January 12, 2004

Gold/Silver Ratio Improving

Pulled the trigger on silver calls today in the Options Alert in part because of what this chart from Weldon is showing us. You hear about the Dow/Gold ratio all the time. And in fact, I've said before that I think the price of an ounce of gold will cross with the Dow Jones Industrial Average at some point...perhaps gold $4,000/oz Dow 4,000. The implications of that are staggering from a bullion bull's perspective, and to traders who want to cherry pick the destruction of the leveraged financial economy lurking underneath the nervous surface of Wall Street. But what does it mean for silver? Well...if the chart below is any indication, it means that gold is no longer rising at a much greater rate than silver. There's two ways for this ratio to fall: one, for gold to get cheaper (which it's not), or two, for silver to get more expensive (which it is). This could be a move where silver makes up for its status as the "other" precious metal, the red-headed step-child of monetary metals...the underachieving hard asset. Or...it could be just a sympathy rally...without any real legs. If the economy fails to reflate...it would kick the legs out of commodity prices. Gold would do fine...as it acts more like money (vis a vis the dollar) than silver. However, I think this is the real deal, and for speculators, well worth taking a flyer on.


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