The current price of gold and silver are $1612.70 and $28.10 respectively with a ratio of roughly 57. Since the dawn of the financial crisis in 2008 the ratio has been favoring the price of gold as central banks have been beefing up their supplies of bullion in the fear of inflation.
When gold is mined, for the most part, it is kept in the form of bullion. Silver, on the other hand has a significant industrial demand. Most recently computer manufacturers have been the largest piece of the silver demand pie, however, in the past, film production for photography led as silver was a key ingredient in film production.
As far as market characteristics are concerned, I would say that about 80% of metals trades go through the London Mercantile Exchange (LME). Silver markets are known for being a relatively thin market, making paper a big mover in the metal, making the silver market significantly more volatile than other metals. Another silver market characteristic to consider is that the open interest in this market consists of roughly 400% more paper-backed than silver-backed contracts. This discrepancy implies that there will be a market spike whenever the paper positions are forced to cover their positions.
Metals ratios are known for being irrational. Platinum is roughly 19 times more rare than gold, yet is trading at a $200 discount. One of my longer term trade options would be to spread the pair, buying platinum and shorting gold for when the current goldbug trend fades. Aside from this spread, I remain bullish on gold and silver, slightly more bullish on gold as I believe that inflation will become a significant problem in the healing of the global economic crisis.
David Cornes holds a degree in economics from the University of Montana.
