Why I’m Long Silver, Short Gold

I have a short position on gold through GLD and a long position on silver through SLV.

Each share of GLD is backed by about 1/10th of an ounce of gold, and each share of SLV represents roughly 1 ounce of silver. Base on current market prices, one ounce of gold has the equivalent value as a bag of 65 to 70 one-ounce silver coins.

Now, consider that a geological analysis of the Earth’s crust shows that silver is only 17.5 times more abundant than gold. In fact, over the last 4500 years of history the average price ratio between silver and gold is pretty close to that number. Back in the days when metals are still money, you could exchange 1 gold coin for 16 silver coins.

What this means is that gold is severely overvalued versus silver, and the gap will revert over time, regardless of whether precious metals as a group rise or fall.

This is all before we consider the industrial usage of silver. Our silver supply gets used up in various industrial applications, whereas almost every ounce of gold we ever dug out of the ground throughout human history is still in existence today.

Gold is currently trading with a fat speculative premium – a premium driven mainly by fear of the fiat money system come crashing down. This fear is overblown, but even in the off-chance that Armageddon does happen and we all go back to buying things with metals, silver coins will be more liquid than gold coins. With silver currently at $17.5/ounce and gold at $1200/ounce, you’re more likely to carry around silver for your weekly grocery shopping.

Either gold will fall or silver will rise until the ratio is closer to the historic mean. For an aggressive investor, long silver short gold will prove to be a very profitable trade. For less aggressive investors or funds that have restrictions on short-selling, either get out of precious metals or replace gold with silver for your precious metal diet.

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One Response

  1. Also posted on Seeking Alpha: http://seekingalpha.com/article/215815-why-i-m-long-silver-short-gold

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