Many “silverbugs” out there use a common price ratio between silver and gold to predict silver’s future price. Here’s why you shouldn’t only use that…

Think about shares of a company. A single share of Company ABC could be $2 per share, but that doesn’t mean that company is only a $2 company. If Company ABC has 100 million shares outstanding, that would make it worth $200 million. That’s its market value. And that is exactly how you should look at precious metals.

We’re talking about the market’s value for all the gold and silver in the world. According to Theodore Butler, contributor to SilverSeek.com, that number is quite telling.

In 1900, there were one billion ounces of gold in the world, and gold had a $20 per ounce price tag. That made gold’s market value $20 billion. There were 12 billion ounces of silver in the world with a price tag of 65 cents. That gave silver a market value of $7.8 billion. It led to a ratio of only 2.6.

Today, gold’s market value is $3 trillion, and silver’s is only $12 billion. Here’s how Butler figured that out:

The amount of gold has gone up five-fold since 1900, yet the amount of silver decreased from 12 billion ounces to only one billion ounces, because silver has many industrial applications like electronics and batteries, while gold’s only use other than wealth storage is jewelry.

That mere fact makes this ratio so astronomical. While the price ratio has only shifted from 30 to 56 over the past 108 years, the real market value ratio has jumped from 2.6 to 281.

That means that silver’s price has been suppressed for far too long. The ratio doesn’t have to correct the whole way back to 2.6 for you to make money off of silver. Even a slight drop is big money in your pocket. You also don’t have to store a bunch of silver bars in your house to get rich off of this anomaly either.

One of the most effective ways to profit from a precious metals rally is leveraging the rise in price by investing in junior miners. We’ve talked about this before. During the last big rally in gold and silver, junior miners beat every other investment with gains of 2,464%, 3,987%, and even 13,025%. We may have a chance to see those kinds of gains this time around. And only penny stock miners can offer those types of gains. When we find one we’ll let you know…

Sincerely,
Jim Nelson
August 14, 2008

Invest Using the Gold Silver Market Ratio was originally featured in the Penny Sleuth.

The dollar is falling so fast, that precious metals are struggling to keep up. Both gold and silver are at all-time highs, and every day it seems they are breaking records. When I got into the office today, silver was sitting above $18, and gold is around $935. That’s incredible. I know we don’t normally talk about precious metals, or macro ideas here in the Penny Sleuth, but this one can’t be ignored. Plus, there is an amazing way to use penny stocks to leverage this boom market.

A while back, I discussed how in markets like this, the best way to profit from the falling dollar is to buy shares in junior miners. Greg Guenthner and I did that for our Penny Stock Fortunes readers, and I’ll let you get a chance at that one in a minute. But first, I want to rehash on something that was written here in the Sleuth years ago…

There are three stages to any precious metals rally. When we first wrote to you (in the summer of 2006), we were right smack in the middle of the second stage of the rally. Let me explain…

How the Third Stage Will Make Us Rich

The first stage of the rally begins when the economy takes a large hit (September 11, 2001), and precious metals begin to be viewed as an investment to avoid the crashing dollar. As you can see, between about 2001 and 2004, the Dollar was valued higher than gold. But at the end of that period, the precious metal started its first move, ever so slightly:

The second stage of the gold rally goes like this…

Investors notice the price of the Dollar slip in comparison to the price of precious metals. In the chart above, you can see that happening in 2003-2004. Once this happens, institutional investors replace traditional gold bugs as the major investors. Silver is also brought into the picture at this point.

But as you know, institutional investors are wary of anything not in the S&P 500. So, they dive into physical gold and major producers. Our junior minors remain the only undervalued avenue for investment at that point.

This sets up the third phase, which is just about to start…

Compared to the last huge precious metals rally, this one is more of a slow and steady increase. This gives us a clearer picture of this all-important third phase, which goes something like this…

People outside of the institutions and Wall Street begin to realize what they’ve missed during the first two stages of the precious metals rally. They want in. Just as they did during the end of the dot-com boom in 1999 and 2000, everyone throws their money at the hottest thing, which, in this case, is precious metals.

So instead of continuing to invest in the already overbought mega-producers, this new crowd begins to buy up the undervalued junior miners. This is our chance. Take a look at stage three during last rally:

Almost every junior miner out there is undervalued right now. But there is one that should bring much larger gains for shareholders.

We discussed it back in November, and so far it has done quite well. It’s up about 17% since then, and has a lot further to go. If you want to check it out, you need to read this report describing how we found it.

As for the rest of the juniors’ market, we’ll keep you posted…

Sincerely,

Jim Nelson
February 26, 2008

The Next 1979-1980 Gold and Silver Rally was originally featured in the Penny Sleuth.