- Created on Wednesday, 20 April 2011 16:07
- Written by Michael Robinson, Editor, American Wealth Underground and 180 Trader
- Hits: 5032
Note from Managing Editor Sara Nunnally: Earlier this week, I told you that gold could be headed for a big jump in prices. I told you a little bit about the Gold-Oil Ratio, and that sparked a question from Smart Investing Daily reader J. about a Gold-Silver Ratio.
Using this ratio is a bit different from the Gold-Oil Ratio because investors don't really look at an average historical ratio to determine if one metal is overvalued compared to the other.
Investopedia says, "These days, gold and silver trade more or less in sync, but there are periods when the ratio drops or rises to levels that could be considered statistically 'extreme.'"
For example, in 1991, the ratio was 100, which means that one ounce of gold could buy 100 ounces of silver. This ratio occurred when silver prices hit some astounding lows. Right now, the ratio is 34, a fall from 51 in 2007 before the financial crisis.
It's hard to explain what the Gold-Silver Ratio means, as both are precious metals and tend to trend in the same direction.
In bearish times, though, silver falls faster than gold. But in bullish times (for precious metals), silver prices can climb faster than gold, and we're certainly in bullish times.
So could silver be a better investment than gold right now?
This week's guest editorial comes from Michael Robinson, editor of American Wealth Underground. We tapped him not long ago to talk about how his service racked up some serious gains from rare earth metals. His research has also led him to take a hard look at silver, and this is what he told his readers last Wednesday...
My words come back to haunt me. In a bullish update just last week I told you about the enormous gains we've registered with our big winner in silver stocks.
Specifically, I said I would normally think of taking some gains off the table after getting such a strong rally in a short amount of time but that we should stand pat for now.
Then on Monday, strategic resources stocks virtually across the board got hammered on news that China's export market is much weaker than anyone thought.
Moreover, the headlines also said rising prices for raw materials -- from copper to petroleum -- could derail the global economic recovery. Even the so-called "pros" panicked over that little tidbit and flooded the market with sell orders, particularly for silver and gold stocks.
I hope that by now you know what my gut reaction was -- not to worry. Of course I would be a liar if I didn't say a part of me thought maybe we should have taken some gains on a couple of positions.
(By the way, I'm contributing to Smart Investing Daily today, but regular editors Sara Nunnally and Jared Levy are always simplifying the market with their easy-to-understand articles.)
On the other hand, I expected the recovery we see shaping up today. As I have said before, if you want to invest in precious metals and rare earths you have to have a cast-iron stomach.
Meantime, our big gainer, [CENSORED], is making headlines once again. Yesterday, it was one of the big losers across all U.S. stock exchanges, declining some 9.24%.
But it snapped back today and in early trading had the third-largest gain on the New York Stock Exchange. I can't think of a better example than [CENSORED] to explain the volatility surrounding resource stocks.
It seems every time the news from China is about slower growth, metals stocks in particular get hammered. Then again, China's economic growth is a major factor behind the surging demand for energy, all manner of metals and rare earths.
To me, that's a major factor driving volatility for metals including silver. Investors are just too prone to panic about China.
Even if China's growth slows a bit for a while, that's not going to change the long-run factors affecting demand for strategic resources. Planet Earth has passed the raw materials tipping point.
Global population growth and surging demand for technology products will continue to put huge prices pressures on silver, gold, copper, coal and rare earths. We are in one of the great commodities booms of all time.
I've said from the beginning that gold and silver will continue their long-term advance but with setbacks and corrections along the way. I don't think we are near the top of the market at this point.
Now then, with so much volatility it's difficult to know exactly when to take profits off the table. I try to check the charts for these stocks on a daily basis to see if a prolonged correction is in the making.
So far, I haven't seen that shaping up.
Editor's Note: I've censored Michael's article to exclude the name of his best silver recommendation. American Wealth Underground subscribers can find this name in the full article available online. Michael is also the editor of a new service, 180 Trader, which launched yesterday. Follow this link to learn more about 180 Trader.
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