Gold Is A Better Investment Than Silver – Here’s Why

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A couple of weeks ago, Wheaton Precious Metals released a very useful study on the gold-silver ratio. It concluded that there is no characteristic value for the gold-silver ratio – that there is no mythic value (16, for instance) to which it is attracted, and to which it would return if only the world stopped manipulating its price. Rather, the gold-silver ratio rises during deflationary periods and disinflationary periods, and falls during inflationary periods.

Let’s test this against some measures I’ve used for deflation/inflation. I’ll use the weekly chart of USDX vs gold price, weekly, going back to the beginning of 2008.@Gold&Silver

It is a busy visual, but what we want to do is look at longer-scale variations.

  • Intervals when both the USDX index and the gold price rise are considered deflationary.
  • If gold rises and the U.S. dollar index falls, we have inflation (hence inflation and deflation are not opposites).
  • Gold falling and the U.S. dollar rising will be disinflation,
  • and I suppose that if both gold and the U.S. dollar fall, we must have disdeflation, although I have never seen that word anywhere and, remember, if that ever happens, you should be shorting gold stocks.
  • The graph above suggests that:

  • through most of 2008, we experienced disinflation, and over that interval, GSR rose from 55.7 to 77.1,
  • much of 2009 was characterized by inflation, and the gold-silver ratio fell from 77.1 to 63.3,
  • until the middle of 2010, we had disinflation, and the gold-silver ratio rose slightly,
  • into late 2011 we had a big inflationary pulse, and the gold-silver ratio fell to 40.8…
  • through 2013 we had a disinflationary episode and the gold-silver ratio rose to 65.9,
  • through early 2015 the trend was deflationary and the gold-silver ratio rose to 74.5,
  • over the past 18 months the dominant trend has been deflationary and the gold-silver ratio rose to 88.6 and
  • over the entire chart (twelve years) the big picture is deflation, but most of that has been accommodated through cycles of inflation and disinflation.
  • Why Gold Remains A Better Investment Than Silver

    As long as debts are created beyond any ability to repay them, deflationary conditions will rule [and], as long as deflationary conditions persist, the gold-silver ratio may rise without limit and under such conditions, despite the gold-silver ratio being pretty much the highest in history, gold remains a better investment than silver. As much of the actual deflationary effect is brought about by cycles of inflation and disinflation, however, there are brief intervals where silver makes a better investment than gold.

    Conclusion

    Rather than using the level of the gold-silver ratio as your selection criterion, you need to look closely at monetary policy instead.

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    Source: Investing.com Canada

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