Your editor intended to talk about the big idea we found in healthcare today, but a more pressing opportunity came up. And it’s a great one too.
Right now the foreign currency market is going haywire.
Today the Swiss central bank announced it was ending it’s policy of keeping the Swiss Franc low to encourage exports.
The news sent the Swiss Franc soaring 15% in a day. A 1% move in a currency in a day is a pretty big move. A 15% swing is astonishing.
But that’s just today. Other major international currency trends are just as surprising.
The U.S. dollar -- which should be floundering under the weight of $18 trillion in government debt -- is at a 10-year high.
Oil prices have firmed up for the time being, but in Russia the ruble has resumed it’s slide.
There’s a lot of craziness in world markets right now and it’s greatly affecting asset prices. Sending many to extremes.
One of those extremes is in the precious metals markets. And it’s setting up a truly great opportunity.
The Best Time to Buy Silver in 40 Years
Your editor has only seen this happen a handful of times over the last 20 years. It’s rare. But when it happens, it’s usually enormously profitable.
You see, gold and silver typically move closely together. When gold drops, silver drops. When gold moves higher, silver moves higher.
The relationship between the two is expressed by the gold-silver ratio.
This ratio is based off how many ounces of silver it takes to buy an ounce of gold. The long run average for the ratio is about 55. That means it usually takes 55 ounces of silver to buy an ounce of gold.
The ratio is not locked at 55 though. Sometimes it’s higher and sometimes it’s lower. When the ratio is high, silver is cheap. When the ratio is low, gold is cheap.
Right now the ratio is at an extreme high of 74. That means it takes 74 ounces of silver ($16.92) to buy a single ounce of gold ($1252.00).
So silver is cheap. Extremely cheap.
The chart below from Measuring Worth shows the gold-silver ratio over the past 340 years and how cheap silver is today relative to gold:
Although the chart only goes up until 2012, you can see that only a few times in recent history has the gold-silver ratio hit it’s current highs.
In fact, it has only hit this extreme point in a handful of times in the past century.
Each time it did it signalled silver was cheap and a rebound -- often a large rebound -- in silver prices followed.
Go back to 2003. The gold-silver ratio hit highs around 82 at the time which isn’t much higher than the ratio is today.
After it hit such an extreme low, a bull new bull market began for silver. An ounce of silver went from just under $4.50 an ounce to more than $20 an ounce by early 2008.
That was a total run of more than 340% from beginning to end.
The gold-silver ratio soared again during the 2008 credit crisis. Gold fell during that time. Silver fell much further.
By October 2008 the ratio hit another extreme high of 87.
Again silver was too cheap. But it didn’t stay that way for long. The price of silver ran from lows of $9 to $50 in the two years that followed -- a gain of 456%.
Today, the price of silver is consolidating just under $17 an ounce. But gold is relatively much stronger. As a result, the ratio is hitting the extreme highs of the mid 70s again and it’s creating one of the best opportunities we’ve seen in a long time.
Three Scenarios...Three Winners
Fundamentally, the outlook for silver is bright.
Industrial demand is expected to jump 27% through 2018 according to The Silver Institute.
They say, “Half of this growth will be accounted for by the electrical and electronics sector, but additional demand will be due to growth in other industrial applications”
There’s also significant investment demand for silver at current prices. Last year the U.S mint sold more than 42 million Silver Eagles. That surpassed the previous record set in 2013. And, to put it in relative terms, those sales levels were more than four times higher than they were in 2007.
But aside from the fundamentals, which can take years to noticeably impact the price of a commodity, the gold-silver ratio says a rebound in silver is imminent.
The simple factor is silver is cheap relative to gold so there are only three scenarios.
1. Gold prices go up - if gold prices go up another $100 or $200 an ounce, silver prices are set to absolutely fly.
If gold is $1400 an ounce, silver prices would have to climb above $25 just to hit their historical averages from this point.
If gold moved any higher than that, the gains in silver would be truly explosive.
2. Gold prices stay flat - If gold prices stay flat at $1250 an ounce, silver would still have to rise 30% just to match historical price levels relative to gold.
3. Gold prices fall - in the event gold prices fall, they would have to fall extremely fast to make silver any cheaper relative to gold.
For example, gold would have to fall to $935 an ounce just to put the gold-silver ratio at it’s historical average.
That’s a high margin of safety to silver right now.
Anyway you look at it silver is downright cheap and has all the elements of what The Cheap Investor looks for in a trade.
Silver is so cheap, even the unlikely worst-case scenario where gold prices collapse, it’s likely to hold steady.
Any time you can find a low-risk, high-reward trade, you should take it.
That’s where silver is right now.