Silver makes sense for gold investors

Silver behaves much like gold in times of financial crisis and is often spoken of in the same breath under the portmanteau of precious metals. But the best reason for gold bugs to diversify into silver is something called the gold-to-silver price ratio.

Now the long-term historical average gold-to-silver price ratio is 16. But this relationship does sometimes get rather out of kilter. Like today when gold is at $610 an ounce and silver hovers around $12 an ounce. And not at $38 as its long-term gold-to-silver price average would suggest.

This has happened because silver presently has no perceived monetary role, while the moment a financial crisis is at hand people look for quasi-currencies and silver is a longstanding currency of last resort from ancient times.

Monetary role

What that means is that in historical terms silver is cheap in relation to gold. Even more importantly it means that in a financial crisis silver is likely to close this gap and then move in line with gold. In short, silver will outperform gold.

Let us say that gold moves to $2,500 an ounce by the end of next year, which is a figure at which options are now being struck. If silver followed gold upwards and regained its historic relationship, then silver would be $156 an ounce, up 13-fold on current prices while gold would be 'only' up four-fold.

Highly successful investor Chris Weber has written an excellent report on this subject. He notes the gold-to-silver ration has reverted to 16 during other major crisis periods of modern times: World War II; the early 1970s; and in 1979-80 when gold hit its all-time high.

Crisis time?

Of course, for this to be correct, then you have to agree with the assumption that another major financial crisis is around the corner. Will the US housing downturn precipitate an October crash in US stocks anticipating a recession in 2007? Will problems in Iran cause an oil price spike and a collapse in global stock markets?

This is admittedly a bit gloom laden. But why not hedge your bets and prepare for the worst? Then you will be a winner whether your other investments come off nicely or not.

It has to be said that Chris Weber is one of the most successful general investors known to the financial community, and that he is long on silver. This is not another fund manager who places your money and takes his commission while you bare the risk. It is a strategy to win whatever happens!