Price is an interesting element of the marketplace. At one price, a product may be a perceived bargain, yet at another still similar price, the same product would be a perceived rip-off. As you walk through a supermarket, it becomes evident the tricks that certain prices can play on your mind. $1.99 looks far less expensive than $2, even if the difference is only one cent. Ten for $10 deals are more likely to drive more sales volume, even if the normal market price is actually $1 each.
However, beyond price psychology, we also have the sticker shock effect. While few of us would think twice before placing a $5 item in our cart, most everyone would second guess their buying habits at a $10,000 price point. As prices rise higher, we seek out alternatives, even if the higher price is still a relative bargain.
Gold’s Relativity to Silver
From the perspective of consumption, but not investment, gold seems to have hit its upper bound. An article in the Wall Street Journal found that as gold prices head higher, jewelers are moving towards lighter pieces with less gold and more silver content in an effort to reduce the effects of sticker shock on their customers. Based on pure and simple changes in metals prices, a $100 bracelet in the year 2000 would cost more than $500 today. At prices in between those two price points of $100 and $500, there are plenty of buyers having second thoughts.
To continue to attract shoppers, jewelers are lowering the karat weight of gold and increasing the amount of silver. A 22k gold band made of gold and silver is just as yellow, but nearly 10% less expensive than a 24k band. To a shopper, the difference between 22k and 24k is insignificant, but to silver investors, it's huge.
Confirming the Gold to Silver Ratio
After the fall of bimetallism and the general decline in commodity backed currencies, the gold and silver ratio shed some of its stability. The highs and lows which were previously held in place by law rose higher and lower. Recently, the ratio peaked at near record highs as gold moved into uncharted territory.
However, the new jewelry marketplace is showing that the gold to silver ratio does still have some fundamental backing. When gold runs too high, the obvious solution for jewelers is to add more silver and reduce the per-item price and resulting sticker shock. The justification for the gold to silver ratio, outside of previously legally defined levels, is evident in jewelry.
As the market for gold in jewelry has cooled since 2005, silver is quickly taking its place. Should the economy rebound fully to its 2007 boom levels, consumer jewelry purchases will only aid in helping silver fill the ratio gap between the sky-high price of gold. Plus, with silver production routinely running under the level of gold production, any change in preference from gold to silver is multiplied by the differences in available metal stock and production supplies.
With the tide turning in jewelry, silver investors may be best to root not just for higher silver prices, but higher gold prices.
Dr. Jeffrey Lewis |
