Everybody knows about the value of gold. For the past few years, since the global financial crisis set in, it has been the only asset type that has seemed unstoppable. Every time it reached an impossible high, it rallied even further. Every sign of bad news from the world economy was a signal for gold to move into uncharted territory.
And then, all of a sudden last month, gold experienced a 20 per cent drop. Some say it was just a technical readjustment, what traders call a "reversion to the mean". Others point to the strength of the US dollar, which became increasingly attractive as the European debt crisis unfolded, causing a mass movement in its direction.
Whatever the reasons, the drop caused some to question whether it's time to come off the gold fixation. It may come as a surprise to a financial public trained to monitor the price of gold that the stronger trade in recent times has been silver, or the "poor man's gold", which has outperformed the yellow metal by a significant margin.
Silver also took a beating late last month, even bigger than that experienced by gold, but that is not how it has played out for most of the past three years. If you take the global financial crisis as your starting point and then compare the prices of the two metals over that period, the so-called lesser metal has quadrupled in value compared with the mere doubling in the US dollar value of gold.
David Land, the head of analysis at CMC Markets in Australia, says it is a surprise to see the exact movements of the two metals over this period. Gold, he says, has been such an important instrument in times of volatility that silver has been practically forgotten.
"Gold has always been the great hedge against fear, the hedge against a weakening US dollar and the hedge against inflation. If people are looking for a pure play against those factors, they're probably going for the gold option over silver," Mr Land says.
The gold-silver ratio is one that has been around for some time and there are theories used by many to explain the relative movements between the two metals. The so-called standard gold-to-silver ratio has long been held at about 40 to 1 - that is, 40 ounces of silver will buy a single ounce of gold.
Traditionally, the two metals are a well-correlated "pairs" trade, but things have changed. The value of an ounce of silver in October 2008 was US$9 (Dh33.06) to $10. In April this year, it nudged $50. In the same period, gold moved up from about $745 to a high of $1,920, a rise of about two and a half times.
Silver prices have greatly outpaced gold - not just in this period, but for most of the past decade. Spot silver rose to an all-time high of $49.79 an ounce on April 25, a 12-fold advance from its low of $4.04 in 2001.
The current ratio, with silver trading at close to $31 and gold at $1,652, is about 53, but it was at 65 at the time of the global financial crisis and at about 45 before the most recent price drops. Silver, at least over the past three years, has been the stronger commodity.
The way the silver-gold arbitrage works is fairly simple, but you have to have a relative view of which metal will surpass the other. Silver is arguably the more interesting metal because it is what traders and insiders term a "50-50" asset. That is, it's 50 per cent a safe haven and 50 per cent a usable commodity. It has far more industrial uses than gold and thus its price is not solely dependent on its status as a safe haven from the US dollar.
Silver offers exposure to economic recovery while retaining some safety aspects. It's used in a host of industrial applications, particularly in technology and photovoltaic applications, as well as for jewellery and coins. So any increase in global economic activity tends to swell its price.
Nigel Moffatt, the treasurer of the Perth Mint in Western Australia, looks back at what happened when silver prices surged. This was when the Hunt brothers in the US tried to corner the market in the late 1970s. Recently, silver moved up as George Soros's hedge fund - and a host of others - bought up the metal in great quantities. So silver has also had its share of speculators.
"The other reason is that when gold hit $1,400 to $1,500, it was priced out of reach for the average investor. People realised that you could buy so much more silver than gold," Mr Moffatt says. "Silver took on the role of poor man's gold. It reached its full momentum a few months ago and was heavily sold off at about $49.
"With silver and platinum, the prices are 50 per cent dependent on industrial use. That's why silver has decoupled from gold - with all the concerns in the euro zone and US and the very real fear of a double-dip recession, demand for silver may drop. If industrial output wanes, silver will follow."
The whole point of the gold-silver ratio is to exploit both the divergence and convergence of the two metals. Simply put, there are periods when the ratio drops or rises to levels that could be considered statistically "extreme", which creates trading opportunities. The idea is to switch metals in the midst of the extremes.
If an investor possesses one ounce of gold and the ratio rises to an unprecedented 100, the trader might then sell his or her single gold ounce for 100 ounces of silver. When the ratio contracts to an opposite historical "extreme" of, say, 50, the trader would then be able sell 100 ounces of silver for two ounces of gold.
In essence, the trade has little to do with the actual prices of the two metals and everything to do with relative ones. The really smart pairs trade in the past few years would have been shorting gold and going long on silver - and yet this is hardly what the market has been telling us about the relative interest taken in the two metals.
Silver has had a volatile year. It has shifted from nearly $50, hovered at about $40 and last month, was sold down to just over $30. One of the reasons it lost value was that the margins needed to invest on the futures market in the US became more expensive. When a metal becomes less affordable, less will trade it.
The question is: what is going to happen to the ratio? Some believe the true face of silver has been revealed by the most recent hit in its price. If economies move down, many believe that the gold-silver ratio could easily reach the 70s, which would see silver trading at little more than $US20 an ounce.
If you expect the global financial conditions to worsen, then clearly the message is that you are going to get a better return on gold because silver is prone to economic volatility. In other words, short silver and move back into gold.
"I do recommend investors to stick with gold in the current environment," says Dominic Schnider, the head of commodity research at UBS in Australia.
Malcolm Smith, a London-based director at BlackRock, the asset-management firm, is not so sure. "Short-term movements are quite fitful and it's difficult for investors trying to trade around that," he says. "We take a medium- to long-term view and our view is positive on silver."
The easiest way for the ordinary investor to play the ratio is via exchange-traded funds (ETFs), which pool investments in the metals and can be bought and sold as shares.
The London-based ETF Securities offers exchange-traded commodities such as silver, platinum and palladium, as well as a basket that combines all of them. It has, for example, about $1.8 billion invested in its global silver products.
This, of course, is nothing compared with the value of gold ETFs. Since its launch in November 2004, the SPDR Gold Trust has added more than 1,250 tonnes of the precious metal, giving it more gold than China and Switzerland.
In late August, as the price of gold moved to unprecedented highs, the SPDR Gold Trust briefly surpassed the SPDR S&P 500 ETF to become the world's biggest exchange-traded fund.
It remains the most popular way to invest in gold, no matter how the price performs.