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– In
precious metal bull markets, silver outperforms. Its price climbs at a
faster rate than gold’s price. The reverse happens in bear
markets. Silver’s price drops at a faster rate than gold’s
price. The following chart of the gold/silver ratio illustrates this
phenomenon.
At the peak
of the last precious metal bull market in January 1980, it took 17.4 ounces
of silver to buy one ounce of gold. Thereafter, the ratio turned and
started climbing higher. By February 1991, 101.8 ounces of silver were
needed to exchange for one ounce of gold. Silver was trading at only
$3.50 per ounce, down 93% from its previous bull market peak.
Silver back
then was “dirt cheap”, but it would not get any cheaper.
Silver turned the corner as value oriented buyers recognized a bargain.
Since then the price of silver has been generally rising, and has been doing
so faster than the spectacular rise in the price of gold. The result is
a long-term downtrend in gold/silver ratio. In other words, since 1991,
silver has outperformed gold.
Last week,
the ratio touched 45.0 and ended Friday at 45.3. It was the lowest
daily and weekly close for the ratio since February 1998, which is a
significant date. That is the month Warren Buffett announced that he
had acquired 130 million ounces of silver. His footprint is visible on
the above chart.
We know
from his disclosures that he began buying silver around $4 in July
1997. The ratio then was in the mid-70s. But note what happened
to the ratio as Buffett accumulated his hoard over the next several months,
culminating with the announcement of his purchase. The gold/silver
ratio fell by nearly 50%, so that only 41.3 ounces of silver were needed to
buy one ounce of gold. Silver was clearly outperforming gold, just like
it has been doing over the last several months – as shown in the above
chart by the remarkable drop in the ratio.
The ratio
has now reached an important point. It is breaking through support,
which is illustrated by the lower red line on the above chart.
Several
previous attempts to break through support have failed, with the result that
for many years the ratio has continued marking time within a trading range
bounded by the parallel red lines. That trading range now looks mature
and ‘ripe for picking’.
One never
knows of course how the markets will unfold in the future. But I expect
that the ratio will finally break through support, which is an event that I have
been looking and waiting for patiently over many years.
If I am
right and the ratio knifes through the low 40s and below the Buffett point,
there is no clear short-term target. Given the momentum evident in the
above chart and the bullish fundamental factors impacting silver at present
– like its unprecedented
backwardation – a drop to at least the low
30s seems highly likely, but I don’t rule out the possibility of the
ratio falling even lower.
My
long-term target for the ratio is 17. It is approximately the average
level at which the two precious metals were exchanged for hundreds of years
prior to the arrival of fiat currencies in 1971. It has been my view
that a 17-to-1 ratio is attainable by 2013-2015, but given what seems to be
shaping up, we probably won’t need to wait that long.
The
unprecedented backwardation in silver has one clear signal. The
potential for a massive short squeeze is building. If one occurs
– as I believe is becoming increasingly likely – there is no
telling how quickly a 17-to-1 ratio could be achieved.
James
Turk
All data and quotes sourced from Reuters.
Published by the Free Gold Money Report.
Copyright © 2010. All rights reserved.
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