Gold-silver ratio crumbles to 28-year low

The gold:silver ratio has traded in a range between 42 and 85 for 15 years. There’s a dramatic change in that historic ratio, though, and it’s happening right now.

With silver trading at its highest prices in 31 years, the gold:silver ratio is tumbling rapidly. On Friday, the gold:silver ratio hit its lowest level in 28 years near 35. A growing number of uncertainties in financial markets have investors piling into precious metals as no one’s quite sure when the next big shoe is going to drop.

“I’d say that from a macro/fear standpoint this is most like 2008 only its not the banking system that’s blowing up (that was around Bear Sterns time) it is the Sovereign debt, the US dollar and the Arab world that are on fire,” MontyHigh writes at WorldofWallStreet. “I would say the current chart’s eight in-a-row white candles looks a lot like the beginning of 2008’s ten-in-a-row white candle run leading up to its parabolic peak.”

Back in 2008, silver rose more than 24 percent in a month, only to plateau then take a huge 16 percent plunge in a single day of trading. That sobering fact should keep investors on their toes. But there may be more to it then just a manic buying spree.

Institutional investors have long been calling for a parabolic rise in silver that will close the large gap in the gold:silver ratio. Back in February, Eric Sprott of Sprott Asset Management was calling for the gold:silver ratio to hit 16 in the not-so-distant future – a level that would likely see silver upwards of $80 an ounce.

In an interview last week, Sprott called silver “the investment of the decade.”

“I’ve always thought that silver would move quickly to $50, and it would move to $50 this year – I thought it would get to $50 before year end,” Sprott told MineWeb. “If you ask me in the three to five year time frame, obviously I think it’s going to go north of $100 simply because we’ll get that 16:1 ratio.

“Silver is the investment of this decade as gold was the investment of the last decade,” he says. “So we’re sitting back waiting for things to evolve here.”

The gold:silver ratio has traded in a range between 42 and 85 for 15 years. Sprott chalks up today’s ratio change to industrial demand for solar panels and other high-tech industries. But changes of this scale and at this speed are unprecedented. There are obviously other factors at work – things like fear and greed. Even more than that, though, the spike in silver prices indicates just how tenuous the global markets have become.

Unlike in 2008, investors don’t feel comfortable crawling into a cave with dollar bills in their hands as the dollar itself is under assault by the loose monetary policies at the Fed. Silver has become the investment du jour. It could just as quickly become the short du jour, but silver’s showing no signs of weakness in early trading this week.

I agree with MontyHigh when he says it’s looking a lot like 2008 right now. The difference is there are few places to turn outside of gold and silver. If that other shoe drops soon, the markets are going to be in for a lot of pain. And I won’t even predict where the gold:silver ratio could end up. I do know, though, that I wouldn’t want to be holding dollars this time around.

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Silver price record could fall in 2011

Silver bullion is trading within 26 percent of its 1980 record high, and it isn’t a stretch to think the metal could break that record in 2011.

Silver hit an all-time record high price of $49.45 per ounce in 1980. Thirty-one years later, the metal’s logging multi-decade highs. Suddenly that 1980 high doesn’t look so preposterous. Silver spot prices rose as high as $39.25 in trading yesterday. That puts silver up more than 27 percent since the start of year, and it brings the metal within 26 percent of its 1980 record high.

Silver would have to log gains of 50+ percent this year to break its record price. That’s a big gain, but it’s far shy of last year’s 76 percent gain. The phenomenal run has been underpinned by inflationary fears, as investors dump paper currencies for finite physical commodities. Silver, too, has looked particularly attractive as the price of gold ($1,400+ per ounce) puts it out of reach for many individual investors.

March alone saw the price of silver up more than 11 percent with much of the demand coming from China. Not only is the growing middle class in China buying silver as a store of value, industrial demand for the metal has risen dramatically.

“We do see a lot of demand for silver from China, so we think silver used in solar panels have increased,” Natalie Robertson, commodities strategist at ANZ in Melbourne, tells Reuters. “We think China will have a lot of demand for silver in the medium to long term.”

Solar power is increasingly looking like the go-to renewable energy source as the world’s opinion on nuclear power sours. Because solar panels, which include small amounts of .9999 fine silver, are relatively quick to install, Japan itself is expected to turn to solar as it seeks to relieve pressure on the country’s power grid.

A number of noted analysts and investors have called for silver to break its 1980 highs by the end of 2011. As I wrote on Monday, Eric Sprott, the chief investment officer at Sprott Asset Management, has been particularly vocal. Sprott doesn’t rule out the possibility of $200 silver as part of what he sees as a correction in the off-balance silver:gold ratio. Putting money where his mouth is, Sprott’s got $1 billion or so of client capital and his own cash invested in the metal.

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Three triggers that could push silver over $50 ounce

A sovereign debt default, a credit downgrade of U.S. debt or a housing collapse in Asia could easily push the price of silver above $50 per ounce as investors would be left clamoring for a safety trade.

Silver’s low price and its hybrid status between a monetary metal and an industrial metal makes it vulnerable to major price swings. Here are what I see as three major triggers that could push silver over $50 an ounce:

1) Geo-political turmoil. It’s easy to slip into a false sense of security regarding the U.S., European and Asian economies. While we averted a widespread collapse of the banking system in the U.S., governments around the world are growing their money supply in a race to devalue their currencies. The implications of this could be far more reaching than investors and the public anticipate. A sovereign debt default by a major European country, a credit downgrade of U.S. debt or a housing collapse in Asia could all push the price of silver above $50 per ounce as investors will be left clamoring for a safety trade in an environment where there aren’t many safety trades left.

2) Government buying. Large-scale gold purchases by central banks and governments around the world made headlines last year. If central banks and governments followed suit this year by buying and storing silver, they’d be sending a very clear message to the markets that silver is a monetary metal, and its one that, like gold, offers protection against falling fiat currencies.

3) The emergence of new industrial uses for silver. Entirely new industrial uses for silver are growing rapidly. Phillips Baker, CEO of Hecla Mining Company (NYSE:HL), claims silver’s use in new products grew by 18 percent last year. Specifically, Baker cites last year’s adoption of silver as a component in the manufacturing of solar panels and iPads.

Silver’s antimicrobial properties, though, prove more tantalizing to me. Researchers at Bar-Ilan University in Israel announced last week that they’d created a new form of silver-infused paper that can can fight bacteria including E. coli and S. aureus. If their development receives FDA approval, it could transform the food industry and become standard packaging for meats around the world. That would be great for consumers and just as good for silver bulls. Similar transformative breakthroughs that involve silver could aggressively push up prices for the metal.

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Industrial uses for silver in new products up 18 percent

One of the more tantalizing prospects about investing in silver bullion is the metal’s growing use in emerging products and technology. By some accounts, it’s up 18 percent.

One of the more tantalizing prospects about investing in silver bullion is the metal’s growing use in emerging products and technology. Phillips Baker, CEO of Hecla Mining Company (NYSE:HL), claims silver’s use in new products grew by 18 percent last year.

“Those sorts of things people didn’t envision even existing and that market has just grown, taken off,” Baker tells TheStreet.com. “We’ve seen in the last year the growth in that type of use increase about 18%.”

Specifically, Baker cites silver’s use in the construction of solar panels and iPads. The metal’s also being explored in other industries, too. Chemists at Bar-Ilan University in Israel, for example, announced the development of so-called “killer paper” last week. The material is infused with silver nanoparticles, which gives it anti-bacterial properties. If the paper ever receives FDA approval, it could be used throughout the food industry as a packaging material.

Large-scale studies into the safety and effectiveness of antimicrobial garments woven with silver have also shown promising results, and the tests could foreshadow widespread adoption of antimicrobial garments and bandages by hospitals.

What percentage of silver is used for industrial products?

Bloomberg reports that some 30 percent of silver consumption comes from industrial use. Only 10 to 20 percent of gold demand is driven by industrial use. India, for example, imported 4,000 tons of silver last year with 1,300-1,500 tons consumed by industry, according to CommodityOnline. Look for these numbers to rise as researchers find new uses for the metal.

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