That is a very interesting question, and I suspect that a recent client made me think about it more clearly. First of all, the ratios indicate that the current ratio of 58 to 1, will eventually be restored to the historic one of 16 to 1. I see no reason why that should not happen. The ratio has been as high as 77 to 1.This, on the surface, indicates that silver should be a better buy now. Correct? Maybe, but not for certain. Here’s why.
When you buy silver, say at $10.00 per ounce, and perhaps 10 oz bars, which are my favorite at $10.50 per ounce, or $105 each. I add a 1.5% commission and shipping on to that of $1.58, making that ten ounce bar in your hot little hands for $106.58, in lots of at least ten. Now here’s the catch. The “spread” on silver is much higher than for gold. The spread on silver is about 50 cents per ounce, whereas the spread on Krugerrands or Gold Eagles is about $7 per ounce. Let’s analyze those figures, but first let’s define “spread.”
The “spread” is the difference between what you buy it for, and what you can sell if for, just like the stock market. Call your stock broker and ask about GM, and he might say “GM is $19 at $21.” This means that if you want o buy GM, it will cost you $21 a share, plus the broker’s commission. If you are selling GM, you will get $19, less broker’s commission. The spread varies, depending on the stock. I don’t charge a commission if you bought the silver or gold from me, but the shipping is on you. With silver, the shipping costs may be a dime an ounce and gold a dollar an ounce. Why is there a spread anyway? It is to protect the buyer. Suppose you bought GM at $19, and the market went down. The spread protects the buyer from market losses. It’s just that simple. Why does silver have such a high spread? I do not know, but it might be because it requires so much storage space and shipping costs at all levels of the transaction. The mine has heavy shipping costs, as does the mill, smelter, wholesaler and broker. The storage costs are equally high for all. I think this is the reason, but it has always been that way, and I can’t change it.
So the investor buys gold Krugerrands, at say $7 over spot, which we will say is $575, plus 1.5% commission and shipping. Got it so far? This means he has a Krugerrand in his hands for $582, plus 1.5% of $8.73, or $590.73. Counting the shipping if he sells, it is $591.73, total. In other words, spot gold has to go up $16.73 in order to break even. 10 oz silver bars from a total base of $106.58, or $9.75 per ounce, have to go up to a spot price of $10.70 to break even, including shipping at the sell time. Percentage wise, silver’s spot price has to go up 9.75% in order to break even and show a legitimate profit. Gold has to go up only 2.9% to break even and begin going into the profit position. This is if the investor deals with me. 2.9% vs 9.75%, to break even. I know damned well that other brokers charge a fee for selling as well as buying, so the above only applies to me, and I am certain higher with others, but maybe not, I don’t know. I don’t deal with others! Suit yourself, but by all means check the figures, because it may change with different dealerships, just like car dealerships offer the same car for different prices. This is not meant to be a sales pitch! Just do the figures, which most people don’t do, so I have done them for you. Fair?
For silver to go up 9.75% from $9.75, it would have to go to $10.70, and for gold to go up 2.9% from $575, it would have to be $591.68. This is the break even figures for the spot prices of $575 and $9.75. They are $10.70, and $591.68 respectively. Does this discourage you? It shouldn’t, because with stocks there are brokerage fees in and out, and it is rare for a stock to go up as fast and far as have gold and silver so far, and I believe will in the future. The actual break-even figures for gold and silver have been reached in a couple of days of late. You just need to know, that’s all. In the last few years, silver has gone from $4.20 to its present price, and gold from $252 to its present price. They may be different when this is put up than when I am writing this, so you look at the web sites to determine spot prices. Silver has gone up 130% and gold about 125% over the last few years. This makes either one a fine investment so far.
Which will go up fastest? Which is the best buy for long term? I say silver. For a year or less? I say gold. Why? Because a client of mine, with an obvious excellent credit rating, has $48,000 in interest free money for a period of from 9 to 12 months, and he wanted to know what to do with it. I don’t recommend borrowing to buy metals, but in this case, it is for many months, and at no interest and no transfer fees. Free dollars! Whoopee! I thought about it, and decided that he should go with Krugerrands, which are the cheapest way to get into gold, and the Krug has a low spread, as opposed, as an example to the Canadian Maple Leaf, whose spread is a minimum of $5 more than the Krugerrand. With a Maple Leaf, the spot price would have to go $5 more to break even. He bought Krugs at $571.96 delivered to him, and in 6 days he is already at a profit position. He can sell them, as I write this for $573.30, so he has already, after all costs, made himself about $300, and has invested nothing. Had I suggested silver, he wouldn’t have been near break-even yet. Do I recommend this? No, but he was going to do it anyway, and I think I advised him correctly. By the time his free dollars run out, and he has to repay with no interest, he will probably have made himself several thousand dollars with no investment. With silver, probably less.
There are risks in everything! Marriage, business dealings, investments, and used cars. There are thousands of previously submerged New Orleans cars out there for sale and have been disguised pretty nicely. Beware! There are huge risks in futures contracts, because a drop can cause huge margin calls. Risks in everything, but of all the risks I can think of, I think gold and silver are the least risky. Do I know what prices will be tomorrow? Nope, and please don’t ask. No one knows! But months from now? I think it is a small risk. Anything can go wrong, and this is why I refuse to give advice as a rule, because I don’t know tomorrow’s prices any more than do the ’experts’ who say they do. It’s all guess-work, near time. Long term, it’s hardly guess-work. Long term, and I mean years, you can hedge yourself very nicely with either gold or silver. Would I do it? I do it all the time!
Beware of doctors who don’t follow their own directions, fat ladies selling reducing plans, bleached blonde real estate sales gals, and used car salesmen. One of a used car salesman’s neatest tricks is to take your paid for junker in as a trade and offer you a newer junker, with a low interest rate. You drive it out, and guess what? “Oh, we couldn’t get that interest rate through, so now it’s 15%.” You want your old car back. “Sorry, we sold it.” Sue them? Forget it, as they will always win. You are stuck. I mention this because I know of it happening a couple of times. Always beware of used car salesmen and something for nothing gimmicks. I know of several who have fallen for those too, and they have lost big time. “Invest $10,000 with me, and I’ll guarantee you a 10% interest per month.” Horse puckey! “I can get you out of all your credit card debts and mortgage debt for a fee.” Don’t be stupid! Just protect yourself.