Tuesday, October 9, 2007

Looking for a bargain?

We all like to buy when something is on sale right? The common sense answer is of course we do. If you go to the store to buy a pair of jeans and one store is having a sale, half off, I think it's safe to say you're going to make your purchase at the store having the sale. The problem is that when it comes to investing common sense gets tossed right out the window. When investing we are drawn to the most expensive "jeans". Hell if they raise the price overnight on us that just makes us want those "jeans" even more. Take a look at those first two charts oil & copper. Pretty representative of what's been going on in energy and base metals during this bull market. Both are showing gains in the 700% range. Now take a look at Gold. A measly 200%. How about silver 250%. Copper and oil look much more appealing don't they?

Of course that doesn't make any sense.

We're looking at two commodities that are on sale and not at half price but more like 1/3 price. Now let's take a little closer look at silver because at first glance it looks like silver is slightly more expensive than gold. The problem is that sometimes looks can be deceiving. The historic ratio of gold to silver is roughly 15 to 1. That means 1 oz. of gold should only buy 15 oz. of silver. So what does 1 oz. of gold buy at the moment you ask? 20 oz. of silver? 30 oz. of silver? 30 oz. would be twice what the historic norm is which would suggest that silver should be trading at $27.00 not $13.50. However 1 0z. of gold will buy a little more than 30 oz. of silver. How about 55 oz. of silver! At the moment gold will buy almost 4 times as much silver as it historically has throughout history. That means with gold at $750 an oz. silver should be priced somewhere around $45-$55. That would suggest this pair of "jeans" is on sale at 50-75% off. Personally I do love a good bargain and if the market is stupid enough to give me that kind of bargain I have no qualms about taking advantage of it :)