Should you be buying silver now?

In 51 countries, the words for silver and money are identical.

Silver has been used as money for longer and in more parts of the world than gold. And silver was money long before the idea of paper and electronic currencies.

With the government creating an unprecedented amount of paper and electronic money, you could find yourself much poorer if you don’t own something that holds value through chaotic times. That’s why metals like gold and silver make sense in times like this. They have intrinsic value, and they can’t be created on a whim… There’s only so much gold and silver to go around.

For now, gold is more popular with investors. That’s the problem… Lots of people are turning to gold as an investment. They’ve pushed gold prices up to $950. Gold hit its all-time high in March 2008 at $1,004, and I expect it’ll get there again soon.

But silver at about $13 [currently about $14] is not even close to its all-time highs in the $50s (or inflation-adjusted highs above $1,000). As a result, gold is overvalued relative to silver (I’ll explain this more in a moment).

Think about it this way: We’ve all seen ads from companies offering to pay you cash if you mail in your gold jewellery (don’t go anywhere near those sharks, by the way). Have you seen any for silver? Me neither.

At the time of writing, you would need 71 ounces of silver to buy one ounce of gold. This difference in value is wildly out of step with centuries past. And it’s not going to stay that way…

The US Congress established its monetary system in 1792 and agreed to mint coins using both gold and silver. At the time, you needed 15 ounces of silver to buy one ounce of gold. (In other words, what we call the “silver-to-gold ratio” was 15:1.)

That ratio was well established. In fact, 15 ounces of silver had roughly equaled an ounce of gold for the previous four centuries (at least according to my 1932 edition of the US Geological Survey Minerals Yearbook).

But then, in the early 20th century, governments around the world (notably ours) stopped backing their money with gold. People started hoarding gold, driving up its value, and the ratio went haywire, first cracking 71:1 during the Great Depression.

A variety of political and economic factors calmed the gold market and the ratio narrowed (though not to pre-Depression levels). It eventually bottomed out at 20:1 in the 1960s… when the US stopped backing its currency with silver. Soon after, people bought up silver coins, driving the price of silver higher relative to gold.

Silver is incredibly cheap relative to gold

Guess what? Right now, enthusiasm for gold has pushed the ratio back to its 15-year high of 71:1… exactly where it was in the last Depression, when people were crazy for gold. If the ratio dropped back to 15:1, silver would sell for around $60… a 369% increase from prices [at the time of writing] of $13.
I believe you will make a lot more money in silver over the next few years than you can holding ordinary stocks or mutual funds. And it’s a no-brainer to hold silver versus gold.

Will the silver-to-gold ratio drop back to the pre-Depression ratio of 15:1? No one knows. But given the reasons for precious metals to rise, it’s smarter to own the metal near its all-time low rather than the one near its all-time high. And I think the recent run in silver is just the beginning.

• This article was written by Dr. David Eifrig M.D. for the free daily investment letter
, and was first published on 23 July 2009.