Silver seems to be the talk these days in the precious metals world.  Anything from the historical gold/silver ratio, past performance, JP Morgan’s short contracts to Tomahawk missiles, but one thing is for certain, silver is climbing fast.

I get this question a lot being in the precious metals industry: “How do you feel about silver compared to gold.”  I always answer with this: “Silver and gold do tend to rise together, and up until last year they both averaged around 17.35% appreciation per year for 9 years in a row.  So they tend to end up in the same place (appreciation wise), silver just tends to be more volatile.”

Here are two charts priced in US Dollars comparing the performance of both silver and gold from 2001 to 2009:

GOLD USD SILVER USD
2001 2.5% 2001 -0.1%
2002 24.7% 2002 4.8%
2003 19.6% 2003 24.0%
2004 5.2% 2004 14.3%
2005 18.2% 2005 29.6%
2006 22.8% 2006 45.3%
2007 31.4% 2007 15.4%
2008 5.8% 2008 -23.8%
2009 23.9% 2009 49.3%
Average 17.1% Average 17.6%

 

If you take into account 2010 the average for gold jumps to 18.37% per year and silver jumps to 24.22%.  Last year silver jumped 83.44%.  So you can see why there has been a lot of attention on silver as of late.  Not to mention silver has jumped 27.95% so far this year.  The thing about silver is the correction years.  The underlying trend is positive but silver has shown that it can correct and can correct big.

As far as the gold/silver ratio there is a lot of talk about the historical ratio at 1/16.  Meaning the price of silver has been as low as 1/16th the price of gold.  With gold at $1,459 per ounce today that would mean that silver would need to be trading at $91.18 per ounce today to be at 1/16th the price of gold.  This is where most of the excitement lies around silver.  People believe that this ratio will again be achieved. Time will only tell.

I read the other day that each tomahawk missile that the US blows up has over 500oz of silver in it, so as a nation we are destroying the supply.

A concern for the downside of silver is JP Morgan’s manipulation of the silver market for years now.  In a recent hearing the CFTC voted to continue to allow JP Morgan to naked short the market for silver, which artificially pushes prices down.  Therefore if JP Morgan really wanted to push the price down dramatically all they would need to do is buy more naked shorts.

So there are arguments for silver both ways, what else is new.  What is important is to add precious metals to your portfolio to give yourself the ultimate hedge.