Silver Investing – Is the Party Over?

There has been much written by silver bulls the past few years about the low price of silver relative to that of gold. I am one of those bullish authors. In 2010 and early 2011 all the bullish rhetoric about silver investing proved to be more than justified by the relative price increases in silver and gold, with silver outperforming gold by almost 300% during this that period. Then silver hit a big bump in the road-or more descriptive; fell into a trench in the road. The price pulled back over 30% in a week, and didn’t recover and make new highs in a few days as it had done in other recent sharp pullbacks. Is the party over for silver investing? Has the bubble burst?

Let’s take a long-term perspective. After 200 years with a gold-to-silver price ratio of about 17:1, the ratio rocketed upward in the 1980s and even touched 100:1 in the early 1990s. Yet, during the 1980s and 1990s, industrial demand for silver also rose sharply, and continues to rise in 2011 as new uses continue to be discovered. With uses for silver on the rise, and for gold remaining fairly static, one would have expected the ratio to decrease the last thirty years, not increase dramatically.

In early 2010 the ratio was about 70:1. But in early 2011, the day both gold and silver hit new intraday all time highs, the ratio dropped to a multi-decade low of about 31:1. The ratio dropped by more than half in a little over a year, justifying the fundamental supply/demand viewpoint that return to the long-term ratio is inevitable. Then the price of silver crashed some 30% while the price of gold dropped by a single digit percentage, resulting in a gold to silver price ratio of 43:1.

In the late 1970s and early 1980, when the price of gold reached bubble territory on inflation fears, there were several sharp and fairly deep pullbacks in the price of both gold and silver. It appears this time around will be no different. But those who say the bubble has burst are wrong. Gold mania hasn’t yet set in, because inflation in the U.S. hasn’t yet been recognized. Measured in the manner it was measured in 1970, inflation is running about 10% in the U.S. in mid-2011. Yet by the current method, inflation is running just over 2%.

Those who are on the low end of the earning scale are feeling the price increases, but they do not have the disposable income to buy gold or silver. The middle class who are still employed haven’t felt inflation yet. And those who are out of work do not have the disposable income either. When the official inflation rate hits high double digits, resulting in a deep pullback in real estate prices and the markets, the middle class will wake up. Gold mania will ensue, and silver mania will be close behind.

The silver investing party is not over. It has barely begun.

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