Is Silver Cheap? These charts suggest it is
Friday, March 13, 2009 18:23I came across an article on MarketWatch.com which argues that the price of silver is cheap relative to gold. Written by Myra Saefong, the article goes on to say that because silver is trading more than 70 times less than gold, it is under priced when compared to gold.
When reading market commentary, I tend to use the old US/USSR policy of “Trust but verify.” Below is a chart of the gold-to-silver ratio. To form the chart, we simply divide the price of gold by the price of silver. When the line is rising, gold is out performing, and so when the line is falling silver is out performing.
Important bottoms were formed in 1998, 1999 and 2006. When the bottom was reached, gold became cheap relative to silver and so you would have wanted to buy gold rather than silver. Tops were reached in 2003 and 2008, which was an indication of cheap silver relative to gold, and you’d want to buy silver instead of gold.
Considering the 2008 and the following decline, we have to agree with the author of the MarketWatch article. Silver is indeed cheap relative to gold. Well done Myra.
It is important to keep in mind that the chart above is a ratio. It tells us how the price of one is in relationship to the other. The chart below shows the actual price charts of gold and silver. Both are in a strong uptrend and we continue to like them both. The ratio analysis tells us we would likely get “more bang for our buck” buying silver rather than gold.
Silver isn’t the only commodity that looks cheap in terms of gold. Crude oil now looks under priced when compared to gold. The recent failed test of a 15 year downtrend line suggest that oil may have more upside in the coming months than gold.
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