Wednesday, March 23, 2011

Gold/Silver Ratio, etc

Since March 7, 2011, the ratio between the prices of gold and silver has been below 41 every trading day but for three days. The ratio at current prices is at the lowest it's been all year (38.48). This means it takes a little less than 39 ounces of silver to purchase an ounce of gold.

On June 7, 2010, nine months ago, the ratio was 70. In other words, if you'd traded 2 ounces of gold then, it would have bought 140 ounces of silver. Today, you could trade that silver back into roughly 3.5 ounces of gold, a 75% gain in only 9 months. Zero leverage in two investments considered to be sterile, producing a true 75% return... after all, you started with only 2 1-ounce coins... now, you have 3 1-ounce coins and a half-ounce coin.

I've been tracking the ratio since 2003. It fluctuates every year; during the 2008 economic problems, it hit a high of around 84. In the last seven years, the lowest the ratio has moved has been about 44; half of this year thus far, we've been below that multi-year low, so we're in uncharted waters now. Silver is making big moves relative to gold, and continues to push the ratio lower.

At the current ratio of 40 and below, I'm considering swapping some silver to gold; if it goes below 20, I may swap it all to gold. Not that I have an awful lot, but it really makes sense to leverage the ratio to produce a real return and increase one's holdings in a real asset.

In other news, last night I had a thought: with all the current irrational fear surrounding nuclear power, I wondered if the nuclear industry had been hard hit, particularly uranium miners. When I went to look, I found that, indeed, some stocks had taken 25% hits or more. I filtered through them and found a few that appeared to be only affected by panic selling and bought a few hundred shares of one company at a 25% discount to their trading price of just a few weeks ago. I think just about any uranium company is a great deal right now, because nuclear energy is not going away any time soon, and the depression in prices is already starting to correct back up. Once Fukushima Daiichi has been completely dealt with, I believe the prices will get back in line with reality; the bargains are available now, but won't be for long. My plan is to let it rise back to a reasonable price, book the profit, and put the money back into agriculture or silver.

Some of the stocks and ETFs that made it through my initial screening process are, in no particular order, Bannerman Resources, Mega Uranium, Paladin Energy, the Market Vectors Uranium+Nuclear Energy ETF, Strathmore Minerals, Uranium One, and the Global X Uranium ETF. I want to stress I have not done due diligence on all of these, therefore I am not recommending any of them. However, if you want to leverage the irrational panic into some Christmas money, you might want to consider jumping on what may be a once-in-a-lifetime opportunity in uranium mining. The real bargains (30% or bigger discounts) were snapped up a day or two ago, but it looks like there are still some good deals out there while the panic is still in the air.

Please do your own due diligence. I have lost money on one stock that I didn't research carefully enough... I was seduced by a high dividend yield, ignored the high level of debt the company held, and it ended up biting me in the butt. For goodness sake, don't buy anything based on the recommendation some guy whose ramblings you read on the internet. He could be a complete loon, or he could be a pump-and-dump scammer. I am definitely not the latter, and I certainly hope I'm not the former.

Disclosure: I am long Paladin Energy, and plan to sell once the bargain hunters outnumber the panic sellers.

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