Friday, August 19, 2011

Putting the Silver Bubble in Perspective ($SLV, $PPLT)

A great way to shed light on the silver bubble is to look at the silver/platinum ratio, as expressed by the physial silver and physical platinum ETFs.

Rather than speculate on the price of silver (or any other commodity) it is helpful to look at the ratio of two things that are at least somewhat substitutable. If platinum can satisfy some or all of the demand for silver - say for investment purposes - then you would expect the price ratio to be mean reverting.

We already know that the gold/platinum ratio is strongly mean reverting once an ounce of gold costs more than an ounce of platinum.

I wonder whether the "cheapness" of silver - not in an valuation sense, but in the sense of an arbitrarily low price per ounce - has led to irrational demand from small investors? That would not bode well for the silver price.


Stagflationary Mark said...

We tend to see things very similarly.

In 2010 I did the following post comparing gold to the "platinum group" (as seen in the USGS historical minerals statistics).

A Century of Gold Bubbles

CP said...

Yes, the key seems to be buying it when no one else wants it and selling it when they do.