Continued from Part One.
In large part, investor enthusiasm seems to be coming from the gold-silver ratio.
There are many situations in which gold-silver ratios are assessed, such as naturally occurring (as ores in the ground), total quantity ever mined ratios, and ounces held in investments ratios; but the most important is the price ratio, which for the last few years has trended between 45 and 60.
That is, one ounce of gold is usually worth between 45 and 60 ounces of silver.
It has been as high as nearly 76 during the 2008-09 crash, but currently stands at 53.
The argument goes that whenever the ratio indicates that there are too few ounces of silver for one ounce of gold, you know that silver is overpriced relative to gold and might fall. If the ratio indicates too many ounces of silver for one ounce of gold, silver is clearly too cheap and will rise to its real value. In short, once you know the normal range, you can predict how much room remains for both metals to move, even if all other factors remain the same.
Traders who swear by the ratio are therefore currently buying silver and selling gold because they believe silver will give them higher returns than the yellow metal, for now. The same argument was used to very good effect in the platinum-gold ratio recently making investors who spotted the divergence a handsome return within days.
Central bank quantitative easing is supposedly good for gold as well as silver. Gold bugs are certainly expecting the price to rise, but the leveraging effect would mean silver prices should in theory move even faster if the current ratio is maintained.
Although some chartists are suggesting silver prices could hit $165 per ounce by 2015, most analysts are more cautious.
Philip Klapwijk, executive chairman of GFMS is quoted as predicting $40-45 per ounce next year, possibly $50. That would require both a further rise in gold and a drop in the ratio towards 45…