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Silver 'Poor Man's Gold' to Play Catch with as Ratio Falls

Commodities / Gold and Silver 2010 May 27, 2010 - 07:06 AM GMT

By: GoldCore

Commodities

Best Financial Markets Analysis ArticleSilver has risen yesterday and today as it reverses recent sharp falls - many investors see silver as very cheap versus gold as seen in the gold silver ratio (see charts below) which is back to over 66.


Silver remains very undervalued on a historical basis vis-á-vis commodities, gold and other precious metals. The gold/silver ratio remains favourable to silver at 66, and the ratio is falling as seen in the long term trend channel. "Poor man's gold" remains far from recent record highs and long term record (nominal) highs near $50/oz in 1980 (see chart below).

Silver could be the surprise outperformer in 2010 as it was in 2009. Silver's industrial uses should mean that the gold/silver ratio will likely gradually regress to the average in the last 100 hundred years - around 45:1. If the tiny silver market was to see real funds enter it, the ratio could return closer to the historical average of 15:1. This occurred as recently as in 1968 and in 1980 and this time around could result in silver surpassing its 1980 nominal high at $50/oz.

The chart above shows how the gold silver ratio has been falling since 1992 when it reached a record high over 90:1. It fell to below 50:1 when there were rumours that Warren Buffett was accumulating silver aggressively. Silver subsequently fell when gold prices began to move up strongly between 1999 and 2003. Silver tends to lag gold and play catch up. More recently they ratio has fallen from nearly 80 in mid 2008 to 66 today. The gold silver ratio looks likely to challenge its recent lows in 2007 at 50. Below that it could quickly fall to below the "Buffett low" at 48 and target the 1980 low at 20:1.

Already there is evidence of buyers in Asia, and particularly in India, buying silver jewelry (for dowries and as a store of value) rather than gold due to fact that gold has surged to new record highs in recent weeks. With industrial demand for all commodities, including silver, to continue growing in the coming years, particularly from the new industrial powers (such as Brazil, Russia, India, China), silver will likely reach record nominal highs in the coming years as gold and nearly every other commodity has done in recent months.

Silver looks well technically and is in a rising trend channel with strong support at $15 (see chart below). Resistance is between $19.50 and $19.64 per ounce and a close above these levels should see rapid price moves to $20 per ounce. Above that the next level of resistance is at the March 2008 highs at $20.81 per ounce.

This update can be found on the GoldCore blog here.

Mark O'Byrne
Director

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