"Everything you need to know about gold"
Over the years (and decades) silver travels a path fraught with excitement and disappointment. Both the excitement and the disappointment stem from three things that are killing silver – unrealistic expectations, inflation, and time.
UNREALISTIC EXPECTATIONS
The unusual conditions leading to the explosion in the silver price in the late 1970s are unlikely to happen again in a similar context…
SILVER COIN PREMIUMS ARE SMALLER
One year ago I published the article Silver Coin Premiums – Another Collapse?. In it, I expressed concern about the high premiums being paid by stackers and others for the privilege of owning silver in coin form, particularly Silver Eagles…
Sometimes fantasy becomes reality. At other times, a dose of reality will temper fantasies of outsized and unjustified proportion.
Some silver investors and analysts could use a dose of reality. Below is a chart of silver prices dating back to 1915…
Expectations still abound for the long-awaited, vertical leap in silver prices. We are told it is inevitable; and that it is supported by solid fundamentals. Those fundamentals include supply deficits, a return to the 16 to 1 gold-silver ratio, increasing monetary demand for silver, etc.
However, an examination of those fundamentals reveals a different picture.That picture is inconsistent with the call for higher silver prices.
SILVER SUPPLY & DEMAND, RATIOS
The supply deficits (gaps in consumption over production) have been talked about for decades. In the 1960s and 1970s they were the principal fundamental justification in the case for higher silver prices.
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. The government then 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 (not Silver Eagles) is worth exactly $1.00.
The huge price gains for silver that occurred in the 1970s were largely attributable to years of price suppression prior to that. Those years of price suppression, though, were preceded by decades of price support.
Neither price suppression, nor support, are significant issues at this time. The primary imbalance in supply and demand was corrected in the 1970s. If it hadn’t been, the silver price might be much higher than it is.
Expectations for a return to a 16-1 gold/silver ratio will go unfulfilled. The gold-to-silver ratio that existed one hundred fifty years ago was mostly the result of political influence and appeasement. There is no fundamental reason which justifies any particular ratio between gold and silver. (see Gold-Silver Ratio: Debunking The Myth)
As can be seen in the chart above, the gold-to-silver ratio continues to widen in favor of gold.
SILVER FUNDAMENTALS
Silver is an industrial commodity. Its primary demand is driven by – and its price is determined by – industrial consumption. Any role for silver 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; particularly Silver Eagles.
The fundamentals simply do not support the bullish expectations for silver. Also, there are fundamentals that make silver vulnerable to a big price drop.
Deflation is a more likely near-term possibility than hyperinflation. True deflation results in a decrease in the general price level of goods and services.
As an industrial commodity, the silver price would reflect the full brunt of deflation’s effects. The depression-era low for silver occurred in late 1932 at $.28 oz. This low coincided with the stock market’s low.
Something similar happened in March-April 2020, when both silver and stocks declined by thirty-five percent.
Another possibility is that we might continue for several more years with relative prosperity and disinflation. This would not stop further price declines for silver.
SOME HISTORICAL PERSPECTIVE
After it peaked at $48.00 per ounce in 1980, silver’s price declined ninety-two percent over the next thirteen years. It reached a low of $3.57 oz. (February 1993) during the boom years of the 1990s.
It has been ten years since silver last peaked at close to $50.00 oz. At the current price of approximately $25.00 oz., silver is cheaper by one-half. This is shown on the chart (source) below…
Given that, does it matter much that silver has doubled in the past year. All of that increase is just a matter of recovering some lost ground.
Historically speaking, most of the reasons people give in support of dramatically higher silver prices, lose credibility when one looks at the facts.
CONCLUSION
Silver is ineffective as a monetary hedge because it is not a store of value. Silver would need to be over $100.00 per ounce right now to roughly approximate what gold’s current price of $1800 oz. reflects regarding the loss in purchasing power of the US dollar over the past century.
It is not remotely close to that number and there is no historical precedent to expect the gap between gold and silver to narrow in silver’s favor. As long as the US dollar continues to lose purchasing power, the gap between gold and silver prices will continue to widen in favor of gold.
In addition, on the few occasions when silver has increased in price dramatically, it has given up most or all of the gains in short order.
In other words, there is likely more downside ahead for silver’s price. And it could be quite significant.
(also see $100 Silver Has Come And Gone)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
GOLD-SILVER RATIO TOPS 100
Recently, the gold-silver ratio topped 100. Nevertheless, it doesn’t seem to matter what the ratio is, or how high it goes. Those who prefer silver always seem to think it’s going to reverse “soon”.
It might; maybe significantly so, too. But it doesn’t mean a thing. There are no fundamental reasons for the ratio to move up or down at any given time.
Actually, there is no reason to track it, either. Except that those who love silver think it is correlated in some way with gold; its not. And that silver is cheap relative to gold (it is), so it must be a better buy (its not).
But what if there was a correlation; or inverse correlation? Shouldn’t we see something on a chart that would indicate such?
RE: SILVER LOSES ITS METTLE
Last week I talked about unrealistic expectations for the price of silver (see Silver Loses Its Mettle). My comments were centered on two specific factors: 1) silver’s primary role as an industrial commodity and 2) the fallacy of the gold-to-silver ratio.
Both of these items have their root in fundamentals, or lack of them.
In addition, I pointed out the fact that the price of silver has declined significantly in every single recession of the past fifty years.
Not surprisingly, the technical side appears to reinforce the lack of fundamental support for higher silver prices.
SILVER LOSES ITS METTLE
Actually, it is silver investors who might be losing their mettle. Coping well in the face of a fourteen percent decline in the vaunted white metal must be very difficult.
The size of that decline happens to be right in line with the major stock market indices, all of which (Dow, S&P, Nasdaq) lost similar percentage amounts this past week. No better, no worse for silver; but it is ironic.
We have been told over and over that silver is a hedge against that type of stock market action. Also, we’ve been told that silver would be more explosive that its well-respected brother, gold. It was – sort of. The correct word is implosive.
$100 SILVER…
In January 1980, the price of silver peaked at just under $50.00 per ounce. From its low in October 1971 at $1.27, silver had risen thirty-nine fold in little more than eight years.
There was talk about higher silver prices, as much as $100.00 per ounce and more. Yet, only a few months later, silver was down to $10.00 per ounce. That amounted to a decline of nearly eighty percent from its peak.
Silver bulls were not deterred, however. They continued to stress the “fundamentals” which would lead to higher silver prices, but their dreams turned into nightmares. The price of silver continued to fall.
Silver is definitely cheap. By almost any standard of measurement, the price of silver is cheap. It is cheap relative to gold, it is cheap compared to its recent peak in 2011, and it is cheap historically. For some, that apparently means that silver is a bargain, too. I’m not so sure.
