3 February 2014

The Optimum Gold / Silver Ratio

The “optimum gold/silver ratio” is an interesting question, because in prior centuries the ratio was based on both being monetary metals. The two metals previously had little practical day to day use for common people (except monetary), and they functioned mostly as status symbols of wealth and power for the privileged. All that changed with the industrial revolution, when silver slowly started playing an essential role in technology. Today’s gold/silver ratio is based on gold being primarily a monetary metal, and silver being primarily an industrial metal, thus making the gold/silver ratio very unstable. Let’s start by examining some historical facts to see where we came from, where we are now, and finally, the unknown Event Horizon we are heading toward that will establish the future gold/silver ratio. The earth currently yields about 80 million ounces of gold per year, and about 650 million ounces of silver per year.
These figures are in the same ballpark with total planetary production of the two metals from the dawn of recorded history, which is about 4.5 billion ounces of gold and 44 billion ounces of silver. So, global silver/gold production ratios have drifted somewhere between 8:1 and 11:1. About 2500 years ago, the silver/gold price ratio started off near 10:1 (which makes sense), and slowly edged up to about 16:1 by the 1860′s, where it was currently fixed by the US Government. However, the gold/silver ratio destabilized in the mid 1860′s, triggered by fiat currency creation used to finance the American Civil War, and the ratio has since been all over the map in the last 140 years, ranging as high as 100:1. The gold/silver ratio never regained stability, possibly due to the massive silver discoveries in the American west, and the advent of technological uses for silver including photography, which started silver’s shift away from a monetary metal and towards an industrial metal. This instability caused silver to be widely demonetized starting about 100 years ago, because silver could no longer work together with gold to form a stable monetary base. For example, prior to 1900 the US dollar was defined as 3/4 ounce of silver, and after 1900 the US dollar was defined as 1/20 ounce of gold. (And of course, in 1933 the US dollar was totally redefined by the Parker Brothers, with the Monopoly board game actually being patented in 1935. What a great educational tool to brainwash the youngsters about the new monetary system!) As commodities, gold and silver are almost always used independently of each other. A person may need a gold crown on his tooth, or a flat screen TV in his living room. The reason I use the “flat screen” example is to emphasize a very striking difference between the use of gold and silver as commodities. Silver has enormous use as an “invisible” industrial commodity, requiring minute amounts in zillions of applications, especially in all consumer electronics, while gold’s industrial use is comparatively limited. To put it bluntly, if all our gold suddenly vanished, we would have to scramble to find substitutes for some technological uses, but we would mostly miss gold’s beauty. However, if all of our silver suddenly disappeared, we would be instantly plunged into the Stone Age. Annual silver demand has exceeded annual planetary production for many of the past 50 years. Until the last 2-3 years, monetary silver investment has been less than zero, due to silver coin melting and other recycling making up the industrial deficit. Yet, the shortfall is unsustainable at current silver prices, because silver in electronics often cannot be recycled economically, so it is simply thrown away. Also, every time the US military explodes a smart bomb, 100′s of ounces of silver are vaporized. Vast stockpiles of silver accumulated over many centuries have now been “consumed” in the last few decades, and it is unclear how much is left. For example, after World War II ended the US Government had stockpiled billions of ounces of silver. As of 2002, this stockpile is completely gone, as are all other official world government stockpiles. In many expert opinions, at least 50% of all silver mined in history is now gone, unrecoverable by any means, while at least 80% of all gold probably remains. So, the current ratio of existing silver to existing gold is probably more like 5:1, and not 10:1. On top of this, most of the remaining silver exists in things like jewelry, silverware, or coins hoarded by people wearing “tinfoil hats,” and I doubt that the “tinfoils” will relinquish their silver at anywhere near current price levels. Therefore, in regards to world bullion stockpiles the 5:1 ratio is flipped, with gold bullion actually being around 5 times more plentiful than silver bullion. So, we now have a price ratio of 70:1, but an availability ratio at current prices of 1:5. In this light, remember that silver (not gold) is the metal that is indispensible for modern society. Can you say “unstable?” The Event Horizon is a physics term used to describe the boundary between two realms with discontinuous rules, so you can’t look from one realm into another, but you can move from one realm into the other (that is, if you like being sucked into a black hole). In this case, it is the economic rules of monetary metals versus the economic rules of industrial metals, which prevent us from seeing the proper gold/silver ratio, and which explains why the market always seems to be searching for it. I believe that these two sets of rules are being “merged” in silver, but most of us can’t see it coming. We live in a world of unstable digital fiat money, with 100′s of trillions of unstable “dollar” derivative bombs out there, which are considered “investment vehicles” by very rich entities. Yet, at current silver prices of $12-13 an ounce, the market value of annual global silver production is only about 8 billion dollars. For a precious metal that is also indispensible to society, this kind of pricing is ridiculous. Since silver is literally more important than gold, yet gold retains the sentimental favorite crown, watch for the “optimum gold/silver ratio” to eventually come to its new resting place around 5:1, with the potential for parity.

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