Is This A Good Time To Exchange Gold For Silver?

By Michael Pennington © Copyright 2010 Pennco Coins

This is an excellent question that came up last week in a discussion I had with a long time client. Let’s review quickly where we came from. I always recommend a client start off with Silver Eagles investment before adding any gold. From here the next consideration is analyzing the primary goal of the client. If the primary consideration is long term insurance against the coming inevitable collapse, then the client should be heavy weighted in favor of Gold – perhaps 70%-30% or 60%-40%. On the other hand, if the primary goal is to maximize return, perhaps one’s portfolio should be weighted in favor of Silver – perhaps 70%-30% or 60%-40%.

But circumstances change. For several years Gold has considerably outperformed Silver. This is best seen by following the Gold/Silver Ratio.

There have been several sharp downward spikes in the gold/silver ratio. Some of these spikes resulted in periods of huge outperformance by silver compared to gold. Right now the trend favors silver relative to gold, so assume that the ratio will fall further.

It is also a function of the intensity of the manipulation that has occurred. The Silver shorts have been vicious for years. However, lately the shorts are being squeezed, investor demand is increasing rapidly and the supply of physical Silver is dwindling. Hence, we are witnessing the beginning of a surge in the price of Silver.

In fact, Silver has been the investment of the year. Silver prices have risen 31 percent in 2010 to a 30-year high, outperforming gold, equities and most base metals. Last week the gold-silver ratio dropped below 60 for the first time in 11 months. The gold-silver ratio is simply the number of ounces of silver it takes to buy 1 ounce of gold.

I believe it is possible for Silver to reach $50 by the end of 2011 and perhaps as high as $75 by the end of 2012. The problem with silver as an investment however is all the volatility along the way. That is why I encourage investors to not even engage in day to day watching of silver prices. While there is a lot of money to made in silver, it certainly isn’t for the feint of heart.

As a result, it is not a bad strategy to exchange some Gold for more Silver, perhaps at a 50%-50% ratio. This could be maintained until Silver catches up to Gold and then a switch back to Gold would be wisest. Be aware that there is a cost for making the exchange – normally about 5%. This is the difference between the BID and ASK prices. So you don’t want to make this a habit. Also, one needs to consider that the “exchange” is a taxable event. So if you have a nice profit in your Gold, you may want to consider the tax consequences. However, the upside of the coming Silver Tsunami would minimize all transaction expenses. If you would like to discuss whether this is a strategic move that makes sense for you, feel free to call me and I will be happy to discuss with you personally.


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This entry was posted in Buffalo, Bullion, Coin, Dollar, Eagle, Federal Reserve, Gold, Gold to Silver Ratio, Government, Investment, Maple, Mint, Palladium, Peso, Platinum, Silver, Tax and tagged , , , , , , . Bookmark the permalink.

3 Responses to Is This A Good Time To Exchange Gold For Silver?

  1. I like your article.
    Three comments about gold:
    1) Price is at an all time high.
    2) It will continue to rise (at least in the short term).
    3) I would not buy it.

    Silver has a higher return this year than gold. I would rather trade precious metals via an ETF rather than coins/bullion because it is easier to buy and sell and you don’t have the storage risk. I do agree with your silver assessment that it will continue to climb in value (at least for the next year or two).

  2. This is very interesting. Thank you!

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