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Silver Investing - The Decoupling of Silver From Gold


A few weeks ago, I wrote in this venue about the alleged manipulation of silver prices by JP Morgan. As a matter of fact, three of my first four articles mentioned, and briefly explained the detrimental effect this manipulation has had on silver investing. On September 9th JP Morgan announced that they will be closing their commodity trading department. The small silver investing community grew hopeful that the manipulation would be phased out.

For two-hundred years, the gold to silver price ratio ranged between 15:1 and 20:1. This made a lot of sense, because geologists tell us that there is about 17 times more silver in the earth's crust as there is gold. But for the last twenty years, since huge short positions have been maintained in the silver market and the price ratio grew as high as 75:1. Given that industrial demand for silver has skyrocketed during this period, but not for gold, one would expect the price ratio to decrease from the two-hundred year average. Even though the price of silver has been manipulated to an artificially low level, the prices of gold and silver have been coupled together in recent years. When the price of gold is up, the price of silver is up, and vice versa. Prices have moved in unison, largely because of changes in the value of the U.S. dollar. In the last three years, the only time the price of gold and silver have not moved in unison is when silver approached $21. The price of silver was manipulated lower-until--this last time around.

The recent surge in gold prices has gotten some press recently. But in August and September, the price of silver rose twice the percentage than that of gold. With respect to gold, you might say silver's beta was 2. On October 14th the price of silver hit still another new 30-year high; a very good sign that manipulation is easing. In the first few days of November, it seemed as though a new 30-year price high is made every couple of days.

In May 2010, the price ratio was 68:1. The gold to silver price ratio is currently 52:1, the lowest in decades. The ratio moved 28% of the way to its long term historical average of 17:1 in only five months. Could this be early signs of decoupling for gold?

But there is more good news for the silver investing community. That news would be that two lawsuits were recently filed concernig silver markets manipulation. If the massive short positions in the silver market are removed, through force, or voluntarily, the huge downward pressure on silver prices will be gone once and for all.

Since August, the silver market seems to be moving freely. And the gold to silver price ratio has dropped significantly. If the manipulation ends abruptly, the ratio could drop even more abruptly. And that would be very good for silver investing. The attention that silver will garner in the investing community if that takes place could be the jolt necessary to forever decouple silver from gold. When the supply/demand facts become common knowledge, that is, that silver has a much greater industrial demand than gold, and is in short supply, there will be tremendous upward pressure on the price of silver. It may take years, but I believe worldwide free market forces will result in silver finding it own place, separate from that of gold.








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