Observations on the market action and the implications of the gold and silver markets.
Friday, December 28, 2007
It seems about time again for a review of silver. Here is one from October 25, 2006. The current gold:silver ratio is a little different, but not by much.
The gold price is in for a big change relative to the silver price. The gold price to silver price ratio now is about 50:1. Historically it was more like 16-17:1. Who knows, it could go to 1:1. The current world's financial system since 1971 is unlike it has ever been in history in that almost all of the world uses nothing but government fiat tokens redeemable in nothing. And almost all of those are nothing but digital bits on a computer's hard drive which is not in the hands of the alledged owner of the bits.
Silver is found in the earth's surface about 16-17 times more often than gold. For hundreds/thousands of years, the above ground supply of silver was a lot more than gold. So, naturally it was cheaper than gold, no matter how silver was related to some thing in order to get its price in order to compare it to gold's price. For instance, silver has a copper price or a milk price just like gold does. You can compare the relative values of gold and silver by pricing those metals in weights, or sometimes volumes, of milk, gasoline and many other things.
Over time man has found plenty of unique (there is no substitute) uses for silver. This mostly has not happened with gold. This explains a lot of the decrease in the above ground supply of silver. So much so that the above ground supply of silver is now substantially more rare than gold.
There are many products that simply must have silver or the product can not be made. Usually the product has only a tiny amount of silver in it so that the price of silver hardly matters to the overall price of the product that contains the silver. This means that a much higher price of silver can be tolerated for many industrial uses. There happens to also be huge amounts of silver being used that is consumed, meaning it is not recoverable. The amounts per product are incredibly small and the silver price is too low to make it worth while trying to recover these incredibly small amounts of silver per product unit.
Also, there seems to be a lot of politics involved in how the above ground supply of silver has gotten so low. Be that as it may, the above ground supply of silver has gotten into an opposite situation than it used to be relative to gold.
Right now estimates of the above ground supply of gold are about 4 billion ounces. Some estimates are as high as 5 billion ounces. 4 billion ounces times $600 = $2.4 trillion dollars.
Right now estimates of the above ground supply of silver are about 4-600 million ounces. Let us be conservative and call it an even 1 billion ounces. This compares to about 10 billion ounces available during WWII. 1 billion ounces times $12 = $12 billion dollars.
So, the market value of the supply of gold is 200 times greater than the market value of silver, right now. Or, the current USD value of gold is 200 times greater than the current USD value of silver. Or, the total value ratio is an historically whacky 200:1.
Historically this ratio is hugely different than what it was for 100s/1,000s of years. Considering all the increasing industrial uses of silver and the fact that it is also actual money like gold is, silver has more fiat price increase potential to the upside than gold does.
It is normal or it is human nature that most players in financial markets do not have respect for items that are low priced. Thus silver has no respect right now. It could be said that people think gold is more rare than silver because of gold's much higher price relative to silver.
It would not take much for people to change their perceptions.
All that is needed is for 1/2 of 1%, or less, of gold owners to decide to switch to silver. That would be the equivalent of the total USD value of silver in the world buying, going into, silver. For silver, that would be incredible demand and a huge massive silver price increase. There would be a radical reduction/decline in the gold price to silver price ratio.
Make sure you have some silver while you are waiting for the world to catch on to the real silver situation/story. Eventually world markets will force price rationing to happen in the silver world. That is just one of the iron laws of economics. Given enough time, there is nothing governments can do about it.
Never mind under $5. At $12/ounce, silver is still the Rodney Dangerfield of metals. It's current price is still "just this side of stealing". If you want to make huge percentage gains, buy something when nobody wants it, when it can't get any respect. In financial markets, the crowd is always wrong. Right now the crowd could care less about silver.
"...a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do." - Jesse Livermore, in Edwin Lefevre's 1923 classic "Reminiscences of a Stock Operator"
"A stock operator has to fight a lot of expensive enemies within himself" - Jesse Livermore
Think about the below when thinking about the US dollar:
"A democracy cannot exist as a permanent form of government. It can only
exist until the voters discover that they can vote themselves money from the
public treasure. From that moment on the majority always votes for the
candidates promising the most money from the public treasury, with the result
that a democracy always collapses over loose fiscal policy followed by a
The average age of the world's great civilizations has been two hundred years.
These nations have progressed through the following sequence: from bondage
to spiritual faith, from spiritual faith to great courage, from courage to liberty,
from liberty to abundance, from abundance to selfishness, from selfishness to
complacency from complacency to apathy, from apathy to dependency, from
dependency back to bondage." - Alexander Tyler
Teddy Roosevelt put it well:
"Not because of the ambition of Caesar or Augustus, but because it had already long ceased to be in any real sense a republic at all. When the sturdy Roman plebian, who lived by his own labor, who voted without reward according to his own conviction, and who with his fellows formed in war the terrible Roman Legion, had changed into an idle creature who craved nothing in life save the gratification of a thirst for vapid excitement, who was fed by the state, and who directly or indirectly sold his vote to the highest bidder, then the end of the republic was at hand. Nothing could save it. The laws were the same as they had been. But the people behind the laws had changed, and so the laws counted for nothing."
"How did you go bankrupt?"
"Two Ways. Gradually, and then suddenly."
- Ernest Hemingway, The Sun Also Rises
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