‘Should I be buying silver now? No I will wait until the stock market tanks and silver becomes even cheaper.’ This is a fairly typical comment from an ArabianMoney reader these days. The problem with following the lazy consensus, as any good contrarian investor knows, is that it is frequently wrong.
Why’s that? Well for one thing it means too many people sit on one side of the trade and not enough on the other, so the tendency is for a small movement to produce disproportionate price swings. Spot the legendary volatility of silver as an asset class.
Silver very cheap
So is silver cheap at the moment? One measure is the number of ounces of silver you need to buy an ounce of gold. It is almost 62 at the moment compared with around 50 earlier this year. That means you are getting a 20 per cent additional discount on silver on top of the $500 you are getting off gold’s recent all-time high.
But will silver become even cheaper if the US stock market finally takes a big correction? The nine per cent inter-day crash in the Japanese stock exchange last week certainly made this no mere theoretical possibility any longer. Gold prices actually bounced by 2.1 per cent last week and silver by five per cent.
You might expect a rush of money back into precious metals in a financial crisis. But this did not happen in 2008-9 when silver took a massive plunge to $9 an ounce and gold prices fell by a third. Understandably the fear of recent history repeating itself is engraved on the minds of many investors.
Of course who is to say that we will get a repeat of 2008-9 in global financial markets. Certainly central bank liquidity is stacked against it and bank balance sheets are in much better shape. What we might see instead is something far more like a normal correction in an overbought stock market, and that could be gold and silver positive as we saw last week.
Certainly master-investor George Soros seems to already be there with his massively risky punt on the junior gold stocks ETF that we revealed on this website last week (click here). He is extending his risk on gold with GDXJ. You could achieve similar leverage to the gold price by buying silver now.
Silver prices are leveraged to the gold price and go up and down faster. That would make a two-and-a-half year low in the gold:silver ratio look a buying opportunity. The next issue of the ArabianMoney investment newsletter (click here) will have more proprietary information for our paid-for subscribers who we have to serve first.