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TheStreet Open House

Gold vs. Silver: Investing for Novices

By Jeff Nielson of Bullion Bulls Canada

NEW YORK ( TheStreet) -- One question which I am asked regularly is how do investors decide how much of their precious metals dollars do they invest in gold bullion, and how much in silver? In other words, they are looking for a "ratio" to guide them. In fact, I will argue that there is an existing, visible ratio which provides investors with good guidance on allocating those investor dollars.

The gold/silver price ratio is a simple comparison of the price of silver vs. the price of gold. With these two commodities having played a vital role in human commerce (and human culture) for thousands of years, the gold/silver price ratio is arguably our oldest "economic statistic". For most of the last 5,000 years it has averaged approximately 15:1 -- until this century, when a combination of developments skewed this ratio to its most extreme imbalance in 5,000 years.

There are many ways to demonstrate that the current price ratio -- of well over 60:1 -- is both unjustified and unsustainable. The starting point is to observe that the element of silver is roughly 17 times more plentiful in the earth's crust than the element of gold. Indeed, what is strange is that our much more primitive ancestors (who had no way of analyzing the composition of the earth's crust) did a much better job of pricing these metals appropriately than their modern descendants.

The result of well over half a century of grossly distorting the price of silver, both in absolute terms and versus the price of gold has clearly set up this market for a spectacular default -- at which time the market will "correct" the price imbalance, in the most brutal manner possible. The evidence of this upcoming event is all around us, much of it compiled by the years of painstaking research by Ted Butler, the "dean" of silver commentators.

It is Mr. Butler who has chronicled the extreme-and-absurd manipulation of the silver market through the criminal activities of the bullion-banks in futures markets -- and mostly from New York's Comex exchange. As most of us know, identical activities have been taking place in the gold market, with GATA taking the lead in exposing that aspect of market-fraud.

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