The Gold-to-Silver Ratio: Why It’s Important, What It’s Telling Us Today

What the gold-to-silver ratio is, why it's important and what it's telling us today.~ reporting from Venice, Italy

I often write about gold bullion in my commentaries, but not much about silver. And my readers are writing asking me what I think about silver. As usual, I’m happy to present my ideas and forecasts.

Right up front, I want to say I’m more biased towards gold than silver as an investment. I’ve been pushing gold since 2002. At that time, I started getting concerned about spiraling U.S. debt and the increase in the money supply.

My thought has always been: if the validity of the U.S. dollar ever comes into play, gold will be the currency of choice. Not silver. I can see the government eventually forced into a situation where U.S. dollars again will be partially backed by gold bullion. I can’t see U.S. dollars backed by silver.

On the other hand, silver is used in many different industries, whereas gold is still primarily used in jewelry and as an investment-related commodity. And, as the economy in China continues to boom, as we believe it will, demand for silver for industrial use will continue to rise, pushing up silver prices.

Gold prices are up about 13% this year compared to a 29% increase in the price of silver so far in 2011. Silver is actually outpacing gold in terms of price appreciation this year.

The gold-to-silver ratio works like this: we take the current price of gold and divide it by the current price of silver. Historically, over two centuries, the gold-to-silver ratio has been 37-to-1. Today, it sits at 40-to-1.

What does this tell me? It tells me that silver is not cheap in respect to gold, but it is not overvalued compared to gold either. It also tells me something else.

Investing in gold—my gold advice: my prediction, as expressed in these pages over recent years, is for gold bullion to reach $3,000 per ounce before the bull market in the metal is over. If I apply the historic 37-to-1 gold-to-silver ratio, silver should be trading at $81.00 an ounce if gold reaches $3,000 an ounce. Hence, we are looking at a doubling of the price of silver before the bull run in commodities is over.

In short, silver is a good investment, not because of the increased demand for the metal in China, but because the metal has been riding gold’s bull market of the past 10 years. I expect it to continue doing so.

There are several major silver producers traded on various stock exchanges. On silver price dips, I’d be a buyer of the major silver producer stocks, especially those listed on the TSX, Canada’s major stock exchange.

Gold and silver will both rise on the back of a weaker U.S. dollar. American investors can enjoy the rise in the price of major silver-producing stocks in non-U.S. denominated dollars, providing Americans with a double whammy of stock price appreciation and profits on a currency play.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.