Tuesday, February 24, 2009

Silver or gold?

It's no secret that I've turned bullish on gold. Yes, it appears we are starting a correction. Unfortunately all bull markets have them. Nothing goes straight up as they say.

The question is will this just be a minor correction followed by gold breaking the $1000 barrier or will we see another test of $850 or even a move to new lows? Nobody knows for sure least of all me.

However what I do believe is that we will see the Dow:gold ratio go to 1:1 before this is over. As long as one has patience, human nature should run its course and make any timing mistakes meaningless in the long run.

That being said I think there is a better place to be than gold. Lets say for the sake of argument that gold eventually goes to $4000. Sounds far fetched I know but then again bull markets always rise farther than anyone expects (just like bear markets drop deeper than anyone expects). A powerful bull market can easily do 2000% from trough to peak. Gold bottomed at $250. You do the math.

Now I want you to take a look at the chart. That's the ratio of silver to gold. Historically that ratio averages roughly 20 to 1. The panic selling this fall took this ratio to a ridiculous 88 to 1.

Now maybe silver doesn't get all the way back to 20:1. Let's just say for arguments sake that silver goes to 30-1 when gold tops out. That would put silver over $130 an oz. if gold reaches $4000.

Buying at today's price of $14.00 that would be an almost 900% gain as opposed to only 300% for gold.

I think the really big money is going to be made in silver as the next phase of the precious metals bull gets underway.