Below are some reasons that people I know are holding gold’s little brother, silver.
Link: Invest in Silver Over Gold – Seeking Alpha
As we get closer to the day inflation kicks into full force, it is worth noting some common gold:silver ratios. History has more or less showed us that the historical ratio has averaged between 20:1 – 25:1 (depending on the measured time horizon). I personally like to break it down using different ratios for periods of low to moderate inflation and high and double digit rates of inflation. As a rule of thumb for times of low to moderate rates of inflation (below 5 or 6%), I use a ratio between 45:1- 55:1. During times of high to double digit inflation (late 70′s style) I revert back to the historical ratios between 15:1-30:1. Given the current low level of “headline inflation” (which is nonsense anyway), which has to inevitably rise over the coming decade, silver is very attractive on the gold:silver ratio, currently at 64.36. Though inflation is said to be “very low” (according to the governments convoluted measure), my expectation for it rise sharply over the coming years, makes silver an absolute bargain.
Take a conservative estimate of the future gold price when inflation is in full force, say $1300/oz, silver using a ratio between 25:1 to 40:1, would give you a price somewhere between $32.5 and $52.5. It need not even be take that far to see the price appreciation potential. Assume the price of gold remains at $1060/oz throughout the time when inflation plagues consumer prices, silver should still be between $26.5-$42, which is a substantial rise on a percentage basis.
The Supply-Demand dynamics favor silver by a mile for one simple reason but important reason, discussed in detail in my previous article Silver Unmasked. The past decade of research has uncovered the vast array of applications from medical to technological uses, many of which will become the “gold standard” in various fields. The article briefly discussed the lack of reserves near the earth’s surface and the implications to future price of this metal. So in other words, while gold may be the ideal inflationary hedge, silver is a close second but also has a long term catalyst (increasing industrial uses) to make silver a likely outperformer. Gold lacks industrial demand almost altogether, and is often recycled. Silver has and will have increasing industrial uses from such products as the silver-oxide battery, which will take substantial market share from the much inferior batteries “lithium Ion” currently used.
Though the first two measures have been successfully used by many investors (especially gold and silver bugs), I would just like to add a recent regression analysis I ran using 6 years of weekly gold and silver prices (Jan 2002 – Feb 2008), proved very statistically significant (the time period was chosen as it was a time of low to moderate inflation). Of the nearly 300 observations, the regression output using the equation Y= -2.7571 + .022929(X) (Silver = -2.757 + .022929 * the market price of gold), had an extremely high systematic relationship of 96.9%. In other words, only 3.1% of the equation mentioned above was unrelated to the price of gold. I also did random sampling, taking the weekly gold price in February over the six years measure, which forecasted what the price of silver SHOULD be given the prevailing gold price. The mean difference was 3.4%, which is much higher than I would have expected. It is not to say that I buy into this analysis, but it is just another tool in the toolbox now. According to the derived equation, silver should be trading at $22/oz.
Conclusion: Using 3 basic methods in an attempt to figure out the relatively undervalued metal, silver is sharply undervalued given the current spot price of $1060/oz for gold. The closest estimate of what silver should be relative to gold, means silver is 30% undervalued (at minimum).
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