, it's like I'm getting more gold for my uck because of how silver and gold share the same properties.

  14. Numonic says:

    One thing you also have to realize is that the gold standard was also a form of fiat/credit. The price of gold was fixed to the dollar and the real value of gold was not realized even during the gold standard. Most people can't really talk about a capitalistic or non-fiat market in gold/silver because we can't even recall one. When was the last time things were priced in the weight of gold/silver without the govt. having a hand in controlling the price by fixing it to a piece of paper or promise? It wasn't during the gold standard because during the gold standard gold was fixed to a piece of paper and promise. So using the gold standard as a reference to gold's popularity isn't exactly a good way to measure how gold will move when credit/price fixing collapses. It will be something that the world hasn't seen since before the use of banking. Which is why i rely more on the commodity value of the metals than the popular history of the metals(although I also read that silver has a greater history of being used as money than gold does). That makes more sense since silver is in greater supply than gold. Some say gold is too rare to use as money. Yes it is possible to be too rare to be money.

  15. Anonymous says:

    @Numonic

    When you say that you're buying silver, what are you buying?

    Coins, bars?

  16. Numonic says:

    Coins, specifically 90% silver dimes. When prices start rising every minute I don't want to spend more silver than I have to so I'm getting the smallest size i can. It's a hyperinflation mindset.

  17. Bowtie says:

    Like the Article:

    Jim Sinclare has a countdown, to what I am not really sure. Check him out at http://www.jsmineset.com

    I have both gold and silver, much more silver than gold - mainly because its cheaper. I don't think silver can go much lower than about 10 bucks namely because those silver eagles say 1 dollar in legal tender. If silver actually dropped below 7 bucks I'd put everything I had into those silver eagles. Worst case i can use them as single dollars but i doubt that can happen. 90% dimes sounds like a good idea, i do have some of those and probably should be getting more but it has roosevelt on there and i cant stand to look at him. I have been buying numismatic gold coins recently. I do have bullion but i think the numismatic value may be worth it, who knows.

  18. Bowtie says:

    One more note on the 90% coins - i think when it comes down to it i want something that is easily identifiable as gold or silver. I'm not sure many people know that pre 1965 coins are 90% silver. I dont want to have to spend 2o min on my computer convincing people. So i'd take the silver eagles b/c its from the US government and its says 1 ounce fine silver. Most people trust that the government coins are real silver i would think... although it wouldn't surprise me if they weren't.

  19. Numonic says:

    Bowtie, the last thing people will trust when credit collapses is the government.

    People will learn how to identify silver. Trust/Credit will be destroyed so having a coin with it's weight written on it isn't neccessarily better. If you define the metal by what is written on it, you are taking the minter's word for it that what is written on the coin is the correct weight and purity and metal.

    Because silver will be in demand for it's industrial uses, it will be even harder to fake. The producers will be using the metal for it's industerial properties and if the metals aren't performing like they should, it will be easily recognized as not being the metal. There will be no room for shortcuts as we have been doing by substituting silver for copper. The only reason we were able to get away with using copper instead of silver was because we were coming from an era of mass production and entering an era of mass consumption where production wasn't as important or a main focus and so we could cut corners. In an era of mass production, silver will be in more need and more demand and there will be no room to cut corners by substituting silver for copper(a lesser efficient industrial metal). So the producers will know what is silver and what is not and because of that we will all have to know what is silver and what is not. These producers will know what metal is silver and what is not so those delivering silver to these producers will have to know what is silver and what is not, and the people giving it to the people giving it to the producers will have to know what is silver and what is not. So it will go like that and everyone will learn how to identify silver. It will not be able to be faked because silver has industrial uses and if what is being called silver isn't performing as silver, it will be recognized as a fake. Because the producers will have to know how to identify silver, everyone else will.

    The pre-1965 US coins will not be identified as silver by the date but by other methods such as look, sound and weight.

    Any so called silver that is not accepted won't be because it won't be recognizable, it won't be accepted because it will be recognized as NOT being silver.

    I admit i have allot of coins and I don't check each and everyone of them and I still use the credit/trust system of looking at the dates but there is a way to tell the difference between a 90% silver dime and the copper-nickel dimes we use today. I'm familiar with that method. I don't use it often after I buy the coins but I can tell the difference between the two metals. I'm sure I'll be using that identification method more as the price of silver rises higher.

    But the fact that the industry will be in need of silver, will be a verification for everyone as to what is silver and what is not.

  20. Anonymous says:

    Two unrelated comments:

    1) There is a significant difference between silver and gold. There are roughly 150 thousand tons of gold held above ground (mostly in jewelery). In comparison to that hoard, the remaining reserves of gold in the ground are relatively small. For that reason, the price of gold is relatively independent of the remaining mining supply of gold.

    The story with silver is completely opposite. There is little silver above ground in comparison to mining supply, so the price of silver does depend on the mining supply of silver. What makes silver a better buy than gold is the fact that the reserve life ratio (defined as the number of years the known reserves will last if present production continues to grow at the rate of 2% per year) is THE lowest among ALL metals. That ratio is just 12 years. Yes, silver production will collapse within 2 decades due to depletion of ore reserves.

    2) Regarding Eric's idea to invest into farm land, there is an interesting article expanding and supporting these ideas:

    http://www.spiegel.de/international/world/0,1518,639224,00.html

  21. Anonymous says:

    If gold makes a dramatic jump, folks w/o liquidity won't catch that train. Silver being more readily affordable will experience huge jump in interest from average folk seeking a hedge. So yes, it will lag, but demand per ounce will swamp interest in gold - ratio to revert.
    Regarding junk silver vs bullion, I wouldn't avoid bullion just because Joe Sixpack doesn't know how to appraise it, believe me - that would change rapidly. Amazon sells an inexpensive portable electronic grain scale that is remarkably accurate, and I sample all coins and bars. The buffalo and mercury rounds from my online dealer are within single digit tolerance when compared to COMEX bars, which would indicate acceptable half gram variance for that mass produced item.

  22. lec721 says:

    An ounce of gold costs over $1000 now. Gold bullion in smaller denominations is difficult to find.

    Silver, on the other hand, can be bought in lesser denominations and is much less expensive by the ounce - the "poor man's gold", in effect - which is why demand for it is likely to increase substantially when people become aware of a serious dollar devaluation.

    In any case, as Eric seems to suggest, owning both gold and silver in physical form, is a good idea.

    Good point, dashxdr, on the potential of anonymous commentaries to distract.

  23. Anonymous says:

    Where can I buy silver online in EU for a good price?

    Pavel

  24. Anonymous says:

    You made a comment that gold might be what ultimately breaks comex. When evaluating gold vs silver, one must factor in both ongoing availability and ongoing viability of a trading mechanism.

    Given all the shenanigans with gold that you've been writing about, the ETF defaults likely to come, and the shock of people who think they own physical gold but will suddenly learn then don't, I can imagine a scenario where gold trading essentially freezes up.

    Gold's value could essentially freeze if gold suddenly becomes (practically) unobtainable.

    In that scenario, sky's the limit for silver, as all that dead dollar panic money with nowhere to go will flow into silver, brought on by an even bigger panic over theh problems with gold.

  25. curiouspilot says:

    Hi, I really would like to buy silver, can someone please tell me where are the best places to buy and, how does one keep one's silver? Thanks.

  26. Bowtie says:

    buy rolls of silver American eagles from ebay. If you arent hot on ebay go to http://www.apmex.com

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