Would you buy gold at $140/oz?

Anybody with a pulse would recognize that buying gold at an 80% discount to the spot price would be the opportunity of a lifetime. Immediately after buying, you could turn around and sell your metal for a 400% return. Unfortunately I don’t know where to buy gold at $140/oz, but for an investor with patience there may be an opportunity to earn a return that is 5X greater than what you would make buying gold at today’s prices. The opportunity that I speak of is in silver – the monetary metal that is often overlooked by gold investors.

How do I conclude that buying silver could be as good as purchasing gold at $140/oz? I come to this conclusion by examining the historical value of the price of gold divided by the price of silver (i.e. the gold/silver ratio). For most of recorded history, the gold/silver ratio has averaged about 15:1. This ratio seems to have arisen naturally and is fairly close to the relative amount of the two metals naturally occurring in the Earth’s crust. As I write this article, the gold/silver ratio is nearly 80:1. This is an historical aberration and the ratio is likely to revert back to the long-term average at some point, as it did at the end of the last bull market in precious metals in 1980. If gold were currently trading at 15X the price of silver (as history tells us it should) the price of gold would be only $140! Now I am not claiming that gold is only worth $140 – in fact I expect gold to appreciate significantly over the coming years against the U.S. dollar. My point is that silver is extremely undervalued at the current spot price of $9.30/oz. Buying silver at today’s prices is like paying only $140 for an ounce of gold!

Many investors claim that only gold is money and that silver is merely an industrial commodity. While silver does have many industrial applications, the historical evidence clearly refutes this claim. The fact is that silver has been used as money more extensively than gold throughout history. Both metals have identical monetary qualities. They differ only in their degree of scarcity. The characteristics that make gold and silver suitable as money are:

1) scarcity
2) durability
3) divisibility
4) recognizability
5) portability
6) high stocks to flow ratio
7) medium of exchange

These characteristics are why silver has been used as money in many times and places in the world. Silver ingots were used as money in ancient Mesopotamia and ancient China (sycee). Silver was mined and valued by pre-columbian civilizations in the Americas. Silver coins were used in the great ancient civilizations of Greece, Rome, and Persia. Silver served as money in most of Europe for the better part of the last two millennia. Even the U.S. dollar was defined in the Coinage Act of 1792 as 371 grains of pure silver. For other examples of countries where silver has been used as money see wikipedia’s entry for “Silver Standard”:

http://en.wikipedia.org/wiki/Silver_standard

Clearly silver is money. The fact that it cannot legally be used as a medium of exchange is irrelevant. A government cannot cancel this fact by decree. I believe that eventually both gold and silver will re-assert themselves as money and circulate as currency. I also believe that when this occurs, the gold to silver ratio will approach its historical average.

In summary: while gold should prove to be an excellent store of value as the irredeemable dollar approaches its intrinsic value of zero over the coming years, silver could very possibly outperform gold by a factor of 5.

So unless someone is willing to sell me gold at $140/oz, most of my money will stay invested in silver.