Gold is in the early stages of a bull market. Some investors will buy gold to benefit from that. Others might prefer stocks of gold mining companies.

While gold looks promising, silver or silver miners could provide even bigger gains.

Silver is popular among individual investors. One explanation is the price. An ounce of silver costs about $15. An ounce of gold is more than $1,700, over 100 times as expensive.

The ratio of gold to silver prices is one way to gauge which metal is more attractive as an investment. Over the past 20 years, the ratio averaged 65:1.

At 113:1, the ratio is unusually high now. In the past, high readings proved to be great times to buy silver miners.

The chart below shows the gold-silver ratio at the bottom. The price of Global X Silver Miners ETF (NYSE: SIL) is at the top of the chart. Some of the previous highs in the ratio are marked with dashed lines. SIL delivered big gains after these extreme readings.

silver miners

Source: Optuma

Just like with gold, there are many reasons to prefer silver miners to actual metal. Taxes are a big reason.

You should consider your personal situation, but the Journal of Accountancy summarizes the potential concern:

“For tax purposes, physical gold investments are classified as collectibles. Gains on collectibles held for one year or less are taxed as ordinary income — the same tax treatment as short-term capital gains.

“Gains on collectibles held more than one year are taxed as ordinary income, except the maximum collectibles tax rate is 28% … sharply higher than the 15% long-term capital gain rate that applies to most other assets … .”

For investors, the important point to remember is that higher taxes reduce the amount of gains you keep. Silver ETFs are taxed as collectibles while miners are taxed at lower rates as capital assets.

The gold-silver ratio tells us silver is attractive. Taxes could make SIL the best investment for that signal.

Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at New York Institute of Finance. Mr. Carr also is the former editor of the CMT Association newsletter Technically Speaking.

Follow him on Twitter @MichaelCarrGuru