Justification for buying SLV - iShares Silver Trust

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements . Dear Clients, In my October Update, I listed three fundamental reasons why I’m emphasizing SLV over GLD. Recently, I came across a fourth reason in an article on savehaven.com called Leveraging Gold with Silver by Roland Watson. In his article Leveraging Gold with Silver , Mr. Watson argues that Silver is essentially a means of leveraging the price of gold. He says:

It may seem strange to call silver a gold derivative but that is essentially what it is. It may have its own unique fundamentals that distinguish it from gold but by and large when gold goes up, silver goes up and when gold goes down, silver goes down. However, being a derivative, when gold goes up, silver goes up higher and when gold goes down, silver goes down lower.

What I really appreciate about Mr. Watson’s work is that he went back and ran the numbers to determine the nature of the relationship between silver and gold and he discovered something that I find very encouraging for our portfolio. He discovered that not only is silver a leveraged derivative of gold over the long-term, but the amount of leverage that silver is providing over gold has been increasing gradually since 2003. Furtherfmore, according to his technical analysis, this trend should continue. He says:

…silver eroded as leverage to gold until [it bottomed at] 0.65 in June, 2003. The leverage from June 2003 has since risen to 1.54 today…Not only is silver outperforming gold, but also it is increasingly outperforming gold! If we extend [the] trendline it hits 1.80 by the end of 2010.

Therefore, according to Mr. Watson’s research, silver should outperform gold by 54% - 80% over the next 3 years. As your investment advisor, I see this relationship take place daily. Movements in SLV are almost always larger in percentage terms than movements in GLD. Since I’m bullish on gold, emphasizing SLV over GLD allows me to use a smaller percentage of your portfolio to gain the total exposure that I’m looking for which allows me to put the rest of capital to use in other plays. Here’s a link to Mr. Watson’s blogsite if you would like to check it out. The Silver Analyst