Gold/Silver Ratio Proves Silver is About to Soar
The Gold to Silver Ratio Implies That the White Metal's Time Has Come
Silver may be getting geared up to outperform just about every other type of investment out there. According to the gold to silver ratio, it will rise much faster than gold. In fact, platinum is another precious metal which is heavily undervalued compared to gold.
Gold prices have been soaring this year, which is even more impressive when you consider the tumultuous action of the broad-based global stock markets.
In fact, the volatility of the major exchanges has partially assisted the afore-mentioned resurgence in precious metals.
The ratio between gold and silver indicates that the white metal is highly undervalued in the relationship between them. Meanwhile, some specific supply events may cause a shortage, while outsized demand will give the commodity the last nudge it needs to really pop.
Much of the renewed thirst for precious metals among investors is being driven by two main factors; the flight to safety; the preservation of wealth.
Flight to Safety
During these uncertain times, people (which maybe even include you), are increasingly cautious about other types of investments, many of which have been sinking significantly, and quickly. When even some of the biggest, and most-secure corporations are dropping 2% in a single day, many individuals get a little... anxious.
With wars dragging on (think Afghanistan), and new ones spiraling out of control (think Syria), plus growing threats from ISIS, disease, terrorism, and whatever the media is currently using to scare you (and keep you watching), there is no limit to the fear factor right now.
Enter gold, long known to be a safe haven during times of concern.
People have a desire to maintain wealth, as the purchasing power of many major currencies gets watered down by money printing and quantitative easing. Inflation also takes a bite out of the money of the underlying nation, and we're starting to see this threat picking up significantly in several nations around the world.
As a population loses faith in the value of their currency, they increasingly look to more tangible, trustworthy, or less-volatile investments. After all, "money" is just an idea that we all agree upon, and works as long as everyone continues to believe in the value of "the buck."
What Happens Now?
So, will gold just keep on rising? Well, we think so and have been telling that to our subscriber base for a long time now. I hold physical gold, gold mining companies (like $ABX - Barrick Gold), and even own other related investments like Sprott Physical Gold Trust, where they store my metal in the government vaults. Of course, in addition, I've got plenty of physical silver, and also own Sprott Physical Silver Trust, etc...
Am I a "gold bug" or a "precious metals bug?" No, since I also own plenty of other types of investments. Precious metals are merely a portion of my portfolio - but, they represent the part which acts almost like insurance against global economic events and military chaos. (Not that I would cheer a global war or stock market collapse, but if something like that did occur, I wouldn't get completely wiped out).
Will gold just keep on rising? Well, we think so, but a very interesting thing has been happening lately.
Specifically, the relationship between gold and silver has reached incredibly compelling levels. Here's what I mean:
- historically it takes (on average during most time periods) about 60 ounces of silver to buy one ounce of gold.
- whenever the ratio of silver to gold rises above or below that, it eventually returns back to the 60 range.
So, if it takes only 30 ounces of silver to buy an ounce of gold, it implies that the white metal is expensive in comparison. Gold would, therefore, be most likely to increase in price at a faster rate than silver.
On the other hand, when the ratio rises to 70 or above, that represents very undervalued silver, and overvalued gold, in relationship to each other. Silver would, therefore, be very likely to increase in price in relation to gold.
Does the gold silver ratio always return to levels near 60?
Well yes, every single time, since the beginning of the earth. There are incredibly few "sure things" in investing, but this is one of them.
The trick is more about getting the timing right, rather than knowing the outcome. And I'd better say that this is all in my opinion before my lawyer falls out of her chair! That will also save me having to go back later and drop those words in once she reads all this.
If gold prices stayed exactly where they are today, silver would need to increase (and almost certainly will). If gold declined, the drop in silver prices would need to happen at a much slower rate, in terms of percentage.
Put simply, the gold/silver ratio always moves back towards the 60 level - 60 ounces of silver to one ounce of gold. Right now, the ratio is leaning heavily in gold's favor, but it will start tipping back towards silver in the coming months and years.
If gold rose (as we absolutely expect that it will), silver would need to appreciate at an even quicker pace.
The most likely scenario in our analysis puts:
- gold near $1,800 (a 42% increase from current levels)
- $30 per ounce for silver, which would end up representing a 92% price jump from where it trades now
Global silver production is expected to drop this year. Meanwhile, demand is outstripping supply already and has been for the last number of years. Combined with the impressive strength in precious metals lately, and the unsustainable gold to silver ratio, we expect the white metal to rise to prices nearly double what they are currently.
While the underlying commodities should do very well in the opinion of myself and my team, the actual gold and silver mining companies should do even better. (Of course, unlike with a commodity, any time you are invested in a stock, you also have to deal with all the human-related issues; theft; poor business choices; death; fraud; employee poaching; worker strikes; alcoholism; government regulations; yada yada...)
If you are interested in investing in a silver production mine, be cautious! Even if commodity prices rise, that will not automatically mean that the related companies would increase in price.
Our process looked into several dozen silver miners, and we will be revealing our top selection to subscribers this week. However, besides a very few high-quality selections we've uncovered, the vast majority failed Leeds Analysis, mainly because these stocks:
- operated in politically unstable nations
- were bleeding cash
- had short reserve-life-indexes (how long until they run out of recoverable resources)
- used too much future hedging (pre-sold their commodity at current prices, which means they will get less benefit from rising silver prices)
- were poorly financed
- issued far too many shares in order to raise operational funds (which dilutes the value of the stock)
- had too many permits to acquire, or too many administrative hoops to jump through
- were many years away from bringing their mine up to production status
There are so many red flags, warnings, and operational obstacles which most people will not notice. In the end, they may be confused as to why the price of silver doubled, but their investment went the other direction!
When finding the best silver mining stocks to invest in, you will want to look for certain things. With any company, focus on some of these important aspects, including but not limited to:
Producers, Not Explorers!
Most mines are exploration companies, meaning that they are "looking" or searching for the metal. Even once they think they've found something, they have several different categories of definition; inferred; probable; proven; measured, indicated.
This is kind of like saying, "we think there may be something underground..." Then, "it is probably there..." And finally, "ok, we've taken all the core samples and done all the test, and we know there is silver a couples miles deep."
Then all they need to do is take several years fighting for permits, agreeing with native and aboriginal groups, and (depending on the country of operations) very likely pay a lot of bribes. Then it can take several more years to develop the actual mine.
On the other hand, a producing mine has already cleared all these hurdles. They are pulling silver out of the ground, and selling it. They have actual revenues, and all the heavy lifting has already been done.
Mines often "pre-sell" their future production, in exchange for cash infusions. For example, they may make a deal with another miner, or financer, whereby they agree to provide X number of ounces of silver, at or near current prices.
The more a mine forward-hedges, they more they are locked into current prices. Then, even if silver quadruples, the contracts mean the mine still has to sell the commodity at previously agreed-upon (and much lower) levels.
Just because two companies both mine the same commodity, it does not mean they are equally efficient. You need to look into the production-cost to bring an ounce of silver above ground and sell it.
While two miners may look the same from all other aspects, one may be producing silver for $9 per ounce, while it is costing the other $14 per ounce. You could probably imagine which is the superior company, from an operational perspective.
As many mines operate in countries all over the world, some have to deal with corrupt governments, military conflicts, worker abductions, employee strikes, terrorism, and more.
With mining companies, always look for those which operate in stable and friendly regions. Think Canada and Peru, rather than Iraq and Chechnya.
The Big (Silvery) Picture
Silver is highly likely to increase in value at a faster pace than gold right now. This will be the case until the gold/silver ratio normalizes, with one ounce of the yellow metal being worth 50 to 60 ounces of the white metal.
In addition, we anticipate that all precious metals (and most commodities, in fact), will trek to higher levels. Added to the recovering gold/silver ratio, this will mean even more impressive performance from silver.
Meanwhile, the supply/demand metrics for the metal imply that there will not only be a bullish trend - but that there may even be a downright shortage! In such an event, or even without it getting to such an extreme, silver has significantly more upside than downside in our opinion.
Just wait a few months... you'll see exactly what we mean.