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Silver Is Way Undervalued Compared With Gold

Mother nature, one could say, is the ultimate asset allocator over a long enough time span. Going by that notion,silver is very undervalued versus gold.

Silver bar and coins
Thomas Northcut | Photodisc | Getty Images
Silver bar and coins

Silver is about 16 times as plentiful in the earth’s crust as gold, according to John Stephenson, author of the “The Little Book of Commodity Investing.”

Yet, the price of gold per ounce currently trades at about 38 times that of silver .

According to the basic laws of supply and demand, especially given that the two metals are quite similar, the price gap between the two metals should be much smaller.

“It basically has the same physical characteristics of gold as a store of value and it also has an industrial kicker,” said Stephenson, a portfolio manager for FirstAsset Management in Canada. “For my money, the trade of the decade will be in silver. Gold was the best investment over the last decade, but in the future, silver will be the go-to investment for investors looking to ride out the current storms in the global economy.”

Gold has jumped about five-fold in the last decade as investors flocked to the metal. They went there first for safety from two bear markets, but then for an inflation hedge as the Federal Reserve lowered interest rates to zero.

Historically, gold sells for about 30 times the price of silver. Since gold is currently selling at about 38 times, silver is undervalued by about 27 percent and should be closer to $47 an ounce instead of $37.

Of course, gold will always be the more precious metal, not only because of its relative scarcity but because of its cultural significance around the globe.

Indeed, all the focus has been on gold over the last decade. The gold spot market is ten times bigger than the silver market and the SPDR Gold Trust ETF has $55 billion in assets, compared to just $13 billion for the iShares Silver Trust .

“In a world where the amount of paper fiat currency is staggering and increasing as governments from U.S. to Europe keep printing, it may be time to start looking at the poor’s man’s gold,” said Stephenson, who pointed out that while gold has exceeded its record price during the 1980s, silver is still way off the $68 per ounce level it reached during that time.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


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Trader disclosure: On March 28, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Grasso Owns (AMD); Grasso Owns (ASTM); Grasso Owns (BA); Grasso Owns (BAC); Grasso Owns (C); Grasso Owns (CPX); Grasso Owns (CSCO); Grasso Owns (D); Grasso Owns (JPM); Grasso Owns (LIT); Grasso Owns (LPX); Grasso Owns (MHY); Grasso Owns (NDAQ); Grasso Owns (PFE); Grasso Owns (PRST); Finerman's Firm Is Short (IJR); Finerman's Firm Is Short (MDY); Finerman's Firm Is Short (SPY); Finerman's Firm Is Long S&P Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman's Firm And Finerman Own (AAPL); Finerman's Firm Owns (BAC) Leap; Finerman Owns (BAC); Finerman Owns (C); Finerman Owns (GOOG); Finerman's Firm Owns (JPM), (JPM) Leaps; Finerman Owns (JPM); Finerman's Firm Owns (TGT); Finerman's Firm Owns (WMT); Finerman's Firm And Finerman Own (MSFT); Terranova Owns (VRTS); Terranova Owns (C); Terranova Owns (GS); Terranova Owns (JPM); Terranova Owns (UPL); Terranova Owns (MS); Terranova Owns (PBR); Terranova Owns (BAX); Terranova Owns (TEVA); Terranova Owns (IBM); Terranova Owns (XOM); Terranova Owns (JNPR); Terranova Owns (AAPL), (AAPL) Puts; Terranova Owns (AKAM), (AKAM) Calls; Terranova Owns (DIS); Terranova Owns (CVI); Terranova Owns (RSX); Terranova Owns (CNQ); Terranova Owns (BTU); Terranova Owns (CNX) Puts

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