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Gold / Silver Ratio Tops 80 to 1

by: Hard Assets Investor October 13, 2008 | about stocks: GLD / SLV    
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By Brad Zigler

With all the gasping and panting recently, it might have been easy to miss the milestone reached in the metals market. The gold/silver ratio has made new highs. The early London fix on Friday had the ratio at 78-to-1; by midday Monday, the ratio had climbed to 81-to-1.

 

Gold/Silver Ratio (London Fixes Through Oct. 10)

Chart: Gold/Silver Ratio (London Fixes Through Oct. 10)

Silver bulls have been perplexed by gold's outperformance amid all the financial tumult recently. And now that ratio's crossed above 80 to 1, there are renewed calls for a surge in silver demand. This time, however, the demand is seen coming from holders of gold, who seem ready, according to some wags, to swap yellow metal for white.

The trouble is, the cash metal market is tight. VERY tight. Premiums for bullion and bullion coins in the retail market are high - if there's any inventory to be had at all - to frustrate those would like a "trade-in."

Futures now seem to be the only place to swap the metals near spot prices. Oh, I know there are the gold and silver grantor trusts such as the SPDR Gold Shares (NYSEArca: GLD) and the iShares Silver Trust (AMEX: SLV), but to make or take delivery through them, you need to be able to swap in or out the equivalent of 50,000 or 100,000 shares. You got that kinda size?

On NYMEX/COMEX, the primary U.S. market for metals futures, gold is delivered in 100-ounce lots; silver is dealt in 5,000-ounce silver tranches. If that still seems a little rich, you can use the NYSE Liffe's "mini" metals contracts, which are only a fifth or a third the size of COMEX standard futures.

Yes, the venerable old NYSE is now a futures mart. Well, technically, a NYSE Euronext subsidiary became a U.S. regulated contract bourse when the Chicago Board of Trade's precious metals business was purchased earlier this year (see "NYSE Chief: Becoming A Competitive Futures Mart"). The deal was made after the CBOT itself was snared by its longtime crosstown rival, the Chicago Mercantile Exchange (the CME was attempting a buyout of the NYMEX/COMEX and used the metals sell-off as a regulatory sweetener).

The NYSE Liffe mini gold contract is sized at a kilo (32.15 troy ounces), while the silver contract calls for delivery of 1,000 ounces. Plainly, these are much more manageable sizes for retail investors.

Of course, if you want to take advantage of exchange facilities for metals deliveries, you must deal through an exchange member brokerage firm (or a firm that clears through an exchange member). You must also establish a commodity futures trading account. Be forewarned, the paperwork required for "good delivery" can be daunting. Most retail commodity brokerage representatives - that is, the people actually executing your orders - have never handled a delivery. After all, only 2%-3% of futures contracts are settled by delivery. Your rep will rely upon his or her back office to handle much of the transaction.

If you don't already have a commodity brokerage relationship, you can search for a broker near you through the CME's online Broker Search function.

But don't tell the NYSE how you found your broker.

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This article has 15 comments:

  •  
    Oct 13 06:41 PM
    I just got tired of telling you guys since long time ago that SELL is the name of the game now, don't get stranded buying Gold coins or Bullion when you can play the game using paper Gold, it does not matter if everyone calls it a manipulated, speculative, "Cartel" game market or else. You buy on the way up and sell on the way down, you keep tight stops en the way down and more generous stops en the way up and you'll not even have the physical stuff to be concerned about in things like safety, confiscation and all that rubbish you read day after day. That's why the difference between the prices and increased volatility which has made paper Gold just another asset class, because people are getting more into the safety of electronically traded spot Gold, remember those days where Gold barely moved USD 5 or USD 6 in a week? well there you go, your paper Gold is cash, your Bullion and Coins are wealth but they are worth what anyone is willing to pay by the time you realized that "not all that glitters is Gold". Long term investors with a 10 - 15 years investment life span, hang on to your Bullion and Coins but don't expect a magic return in the meantime.
    Reply
  •  
    Oct 13 08:30 PM
    Gold price action is surprising- gold should be rising- but it is falling a lot. Are central banks selling gold? In these kinds of environments they would/should sell aggressively. They are not selling mint gold with the excuse of shortage.

    Any body has a clue on this.
    Reply
  •  
    Oct 13 09:15 PM
    SB-tiger, there is so much going on backstage that not even the most knowledgeable analyst is aware of. The information that gets to the media and trading desks has been filtered so much that analyst can only speculate and try to get lucky. Medium term investors and Funds do not mind dumping tonns of Gold in order to realize their profit. The relationship between USD, Overseas inlfation and Gold has never been broken nor will it be ever. What is going to happen is that hyperinflation and depreciation of the USD will drive Gold higher within the next 2 years, In fact everybody knows that the valuation of de USD since Aug has been an artificial move reinforced with Corporate inflows and panicky investors bringing their buck back home plus flight to safety in treasuries, however bear in mind that the USD is fundamentally weak, however the world has realized that a weak USD does not help at all as long as commodities particualrly oil and Agricultural as quoted in USD it becomes a snowball inlfation wise. But to answer you question clearly, do not expect Gold to rally any time soon. Probably next year but keep an eye on the GOLD/USD ratio that will tell you the truth, if that ratio goes above 700 then you can tell for sure that Gold has decoupled from the USD otherwise don't believe what you read. In other words, Gold below USD 800 by Dec 2008 and then coupled with the USD through 2009
    Reply
  •  
    Oct 14 12:26 AM
    as a broker for 16 years i have to laugh at all the rookie comments i read about gold , silver , dollar comments, this is what is known in the industry as a shake out, the dollar is crashing, right before our eyes, we have these bear market rallies like today, 900 plus points to reinvigerate peoples faith, and the fools will follow, however if you pay attention to the VIX, and the fact that nothing has been solved, any one with an ounce of common sence would see that the cartels are shaking people out of the precious metals, trade in your gold and silver for worthless paper before its too late, get your wheel barrow, soo you have something to carry all that cash with you to the liquor store, for something to soothe the pain soon to follow,,,,, Such fools.

    the doolars is dead soon to be a 100 years old, long live the AMERO.
    Reply
  •  
    Oct 14 01:30 AM
    gold was rising steadily however as it gets close to 1000 it is receiving resistance. silver however is at a much fairer price. when it comes to value I think gold has had its run.
    Reply
  •  
    Oct 14 05:43 AM
    SB-tiger: I was selling gold at 917 and buying at 838. I own physical so have no problem selling futures. I will probably sell more if I see a good setup.

    There are a few reasons I did this. See my previous comments for details.

    And please don't misunderstand I think gold is a good long term investment. But either A) the stock market holds above its 2002 lows and now isn't a good time to buy gold as fear levels have already maxed out, or B) the stock market falls below 2002 lows and we're all in big trouble and you might be better off buying long life food and a gun instead of gold.

    I think A) is the most probable outcome by far.
    Reply
  •  
    Oct 14 08:16 AM
    Don't try to guess what the man behind the curtain is doing. The globalists are printing money like there is no tomorrow, because there isn't. Do what common sense tells you.
    Reply
  •  
    Oct 14 08:21 AM
    Between Friday and Monday, I'd say there are two reasons why gold seems to be responding contrary to what gold bugs would expect.

    On Friday, the hedge funds and mutual funds were facing unprecedented withdrawals as ordinary people want out. Probably a huge majority of the larger funds have been investing in foreign stocks. Even today I read an article of why one should invest in China. In their efforts to meet the withdrawal demands, these funds have been selling their foreign stocks and bringing the funds home to meet the withdrawal demands. The mad effort to convert the funds back to dollars has driven the cost of dollars up significantly. Of course, these funds were selling their gold to raise cash as well.

    My thought is that on Monday gold went down further because of the European plan to 'do whatever it takes' to solve the crisis. This means printing more money., the only tool governments have. I read that they were throwing something like two to three times as much money at the crisis as the U.S.'s $700-Billion. So, when they announce they are inflating their currencies two to three times Uncle Sam's rate, that would drive the value of their currencies down in relation to the dollar, making it appear that the dollar is rising in value. Since gold is prices in dollars and the dollar was 'rising,' gold seemed to go down when priced in dollars.

    If there could be a regularly reported 'street price' for gold, in a way that would equal or even replace the NYMEX/COMEX price, it would be interesting to see what the retail free market price of gold is. I have a feeling that would more closely give the 'real-life' value of gold. It doesn't make sense, really, that gold seems to be going down or at best treading water when on Friday people were lined up outside the doors of gold dealers in London. We need some reporting of the free-market price of gold.
    Reply
  •  
    Oct 14 01:52 PM
    Yep. I would second that. NYMEX/COMEX prices dont reflect the physical gold and silver prices by a long way.
    Reply
  •  
    Oct 14 01:55 PM
    Where the hell have you been, bowman711? Finally, I get to read some common sense, thought-out ideas on what is happening to our yellow metal.
    I'm sure you are salivating over this 80-1 ratio. I know I am! When the s..t hits the fan, it will be soooooo (fill in the space).
    Reply
  •  
    Oct 14 02:45 PM
    Buy gold and silver bullion--if you can. The paper and physical markets are completely out of synch.
    Reply
  •  
    Oct 14 07:25 PM
    ob-what-can-doobie-bro... thank you for calling us all rookies, however after 16 years trading (you) I would expect you to be a long term investor already, so the definition of rookie can be a person with no experience or someone with good experience and no success, other than laughing I don't see a real contribution on your comment, are you bullish? bearish? and if so what markets? short term? medium term? long term? please give us a feedback so we can figure out where to put our money at work!
    Reply
  •  
    Oct 14 10:31 PM
    Hey Guys, I really am a rookie on this subject. In the last few months I've learned from reading these articles and comments what the uptick rule was and selling short among other things, but I do believe buying gold now is the prudent thing to do. Many empires and great cilivizations have falllen in history. None of us know what will happen tomarrow. Our current bull market of capitalism is possible through our socialism (taxes). Its not a true boromameter or measure of value and gold and silver are since time emmimorial. If you want to make a quick profit then that is something else but to guard against reckless politicians and wall street greed, you should buy gold. Thats the way this rookie feels.
    Dave
    Reply
  •  
    Oct 15 01:53 AM
    The gold/silver ratio may be 80, but it could go to 90 and stay there for months. It's rational to expect the markets to revert to the mean, but when the whole world is going crazy, maintaining your sanity can help you stay around to be in the game, but does not necessarily help you wing the game.

    There have been instances of pork bellies selling for less than live hogs for more than two years, in ALL cash and future markets. It does not make sense for bacon to cost LESS than live hogs, but it's happened again and again.
    Reply
  •  
    Oct 15 03:23 AM
    delivery from comex /nyse mini's- great idea! The first time doing it would probably be a nightmare but it would cut down the cost of getting middled from the retail side -
    Reply
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