Ignore Gold At $1500 An Ounce

Ignore Gold At $1500 An Ounce

Ignore the headlines about gold breaking $1,500 an ounce for the first time in
history. It's hard to do. I know. The media runs another gold article up the
flagpole almost every day now. But they are missing the real investment you
should be making.

Look, I am not saying gold has been a bad investment. It has risen 31% in the
last 12 months. It's just that there is a much better place for your money. And
it's up 157% in the last 12 months.

If history is any guide, the best is yet to come.

I am talking about silver. "Gold on steroids," as it was recently called. Here's
why you should give silver a hard look...

Gold and silver have always traded at a fairly consistent ratio. It took 15-20
ounces of silver to buy 1 ounce of gold. In 1792, the US Government set the
ratio at 15:1. But if you Google "historical silver-to-gold ratio," it comes
back as 16:1. (That makes a lot of sense, since silver occurs in nature 16 times
more often than gold.)

Today, the ratio is roughly 34:1. That makes silver much cheaper compared to
gold. Even as silver marches steadily higher. In the chart below, you can see
what's been happening since August of last year. (Coincidentally or not, that is
when QE2 was announced.)

And I believe silver has a very real shot at hitting the historical 16:1 ratio.
Here's why...

The last time the silver-to gold ratio hit 16:1 was back in the late 70s to
early 80s.

That time period was marked by three very distinct situations:

Rising gas prices - Gas went from $0.63 in 1978 to $1.38 by 1981. A leap of
119%.

Rising unemployment - The unemployment rate went from 6% in May 1978 to 10.8% in
December 1982. An increase of 80%.

Rising inflation - Inflation soared from 6% in May 1978 to 15% in April 1980.

As a result, Americans fled to the safety of precious metals. Gold jumped 335%
from 1978 to 1980. Silver was the big winner, though. It rocketed 880% during
the same time period.

Today, it's déjà vu all over again (to quote Yogi Berra).

Rising gas prices - Gas has gone from $1.59 in December 2008 to an average of
$3.78 today. A leap of 137%.

Rising unemployment - The "official" rate has gone from 5% in May 2008 to just
under 10% recently. (And that's not counting those who no longer qualify for
benefits or have simply given up. The actual rate is probably much higher.)

Rising inflation - Inflation has soared from 5% in November 2009 to over 10%
right now. (That's according to ShadowStats, calculated the way the government
used to.)

As you can see, it's all playing out the same way it did back in the late 70s
and early 80s. Except that silver is priced at a very significant discount to
gold. But that won't last for long. If you have read my previous articles, you
know I believe inflation is going to get much worse. All that cheap money the
government created with QE1 and QE2 will come home to roost in the not too
distant future. And that is when inflation will really rear its ugly head.

You don't have to look any further than gold prices to see how the threat of
serious inflation is affecting investors.

But, as I said, silver was the big winner in the late 70s and early 80s. And it
will be again. It has already gained 352% since QE1. And when the 16:1
silver-to-gold ratio returns (as it did back then), silver will hit $93 an
ounce. (That's based on $1,500 gold, and that is a very conservative estimate
for gold.)

So while gold has handsomely rewarded investors, silver is where you want to be.
It is rising much faster than gold, and that should continue. Yes, you will see
much wilder price swings when investing in silver. But you should see gains of
just over 100% over the next 18-24 months as the price of silver returns to its
historical ratio with gold.
extract from Early to Rise Investors Edition.