Hi Yo Silver! sort of…

In January, 1980 silver peaked at close to $50.00 per ounce and gold hit its high point of approximately $850.00 per ounce. Thirty-one years later, in 2011, both metals again reached lofty levels.

For gold, the new high point was $1900.00 per ounce.  For silver, the number was $50.00 per ounce; again.

Six years later, as of this writing, gold is priced at $1260.00 per ounce. Silver is at $17.00 per ounce and change.

Over the entire thirty-seven year period, gold is forty-eight percent higher than its January, 1980 peak price; whereas, silver is sixty-six percent lower.  

And this ‘underperformance’ of silver (relative to gold) is not limited to any isolated, short-term time frame.

The US Federal Reserve Bank was established in 1913.  At that time the US dollar was convertible into gold at $20.67 per ounce. Concurrently, and in similar fashion, the US dollar was convertible into silver at $1.29 per ounce. The seemingly odd number was based on the silver content of .77 ounces in a US silver dollar ($1.29 x .77 ounces = $1.00).

Just over one hundred years later, gold’s value as measured in continually depreciating US dollars is up sixty times ($1260/oz divided by $20.67/oz = 60). Silver’s value, as measured in the same depreciating US  dollars, is up only thirteen times ($17.00/oz divided by $1.29/oz = 13).

The US dollar has lost ninety-eight percent of its purchasing power since 1913. In other words, it takes (generally speaking) fifty times as many paper dollars today to purchase comparable amounts of similar goods and services you could have purchased in 1913. The sixtyfold increase in gold’s US dollar price compensates quite well for the decline in US dollar purchasing power. The thirteenfold increase in silver’s US dollar price clearly does not.  (see Silver Is Not Real Money)

All of this seems inconsistent with the hype associated with silver re: its perceived role as a monetary hedge, the effects of inflation, and its relationship to gold (the gold/silver ratio, etc.).

Which begs an explanation.  Hence…

Silver is an industrial commodity.  Its primary demand is driven by – and its price is determined by – industrial consumption. Any role as a monetary hedge is secondary.  This is true even in light of the significant increase in the amount of silver used in minting bullion bars and coins.

The huge price gains for silver that occurred in the 1970s were largely attributable to years of price suppression prior to that.

For nearly seventy years between 1878 and the end or World War II, the U.S. government offered to buy silver at artificially high prices.  This was done to find favor with voters in silver mining states.  It was a political move with no justifiable economic intentions. But it had serious, unintended, economic consequences.

Over the years, the government accumulated a stockpile of silver exceeding two billion ounces.  The over-production from new mining had created a surplus of unused, unneeded silver.

Throughout the twentieth century, industrial use of silver increased to the point where the consumption of silver eventually exceeded new production. This is the start of the consumption/production gap to which people refer quite frequently.  The government now reversed their role and became a willing seller in order to keep the price down.  The specific purpose was to keep the price from rising above $1.29 per ounce. This is the level at which the amount of silver in a silver dollar is worth exactly $1.00.

By 1971, the government had exhausted its silver stockpile.  After years of price suppression which caused excess consumption, the price of silver could be expected to rise to some level of equilibrium.  Most likely, considerably higher than $1.29 per ounce.  Any benefits from silver’s monetary role was icing on the cake.

Speaking of silver’s monetary role, there is a supposed link to gold that is assumed by most investors to be implicit.  Some believe there is a fundamental? mystical? overriding? consideration with respect to the gold to silver ratio.  Literally, that silver will outperform gold and return the gold/silver ratio t0 a specific point; namely 16: 1.  But why 16:1?

Part of the government’s attempt to support silver prices in the late 1800s and early decades of the twentieth century was to fix the ratio of gold to silver at 16 : 1 (gold @ $20.67/oz divided by silver @ $1.29/oz).

It might be reasonable to expect a ratio for purposes of consistency and uniformity within the existing monetary system. However, the price used for silver at $1.29 per ounce was considerably in excess of the current (then) market price.  Again, this was an attempt to win the favor of voters in silver mining states.  A political move with no economic justification.

There are three defining characteristics of money:  1) medium of exchange  2) measure of value  3) store of value.

All three are necessary, but of the three, store of value is the most critical.

For silver (or anything else) to be considered real money, it must be a store of value. According to Investopedia, a store of value is a “form of wealth that maintains its value without depreciating”. In this case, being a store of value means it must at least match inversely the decline in purchasing power of the US dollar.

For this to be so, silver’s current value needs to be at least US$64.00/oz. It isn’t even reasonably close to that benchmark. And there is little in the way of fundamentals to justify expectations that it might attain that level.  Certainly nothing unique to silver.  (Any asset could rise to any higher price, theoretically.)

It is true that silver has a long and storied history as money in coin form. And there is certainly a valid argument for owning some silver coins in the event of runaway inflation and complete collapse in value of the US dollar.

Other than that, silver is just another commodity with limited potential investment attraction.  And that largely depends on timing and price.  Silver has been hugely profitable under very specific conditions in the past. But it is not deserving of the allegiance that some express.

Read more about silver and gold as money at kelseywilliamsgold.com.

 

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