How Reliable is the Old Gold / Silver Ratio?

Many traders, speculators, and investors focus on the gold/silver price ratio in determining which metal is under or overvalued. In recent weeks and months the ratio has collapsed from above 65:1, down to a current low of around 36:1. Throughout the twentieth century, the gold/silver price ratio went to nearly 100:1, occasionally dipped below 30:1, and only briefly hit a ratio of 17:1 in 1980. But few seem to question how misleading this ratio may be, let alone question why the ratio matters for a monetary system that (for the time being at least) is no longer based on gold and silver.

Gold/Silver Ratio as a Relic from Bygone (for now) Monetary System

First off, a quick review of where the interest in the gold/silver ratio comes from. When governments and their people used gold and silver as a medium of exchange, the official mint would dictate at what ratio they would coin gold and silver. In the case of the “American Act for Establishing a Mint” in 1792, all private persons had the right to have bullion coined at “the legal ratios.” The ratio was set by the U.S. government under the direction of the Secretary of Treasury Alexander Hamilton at 15 ounces of silver for every one ounce of gold, often expressed as a gold/silver ratio of 15:1. This relative value had been present in Europe more or less since the late 1500s, when large amounts of silver had flooded into Europe from the huge discoveries made by Spain in Mexico and Peru (which are still the two largest sources of silver today.) This ratio was supposed to be a reflection of the commercial value of gold and silver on the market in Europe—or the proportional value of the two metals in western trade. The European gold/silver ratio of 15:1 was much higher in gold’s favor than in India, parts of Africa, or East Asia, where gold/silver ratios were reported (in isolated cases) as low as 1:1, and generally stayed well below 10:1. Of course, the fixed Anglo-European ratio got out of whack with the market ratio, which is part of the problem with fixed bimetallic systems, but that is another story.

Gold/Silver Price Ratio Is Distorted by Government Bias against Silver

Over the course of the nineteenth century, for various reasons, gold was increasingly favored first by European nations, then by the United States, supposedly as a more stable monetary asset due to its rarity. The prejudice in favor of gold and against silver was due to many reasons, but the bottom line is that silver began to be demonetized in the late 19th century. This demonetization only accelerated throughout the twentieth century as countries from China to the U.S banished their silver from currency circulation. It also did not help matters that huge new discoveries of silver in places like the American West dumped ever more silver on the market. Yet without governments getting rid of silver stockpiles, or refusing to coin new silver bullion at the mint, the monetary demand for silver would not have dropped to as great a degree as it did. Governments took part in a campaign to demolish the monetary value of silver, really, and this cultural legacy has left its scars on the importance of silver as an investment. By the early twentieth century, the value of silver was nearing 100 ounces to 1 ounce of gold, the lowest in history. Yet, the mine production of silver was not 100 times that of gold, nor was the relative abundance of silver money 100 times that of gold.

You should note, then, that the prejudice of the official sector (governments and mints) in the US and Europe has played a factor in the widening of the gold/silver ratio away from 15 to 1, to anywhere from 35: 1 up to 100:1. The dumping of silver on the market by government continued right up until a few years ago. Between 1965 and 2000 governments sold over 3 billion ounces of silver, versus roughly 150 million ounces of gold over the same time period. Moreover, another billion or so ounces of silver was consumed by industry, as opposed to private gold stockpiles actually increasing. The official sector, beginning in late 2009, has begun to buy back some of this gold. They have not begun to do the same with silver. Should we be wondering when they might start?

Keeping with the issue of official sales, governments at present only hold at most 60 million ounces of silver, as compared with 1 billion ounces of gold. Among those who run our world, silver is now far rarer than gold.

With Silver, the Ants (Investors) Will Carry Away the Banks’ Picnic Basket

Given that the official sector can’t dump any more silver on the market, this dramatically increases the importance of the individual investor in the silver market. It means that the vast majority of silver bullion in the world is held by investors. This is quite different from the last silver bull market, where official exchanges and governments stood ready to release several hundred million ounces for consumption.

But just because average investors are the ones who hold most of the silver in the world, please do not take this to mean that there is widespread ownership of silver among retail investors! In fact, up until recently, most people who bought precious metals only bought gold. During the decade from 2000 to 2010, the dollar amounts invested in gold far outstripped those invested in silver. Yet in the past few months something has begun to change.

So far in 2011, dollar demand for Silver Eagles has been nearly equal to that of gold. Inflows into the iShares Silver Trust (SLV) have been greater than inflows into the GLD ETF, and Eric Sprott, of Sprott Asset management has similarly reported that investors are buying more silver from him in dollar terms than gold. Additionally, James Turk of GoldMoney is reporting silver sales near gold in dollar terms. These statements, like them or not, mean that in terms of investor interest the gold to silver ratio is 1 to 1. Since there is less silver above ground than gold, it really means that the gold to silver price ratio should be in silver’s favor.

Please Pay Attention to Gold/Silver Ratios in Terms Other Than Price

I understand if you think that this is a bunch of hyped BS from someone getting carried away with an asset that is dramatically outperforming nearly everything else in the investment universe at the moment. But remember, investment manias take on a life of their own, and when the human investing herd changes directions, you need to learn to get out of the way. I write this with old silver and goldbugs in mind, who perhaps understandably can’t believe the price action on an asset many have owned since it was under 4 dollars. I will address the various metrics for valuing silver today in a different article, but rest assured, with the amount of money printing or monetizing going on, silver may be as cheap today as it was when its price was 10 dollars. Hard to believe, but I think its true.

And at some point, more articles online may begin to quote other ratios between the precious metals. For example, about nine times as much silver as gold comes out of the ground each year, but the vast majority of this silver is used by industry, much of it destroyed. And miners, believe it or not, only believe that there is about 6 times as much silver in the ground that can be mined, according to the USGS. I have read or heard others claim that there is 15 or 20 times more silver in the Earth, but much of this may never, under any circumstance, be economical to mine (this ratio, in other words, is the natural occurrence ratio, not the reserve base ratio). In addition, you might think that producers will just be able to ramp up production in silver to increase the amount of silver bullion or coins to a level greater than gold. But this has not happened yet: the amount of new gold and silver bullion and coin production is not that far from 1:1, even if more silver is produced. And over the past decade, 35-40 times more silver was not earmarked for coins and bullion, which is what the price ratio of gold to silver would lead you to believe.

In short, if you are going to use gold/silver ratios, you may want to think about the possible relevance of other ratios:

9:1 is the ratio of silver to gold annual mine production 6:1 is the estimated ratio of economic gold to silver in the ground (USGS) 5:1 is the estimated physical ratio of all silverware, silver/gold jewelry and other stocks above ground (according to CPM Group) 1:1 is the year-to-date ratio of investment dollar demand. 1:3 (more silver than gold) is the physical ratio of gold and silver coins/bullion These gold/silver ratios are not as familiar to traders, hedge fund managers, or the investing public. But I think that someday in the not so distant future they will be.

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies, APMEX Gold and Silver and Silver American Eagles.

Rick
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Silver - What Better Investment?

When thinking about an investment, the best managers look for returns that beat what they perceive to be average. In the long run, wealth is a relative measure—today, even the poorest people are wealthier than the richest people five hundred years ago, though we’d still say that today’s poor are poor.

Investments work along the same lines, with the simple concept being that an investment must have performance that is preferable to your current financial trajectory, and it must have a return that beats holding money in cash, as well as the negative returns incited by inflation.

Whether or not you are a current silver holder or not, ask yourself one simple question: what price would it take for you to sell your metals or buy government debt? At what rate would it be favorable for you to invest your money in stocks, bonds or any other investment?

Now, take that number, which is likely quite high, and compare it to past performance of all the markets out there. You can compare it to stocks, bonds, and commodities, and see simply which asset type has produced returns that you would see favorable. It would be a safe bet to see that the returns and performance that you want out of your investment portfolio haven’t been found in stocks nor bonds for the past twenty years.

Silver Bubble is Not

For the individual investor, an exercise that looks into what he or she wants in an investment isn’t a daily happening, though it is for the institutional investor. The markets measure just like wealth—you can do well, as long as the other guy doesn’t do as well as you do.

So when the hysteria of a bubble emerges, investors should ask bubble promoters where they should go from silver. Should they buy stocks, which are priced as many as twenty years into the future? Should silver investors pile into fixed-income investments and take home 4-5 percent per year?

It is here that we reach the end of such an argument. Not only are the opportunities present in stocks and bonds weak, but they’re also offering returns that aren’t consistent with their risk profiles. So why would you hold silver, if you wouldn’t own cash flowing stocks, bonds, or an assortment of mutual funds? Because silver is the new cash.

Investors who have amassed massive positions in the metals markets are telling the market that the options aren’t exciting. If you’ve only a small selection of underperforming bonds, underperforming and expensive stocks, or negative-return generating cash, is it really much surprise that you want an alternative? Traditional investments have a best possible outcome of returns equal to a few percent per year, after inflation, and cash has a best possible outcome of negative returns each year.

The bubble isn’t in silver ownership, but in low rates and indebted economic institutions. When investors hold commodities, they’re holding the new cash, and they are insulated from risk to a degree that everyone should appreciate. Silver is “in a bubble” because the remaining opportunities are stuck in a rut. At what point would silver investors swap their holdings for paper assets? You might have to bring back Volcker to make that happen.

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies, APMEX Gold and Silver and Silver American Eagles.

Rick
CLICK ADS BELOW FOR FREE DISCOUNT!

Who Would Sell Silver & Gold Now?

The majority of people who hold precious metals as a hedge against a falling dollar won't sell at market price until they see a resolution of the debts of western nations. Mainstream media, the majority of the public and value investors all believe that the precious metals are in a bubble. But that is because they do not understand the foundations underpinning a move into hard assets.

In this regard there are two camps:

1. The camp who believes that we live in a grand new world where governments can centrally plan economies better than the free market itself and where acceptance of government-sponsored, unbacked fiat paper monies is just a normal, unquestioned part of life.

2. The camp who sees central banks as being artificial and dangerous and who are quite surprised that this era of unbacked fiat currencies has lasted this long (nearly 40 years since the “Nixon Shock” on August 15, 1971).

Those in Camp #1 will never buy precious metals until it is already too late and the fiat currencies have all collapsed.

Those in Camp #2 will never sell their precious metals until they see an indication that the unpayable debts and deficits of the majority of western nations have reached a resolution – either by default (bankruptcy of the nations) or by hyperinflation (bankruptcy of the currency).

Which brings about an interesting state of affairs. Unlike any and every other bubble in the history of mankind, the holders of precious metals will not sell their holdings for fiat currency, at any price.

They may sell their precious metals to buy another asset which they deem as being undervalued in terms of gold or silver – which may mean they sell their precious metals, briefly, for fiat currency but then quickly sell that fiat currency in favor of another asset.

But for those who own precious metals for safety and/or profit against the assured demise of the global financial system there is no price at which they would sell their precious metals in favor of fiat currency.

Of course if someone offered you $10,000 per ounce today for your gold you would be crazy not to accept it. However, most holders of gold would sell at $10,000 and then immediately sell the fiat currency and repurchase the gold at the current market price near $1,400 to buy even more gold.

The majority of people who hold precious metals as a hedge against a falling dollar won’t sell at market price until they see a resolution of the debts of western nations.

However, the great majority of people who hold precious metals as a hedge against the destruction of the US dollar reserve based financial system will never sell their precious metals, at market price, until they see a resolution of the debts of the western nations.

GOLD/SILVER SHORTAGES

This amazing scenario is playing out as we speak.

Reports have been coming in from all corners of the world over the last few months stating shortages in physical gold and silver bullion.

The operating capacity of domestic gold refineries in India have reached very low levels due to scarcity of scrap. Currently domestic gold refineries are operating between 25-30% of their installed capacity as against 35-40% around the same time last year. According to Ajay Mitra of the India and Middle East office of the World Gold Council, “Used gold sales have declined steadily in the last one year as consumers are holding jewellery in anticipation of higher prices.”

They aren’t so much anticipating “higher prices” of gold & silver as they are anticipating “lower prices” in their fiat currency. Until there is any indication that the ongoing, systematic destruction of fiat currencies worldwide will cease then there is no reason for anyone to sell their precious metals in favor of holding the fiat currencies.

Canada’s biggest bullion bank, ScotiaMocatta “sold out” of all its silver coins and bars in January. They have apparently sourced some new supply of silver coins but as of the time of writing they still show 100 oz. Silver Bars as being “sold out”.

Eric Sprott, one of the smartest men in the precious metals business stated that he expects gold to hit $2,150 and silver to hit $50 this year citing extreme shortages and great challenges to secure 15 million ounces of silver for his fund. He stated that “no supply exists in volume except from the margin of immediate producer output”.

MOVE INTO BULLION AND PRODUCERS THIS YEAR

Up until this year it has been relatively safe to “play” in things such as gold/silver ETFs, futures and other “paper” assets. TDV believes that 2011 will be the last year in which it is still relatively easy to find and purchase gold/silver bullion and that those who have not yet begun to do so consider making this move immediately.

TDV issued a Special Report to subscribers entitled "How to Own Gold" on November 8, 2010 which includes more specific details on how and why to move into bullion products.

As well, as Eric Sprott pointed out above, one of the only liquid sources of gold and silver bullion now and in the future may be actual producers. The TDV Portfolio available to subscribers contains numerous large, mid and small cap producers. These equities may rise exponentially if it becomes clearer to the public that they are one of the only sources of accessible bullion available on the market.

Remember to diversify geographically to reduce political risk. We attempt to include miners from different parts of the world as part of this strategy. To date we have miners in Papua New Guinea, Ghana, Canada, Brazil, Nicaragua and more included in the TDV Portfolio. The above is an excerpt from the March Issue of The Dollar Vigilante (TDV).

ABOUT THE AUTHOR Jeff Berwick

Jeff Berwick was the founder of Stockhouse.com in 1994 and was the CEO of Stockhouse until 2002. After Stockhouse Jeff began writing The Dollar Vigilante, a free-market financial newsletter focused on covering all aspects of the ongoing financial collapse. The newsletter has news, information and analysis on investments for safety and for profit during the collapse including investments in gold, silver, energy and agriculture commodities and publicly traded stocks. As well, the newsletter covers other aspects including expatriation, both financially and physically and news and info on health, safety and other ways to survive the coming collapse of the US Dollar safely and comfortably. You can sign up to receive the FREE monthly newsletter, the Basic Newsletter ($15/month) or the Full Newsletter ($25/month) with specific stock recommendations and updates at the Subscriptions page of the website at DollarVigilante.com.

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies, APMEX Gold and Silver and Silver American Eagles.

Rick
CLICK ADS BELOW FOR FREE DISCOUNT!

Is Silver Getting Bubbly?

Silver's rising prices as measured in US government fiat dollars (alias paper funny money) spawns new articles on a daily basis predicting that surely now silver is in a bubble (a price that is irrationally higher than the intrinsic value of the product or investment). I suspect that as the "tears of the moon" metal approaches the 1980 high of $50 per ounce, the uninformed scare-mongering will only increase in volume. But is silver really in a bubble just because its worth as measured in rapidly devaluing 2011 US dollars is nearing the former 1980 peak?

Firstly, let's make sure we're comparing apples to apples, or at least dollars to dollars. Based on the CPI, you'd need $134.29 today in 2011 to purchase the same products you bought in 1980 for $50. So, while we can talk about the NOMINAL high of $50 for silver per ounce, the real figure we should be eyeing for bubbly signs is a lot closer to the $134 mark in inflation adjusted dollars.

Secondly, exact information as to what price point constitutes pricing above an item's "intrinsic value" is always a little sketchy, to say the very least. However, I'd like to tentatively submit the inflation-adjusted high for silver of $134 as that point, since the 1979-1980 bull market is the best and only historical comparison to today's market.

Next, I think a "real world" comparison of actual buying power of one ounce of silver for the years 1980 and 2011, may aid us in our search for buying power equivalency, and perhaps the actual 2011 point at which we may be entering bubbly territory. Therefore, I've collected the economic information below:

1980 $ Price - Price in Silver Oz. @ $50 per ounce

Avg. New Home $76,400 - 1528 oz.

Median Household Income $17,710 - 354 oz.

First Class Stamp $0.15 - 0.003 oz.

Gallon Regular Gas $1.25 - 0.025 oz.

Dozen Eggs $0.91 - 0.018 oz.

Loaf White Bread $0.50 - 0.01 oz.

Next, we'll look at the 2011 - Silver @ $41 per ounce

Avg. New Home $202,100 - 4,929 oz.

Median Household Income $52,029 - 1,269 oz.

First Class Stamp $0.44 - 0.01 oz.

Gallon Regular Gas $3.75 - 0.09 oz.

Dozen Eggs $3.00 - 0.07 oz.

Loaf White Bread $2.78 - 0.07 oz.

It's easy to see from these two pricing tables that you need a lot more silver to buy everyday items in 2011 than was required to purchase the same products at the peak of the 1980 silver bubble. For example, you could purchase an average new home in 1980 for only 1528 ounces of silver, but you'll need 4929 ounces to close on that same house today!

Finally, I'd like to see how high silver would have to rise in price before it could buy the same amount of products it did in 1980. To determine the 2011 dollar adjusted figures I'll divide the current 2011 dollar product costs by the number of silver ounces required in the 1980 peak. See below:

Avg. New Home - $132 per ounce silver

Median Household Income - $147 oz.

First Class Stamp - $147 oz.

Gallon Regular Gas - $150 oz.

Dozen Eggs - $167 oz.

Loaf White Bread - $278 oz!

The incredible numbers above show that silver will have to rise to between $132 to $167 per ounce to arrive at pricing levels in 2011 dollars that proved to be overheated or bubble-ridden in 1980! In addition, if you want to eat bread again like we did in 1980, you're going to need silver at $278 per ounce! So, our tentative figure of $134 per ounce for a silver top is pretty right on the money.

Given all the information above, I'd say we have quite aways to go with silver at about $41 an ounce before we reach any frothy action! For my part, don't even wake me until silver has exceeded $100 per ounce!

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies, APMEX Gold and Silver and Silver American Eagles.

Rick
CLICK ADS BELOW FOR FREE DISCOUNT!

Silver is Consumed!

Industrial Demand

The first fact that jumps off the page is that the future for silver looks remarkable with industrial silver demand rising from 15,160 tons (487 million ounces) in 2010 to 20,712 tons (666 million ounces) in 2015. Much of the growth in the global total of industrial silver consumption will be driven by stronger demand for a number of established uses including the manufacture of electrical contacts and the use of silver in the photo voltaic industry. New uses center on silver's antibacterial qualities, while other new uses tend to make use of its conductive properties, including solid state lighting and Radio Frequency Identification (RFID) tags. Overall please note that silver’s importance in the technology of the day is huge. We go so far as to say that the demand from silver has transformed from a want to a need! Whether we are in a boom or bust silver’s demand will remain robust. It is now needed to make all facets of an economy run well and at all levels, even down to individual needs. This secures its future and assures us that silver prices are well supported. Here is the list of the amounts used in different applications that emphasize this point.

- Cell phones used 404.35 tonnes [13 million ounces] of silver last year.

- Computers consumed 684.29 tonnes [22 million ounces].

- Thick film PV consumed 1,461.90 tonnes [47 million ounces] in 2010.

- Automobiles which used 1,119.75 tonnes [36 million ounces] of silver.

- Electrical and electronics demand for silver reached an all-time high of 7,555.21 tonnes [242.9 million ounces].

- Solar Power in 2011 is expected to reach 2,177.29 tonnes [70 million ounces], up 40%.

- RFID tags in 2010 reached between 31 and 62 tonnes with a long way to go before reaching full market.

- Water purification used 62 tonnes [2 million ounces] set to grow to 74.65 tonnes [2.4 million ounces].

- Medical applications may grow strongly to reach 93.3 tonnes [3 million ounces] by 2015.

- The use of nano-silver in goods packaging and hygiene combined would consume 124.4 tonnes [4 million ounces] of silver over the next five years.

Silver is consumed

While photographic use of silver allows for the re-cycling of silver, reclamation of silver from most of the above uses is difficult to nigh-on-impossible. This in itself assures either a constant or rising demand for these applications. Of particular note is the growth in Asia where we are watching around half of the globe’s population developing at infrastructural level as never before. This growth will continue at double figures, per annum for at least the next decade. Gold is rarely consumed as it is deemed far too valuable. Reclamation efforts relative to the value of the gold ensures that scrap merchants will go to extraordinary lengths to recover the gold. In silver’s case these efforts would cost more than the sale of the silver so used. As the silver price rises further reclamation efforts will become profitable and more silver will be recovered, but we are still a long way off from that day.

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies, APMEX Gold and Silver and Silver American Eagles.

Rick
CLICK ADS BELOW FOR FREE DISCOUNT!

Monopoly Money vs. US Dollars

Everyone has played the game Monopoly at one time or another on a rainy day. A key feature of the game is the paper money used to buy everything from properties to railroads and pay rents and luxury taxes. In the "real world" we use the US Dollar for the very same purposes. I thought it would be interesting to compare and contrast the two paper currencies to see just how eerily similar they are to one another.

US Dollar - A paper fiat currency unbacked by any commodity like silver or gold. Backed solely by the "good faith and credit of the United States" government.

Monopoly Money - A paper fiat currency backed by the good faith and credit of Parker Brothers.

US Dollar - accepted on some level in most of the 195 countries of the world. The world's reserve currency...for now at least.

Monopoly Money - Played with by people in 103 countries.

US Dollar - About $829 billion dollars in circulation.

Monopoly Money - About $3.8 billion dollars in 250 million games sold.

US Dollar - The Federal Reserve Notes first issued in 1913 have fallen victim to inflation in the last century and have lost 97% of their buying power.

Monopoly Money - In the Monopoly Here and Now edition all dollar values are multiplied by 10,000, so a player collects $2,000,000 for passing go instead of $200. Another way of looking at this game change is that the Monopoly Money has lost much of its value as well.

US Dollar - When the Fed wants to tinker with the economy it just prints more money and floods the market with devalued dollars sparking inflation, and perhaps someday hyperinflation.

Monopoly Money - When Parker Brothers needs more money for their games they just print more.

US Dollar - All paper fiat currencies backed by nothing have eventually lost value through inflation. Many have been hit by hyperinflation and lost all buying power, becoming worthless pieces of printed paper. The US Dollar and the current policies of the Fed seem custom-designed to hurry the US Dollar to this same ignominious fate.

Monopoly Money - The game money only has value while the game is in play. When the game is complete, the money reverts to its inherent worthless status as pieces of colored paper valued by none.

Lastly, I'm reminded of a time that my brother and sister decided to play Monopoly out of sheer boredom. To try to make the board game more interesting, we decided to start the game with 4 times as much money as the rules typically called for. In addition, we decided to mimic real life and allow for everyone playing to bid against one another for each and every property sold. Without meaning to, we simulated an inflated economy littered with too much fiat paper money. We didn't end up with any additional property of course, as there was a finite number of properties available in the game (as in the real world). Instead, we only ended up paying 4x as much for Boardwalk, Marvin Gardens, and those darned railroads as we normally would've using the standard game rules!

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies (below):

Rick

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