My friend Louie called me today and asked, "what's up with silver?" What he was really asking was, why is silver lagging so far behind gold? Three months ago, as Gold breached the $1500 level, silver was trading as high as $48 an ounce. At one point the ratio had dropped all the way down to 32 ounces of silver being equal to 1 ounce of gold. At present that ratio sits at 45:1.
At the time, silver's rise to stardom was attributed to its growing demand in industry. Demand and demand growth were exceeding supply thus launching a buying frenzy for Gold's sister metal. Since then, silver prices have cooled but still show remarkable 12 month gains near 100%.
Now the gold price is running again and silver seems to be lagging. But, as we reflect back to silver's last major move, silver's cautious advance makes a whole lot of sense. Indeed, gold has firmly taken its seat in the world markets as an alternative currency. Central banks print money, knowing they are debasing the currency they print. To offset that lost value they buy gold. History makes gold the first metal of choice as a store of wealth and safe haven investment. Silver plays a secondary role behind gold as money.
If you could print money, which would you buy first - Gold or Silver?
Now, consider silver's role as an industrial metal. Without getting into detail now, about its multiple uses, suffice it to say it has many more industrial uses than gold.
So, here we sit in the middle of a debate over debt. If we decide to limit debt, we also make the decision to limit industry. If we limit industry we limit the need for industrial metals.
When you compare the two metals under these conditions it's easy to see how gold is in a win win situation. If we decide to limit industry by restricting the supply of printed money, we head for some form of default. Default destroys the dollar, hence higher gold prices as investors large and small rush to own an asset that preserves value. If we print more money, we effectively default on the dollar's purchasing power which also drives investors to gold for protection and wealth preservation.
It is this win win situation that makes gold a first choice for investors in times of uncertainty. That is not to say it's time to give up on silver. The supply demand fundamentals are still intact. It is just flat out being used up faster than they can get it out of the ground.
I would look for silver to play a little catch up. Once investors get beyond a point of focus on the recent debt debate and subsequent downgrade, it will be back to business as usual. I suspect a little bit of non-buyer's remorse when many investors wake up and realize silver may be the real bargain.