A look at the gold/silver ratio; and FIL speaks on gold.

If you are sitting on buckets of silver coins you are a happy guy. And you know who is a happy guy—the honorable father-in-law (FIL). I told him yesterday, chatting now that he has mastered Skype, which is a huge step for a guy that not too long ago had no clue even how to find the computer’s “on” switch, that the Hunt brothers called, and they said they broke even on their silver holdings yesterday…zoom zoom….[Note: Hunt brothers are notorious in the silver market, having effectively cornered it pushing the price to $50 per ounce back in 1980 before the guys who “run” the exchange changed the rules of the game and Humpty came tumbling down; exchange officials have an interesting way of changing the rules in mid-stream, which is why it is never a bad thing to be very close to an exchange official or two.

Silver Futures Weekly:

Gold/Silver Ratio:

As you can see in the Gold/Silver ratio chart above, silver has been relatively much stronger than gold since the peak in this ratio going back to October 2008. Now the ratio is testing a level not seen in about 13 years.

From Investopedia, which has an excellent basic summary of how to trade the gold-silver ratio:

Here’s a thumbnail overview of that history:

•2007 – For the year, the gold-silver ratio averaged 51.

•1991 – When silver hit its lows, the ratio peaked at 100.

•1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.

•End of 19th Century – The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era.

•Roman Empire – The ratio was set at 12.

•323 B.C. – The ratio stood at 12.5 upon the death of Alexander the Great.

What is interesting is the degree of correlation between the gold-silver index and the Dow Jones Industrial Average. You know the old adage, “As the gold-silver index goes, so goes the stock market.” Haven’t heard that one…well, seems to be playing out now and for the last few years….

Gold-Silver Index (red) versus Dow Jones Industrial Average Inverted (black): We inverted the DJI in this chart so you can see the visual correlation, i.e. as the black line (DJI) falls it means stocks rise.

The question of course when you look at these types of charts is: Well, who leads and who follows and is there any rationale? To the first question, we have not a clue which series leads or follows. And to the second, we might use the rationale as corporations get moving, using silver as base metal for industrial production more so than gold; this ratio tends to favor silver and move in conjunction with rising earnings.

So, pick your poison. Stocks keep running, gold-silver ratio likely (key word there) declines further.

Many have asked for FIL’s views on gold which dovetails nicely with FIL’s desire to let others know he isn’t just burying metal in his walls for the coming end…but has what he refers to as Primary Motives (PMs). Over the years, I have noticed a direct correlation with the number of glasses of red wine and PMs. That is clear from this note from FIL sent to me late last week:

After several glasses of red I conducted an in depth analysis of PMs. For what it’s worth (don’t tell me) I offer my investment reasoning which I do not hear from the talking heads.

1) I do not regard inflation as a primary motive to buy gold. If inflation strikes, interest rate increases usually follow and better investing returns lure gold sales. And this happens with the speed of light. Just look at the last few years to see an inflation-gold disconnect.

2) The prime reason for me to hold (and buy according to prudent diversification) is the world instability, i.e. the Mideast, where a war of sorts would not be a surprise; Europe’s banking/sovereign debt threat; China and EM’s anticipated economic cycle exuberance; and finally the USA’s deficit with inaction to cure. I see no short or possible medium term calming here.

3) There is no longer a safe haven currency. The US$ is the "safer dog" among a bunch of mongrels. This somewhat follows your preaching to those who berate the US$, although it’s the best relative bet as a currency——then there is gold!

For the near term (few years) the perceived value of this "safer" currency is further reduced by other (central banks) attitude that the US economy (inflation) is in trouble (right or wrong). Also a general distrust for the US and other developed countries adds further to an alternative investment in PM’s.

As long as there are so many unstable world factors and US$ problems of one form or another even if it is the #1 currency, PM is here to stay inflation or not.

So there you have it. FIL speaks!