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Swapping Gold for Silver Has Historical Merit

Commodities / Gold and Silver 2010 Sep 18, 2010 - 07:09 AM GMT

By: Dr_Jeff_Lewis

Commodities

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 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.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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