Buyers of Gold vs. Buyers of Silver

Wow! What a week for dollar! It dropped a whole milligram from 23.2 to 22.2mg gold. The dollar is now at its lowest level in years, and on the verge of breaking down.


Silver, the precious metal of the common man [PT]


We insist that the dollar cannot be measured in terms of its derivatives, such as the euro or the pound. These currencies depend on the dollar, not the other way around. When all the dollars are sucked out of them (when they are fully de-dollarized), they will be worth exactly zero.

Well, though in a more abstract sense, the dollar is derived from gold. When all the gold is sucked out of the dollar, then the dollar (and any dollar-derivative currencies that may have survived until that point) will be worth zero. This is my permanent gold backwardation thesis.

Anyway, on a more pedestrian note, the price of gold shot up $58 and the price of silver rose rather less by proportion, ¢47. That brings the gold-silver ratio to a new high.

We talked a bit about this last week, noting that the demand for both gold and silver is monetary reservation. The difference being who demands silver as compared to gold. In the modern era, the ratio has only been higher than this in the episode from 1990-1993. Here is a graph showing the ratio from 1968-present.


Gold-silver ratio, 1968 – today.


The first question is: is it cyclical? What if it isn’t? This would mean silver has been demonetized, silver stocks are rapidly being consumed, and silver could crash or shoot the moon depending on facts specific to events in the mining sector and automotive or solar utilization.

We do not believe this to be the case. And we would add that, unlike stocks and bonds, there is no credit risk. Silver cannot default. A bar of silver today is the same quality as it was in 2011 when the ratio was around two thirds lower than today (i.e., silver was three times more valuable in gold terms).

Gold has long been called the “money of kings” as it was held by governments and the wealthy. Silver, by contrast, was used by wage-earners. One might think that the difference between the two metals is just price (or value). Gold is more expensive, and the not-so-wealthy cannot afford it.

That is true. But it is more than that. Gold is the most marketable commodity in the large. One can do large transactions, without fear of moving the gold market.

There are economic reasons for this, but suffice here to say that gold has such high specific value (value per cubic centimeter, or value per kilogram) that it is practical to move it anywhere in the world. The major depositories and refineries are all within 24 hours by airplane from one another. So the supply or demand of gold is not just local, it is global.

This is not true for silver. At today’s ratio of around 90, it takes 90 ounces of silver to convey the same economic value as one ounce of gold. In other words, the same value in silver weighs 90 times as much.

Silver is also less dense than gold. These 90 ounces of silver take up 166 times as much volume. It is much harder to justify putting silver on a plane. The price differential between the locality where the silver currently is and the destination would have to be that much greater.

Silver serves a different purpose than gold. For those saving a portion of their weekly wages, gold is impractical. The amount of gold one would get for $50 would be a tiny chip. And one would pay a big premium to manufacture something so small and precise.

But in silver, one could get 3 one-ounce coins. Silver is the most marketable commodity in the small. Silver offers the least losses (to get in and out) to small savers.

The point is that there is not necessarily a great overlap between the gold owners and the silver owners. Institutions (those which will touch precious metals at all) own gold, almost exclusively. Small savers have a heavy preponderance of silver, especially those who keep the metal at home.

Market conditions have generally been pushing the gold price up since the start of 2016 (with some drops). Silver, by contrast, almost looks like a bear market since July 2017. And, arguably, a tepid bull market since last September.

Central banks, institutional investors, inter-generational wealth planners, and the wealthy have been favoring their metal for a few years. While the workers of the world have not been uniting around theirs.

One or both of the following things will change. The wage-earners will increase their savings, not in the banking system (which we predict will soon be charging them negative interest in certain countries) but in precious metals. And those institutions with flexibility, not to mention wealthy individuals, will increasingly favor silver, as the relative bargain.

As always, when the trend gets going, the trend followers jump in, and extend it further.

Other than that very brief spike to 100, even during silver’s darkest days the gold-silver ratio did not stay above the level where it now sits. There is no guarantee that today won’t be different, but if one believes that this ratio is cyclical, then it is a no-brainer to shift some of one’s gold into silver. No one knows how long this relative dearth of silver demand will last. But this is a no-brainer trade for value.


Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.


Gold and silver priced in USD


Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose further.


Gold-silver ratio, near term


Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.


Gold basis, co-basis and the USD priced in milligrams of gold


In light of this epic drop in the dollar (i.e. rise in the price of gold in dollar terms), the drop in gold’s scarcity (i.e., the co-basis) looks modest indeed. The Monetary Metals Gold Fundamental Price rose another $38 to $1,440.

Now let’s look at silver.


Silver basis, co-basis and the USD priced in grams of silver


Note that we have switched from tracking the July contract, and now show September.

Silver’s price move was smaller, but alas its scarcity fell more.

The Monetary Metals Silver Fundamental Price rose 2 cents to $15.51.

Astute readers will do the math, and note that the calculated fundamental gold-silver ratio is now up to 92.8. This suggests that Friday may not be the top.


© 2019 Monetary Metals


Charts by Monetary Metals


Chart and image captions by PT


Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.




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