I have talked a lot lately about the purchasing power of gold in terms of what percentage an ounce of gold will buy vis-à-vis the Rogers Raw Materials Index. If the U.S. government’s Cost of Living index was anything close to being accurate, we might do well to measure gold’s purchasing power vis-à-vis the CPI. But no one takes the CPI seriously any longer except the government, which it uses to cheat average hard working Americans of their social security savings. So I have been using Rogers Raw Materials Index as a measure of how much an ounce of gold will buy.
I have maintained that gold will do better than silver in a major credit deflation like the one I am confident we are currently in. I have noted that an ounce of gold prior to Lehman Brothers would have purchased only about 17% of a unit of the Rogers Raw Materials fund but that it surged to about 44% at the peak of risk aversion trade in the February-March 2009 time frame. Recently, an ounce of gold will buy 42% of a unit of the Rogers Raw Materials fund meaning that as we were going to press, an ounce of gold in value by 147% vis-à-vis the Rogers Raw Material fund.
My invitation to talk to Andrew Bell on BNN about silver prompted me to check the data to see how much more of the Rogers Raw Materials fund an ounce of silver will buy since the credit implosion got underway following the Lehman Brothers’ failure of 2008. I knew silver had gained vs. the Rogers Fund, but I was surprised to learn that it has fared every bit as well as gold if you measure it right before the events of September 2008 until the present time.
In early September of 2008 before the Lehman failure, an ounce of silver would have purchased about ¼ of 1% of a unit of the Rogers Raw Materials Fund. However, into the early months of 2009, it surged to 0.64% of 1% or 156%. That is important with respect to silver mining companies for the same reason I have been suggesting gold’s real purchasing power is important to gold mining companies. As the price of silver rises compared to a basket of the Rogers Raw Materials fund, you can anticipate profit margins to increase for silver mining companies.
But what about the notion that gold performs better in a credit implosion than silver does? Let’s take a look to see how the two metals fared into the post Lehman Brothers Market seize up.
You can see from the chart on your left that in the early weeks of the credit crisis, gold performed much better than silver. In fact, a sharply rising gold-to-silver ratio starting in the middle of the summer of 2008 from a ratio of about 50 may have been hinting of a credit problem to come. Indeed, Bob Hoye’s work suggests we watch the silver-to-gold ratio to give us a sense of troubles ahead for the credit markets. In a recent letter, Mr. Hoye suggested we keep our eyes on a ratio exceeding 71, which if you check out the chart on your left is more or less a resistance level since the problems of 2008-2009. Getting back to which metal performs better in a credit crunch, clearly the answer is gold because by October 10th or about one month into the crisis, the gold/silver ratio surged to 84.77:1.0.
My conclusion from this comparison is that in extreme credit contractions, gold performs better than silver but that silver has also performed very well as a store of value since the credit problem reared its ugly head in September of 2008. At the same time, expecting as I do another major decline to take place in the equity and commodity markets, I continue to favor gold over silver at this point in time. Yet, given silver’s robust purchasing power since the autumn of 2008, silver mining profit margins should be improving significantly. In my comments with Andrew Bell on BNN, I discussed three silver stocks, Alexco, Golden Minerals and Allied Nevada. See my comments on those and a couple other silver stocks on my recommendation list below.
