Silver – The Precious Metals Portfolio Balancer - PART I

Wednesday, 31 October 2012
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Published in From The CEO

At certain times here at the Investor’s Corner, we feel it’s important to remind you not to forget to add silver to your precious metals portfolio.  And you might wonder why.  After all, isn’t gold the ultimate hedge against the debasement of the dollar and, for that matter, all other paper currencies?  Shouldn’t our attention be focused on the yellow metal?

The quick answer to that last question is yes, but not exclusively.  Here’s why.  As gold rises in price, the average person could conceivably become priced out of the market.  As we’ve mentioned often, gold at $2,000 per ounce is definitely on the horizon.  But with quantitative easing in our midst, gold at $3,500 per ounce or even $4,000 per ounce is not inconceivable.  In fact it’s safe to sayit’s very possible.

First-Strike

But at $4,000 and above, gold will become accessible to even fewer buyers.  And at $5,000 per ounce … well, you get the idea.  Along comes silver to save the day.  Like gold, silver has been around for thousands of years.  Like gold, silver moves against the dollar.  Like gold, silver isa safe haven during times of inflation. 

But, because of its considerably lower price per ounce, silver is traditionally more accessible to a larger number of less affluent buyers.  Today gold closed at $1,721.30 per ounce, and silver at $32.26 per ounce, making the gold-to-silver ratio 53.35.  Now let’s saygold moves up to $3,500 per ounce and silver closes in on gold for a gold-to-silver ratio of 42.  Silver would then reach $87.50 dollars per ounce.  At these prices, it’s a matter of simple arithmetic that a less affluent investor can more easily spring for, say, 20 ounces of silver ($1,750) than he can for 20 ounces of gold ($70,000).  Of course, the phrase “lessaffluent buyer” will always be subject to definition.  But at whatever income level he’s defined, the less affluent investor will find that silver is more within his reach than gold.

But here’s why we call silver a “balancer” in a precious metals portfolio.  In a bull market, silver will always outperform gold as prices rise.  As gold moves up in price, silver will automatically move faster over time, thus narrowing the gold-to-silver ratio.  When that happens, you’ll continually make a greater return on your investment with silver than you will with gold.

The logical consequences of the narrowing gold-to-silver ratio as prices rise is that the less affluent investor will own less gold, and then balance his portfolio with more silver, whereas the more affluent investor will own more gold and balance his portfolio with less silver.  Also, since silver is more volatile than gold, it will give your precious metals portfolio (relatively) more bang for the buck, but gold will give you (relatively) more stability.

There are specific reasons why gold and silver move with different velocities in the marketplace.  And we’ll deal with these reasons next time in Part II.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.