Living in a Fiat World

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eternaloptimist's picture
eternaloptimist
Status: Member (Offline)
Joined: Jun 19 2014
Posts: 2
Living in a Fiat World

Let me first say, that I am invested heavily in silver as a means of preparing for inflation.  Aside from some real estate I own, I would say that 75% of my liquid net worth is invested in silver while I hold the remaining 25% in cash as a hedge against being wrong about silver.  I don't own any stocks or bonds.  So needless to say, I am very optimistic about the future prospects for silver.  In fact, I have mostly goo things to say about silver with only a few doubtful questions I am hoping someone who knows more than me about silver can help answer.

The strongest fundamental upside for silver actually comes from looking at the dow-to-gold and dow-to-silver ratio going back 80 years (chart below for Gold.)  Mike Maloney does an awesome analysis that you should check out for further details.  You can see that there have been 3 major cyclical bull markets from looking at that chart:

1) The 1929 "bull" market for gold / silver triggered by the dow crashing while the price of gold remained fixed at $20 per ounce.  Gold-to-Dow ratio peaked at a value of roughly 2.

2) The 1966-1982 bull market for gold / silver where the dow remained stuck in the 800 range while gold went from $35 per ounce to $800 per ounce.  Gold-to-Dow ratio peaked at a value of roughly 1.

3) The bull market we are currently in for gold.  It has gone from $250 per ounce to over $1250 per ounce as of June 2014.  A few years ago gold almost hit $2000 per ounce.  We appear to be fairly early into this market.  Gold-to-Dow ratio likely to fall below 1.0 IMHO.  What?  A dow-to-gold ratio of 1.0 or less?  How can that be?

In the chart above, you see that after periods where the dow became particularly overvalued (Roughly 18:1 in 1929; Roughly 28:1 in 1966; Roughly 42:1 in 2000) that the chart swings wildly to the other direction in favor of gold.  In each case there is a "dead cat bounce" (aka a phony rally in the stock market) on the way down.  You can't actually see the fake rally from the 1930s very well on the chart, but it is there.  Stocks rallied in the mid 1930s before taking another nosedive.  There is another dead cat bounce in 1977, prior to gold soaring to $800 per ounce, and it appears we are in the middle of a third dead cat bounce as of the writing of this message (June 2014.)  

From here -- if history decides to repeat itself, we could see gold actually meet or exceed the points of the dow because the dow was so absurdly overvalued in 2000.  As of the writing of this message gold sits at $1270 while the dow is hovering near 17,000 so the idea of $17,000 gold or the dow at 1270 points seems like an OUTLANDISH prediction, however, it is all based on history repeating itself (which may or may not happen.)

Silver has historically maintained a ratio of 15:1 to 30:1 to the price of gold.  Meaning that if gold were to hit $17,000 per ounce (in today's dollars) that silver could be trading in the $500 - $1100 range.  Currently silver sells for a paltry $20 per ounce spot price.

Where I get myself into trouble is when I think about how the entire world is based on a fiat system, meaning that Euros, Dollars, Yuan, Yen, etc are all just conjured out of thin air.  There is no alternative to fiat currencies unless people abandon them and join the precious metals in masses.  Given how easily the "establishment" seems to have been able to manipulate the price of gold / silver it strikes me that they can keep this game going for quite a while longer.  Even the most optimistic doomsayers were predicting that the dollar collapse was coming no later than 2009 or 2010.  Those were the optimists.  Most folks in this community were expecting it even sooner (2005-2006.)  Clearly neither of those events happened.  Can someone address this question of how this small community of silverbugs (myself included) is going to win against the big & bad establishment?  I just don't know if it is going to happen.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Kinda, sorta.

All of the precious metals= money meme is based on historical data. You are betting that we will continue to consider precious metals to be money, as I half-heartedly do. But this is very much a Eurasian thing. Many cultures would not give you the time of day for an oz of palladium.

It would be fun to find out what other cultures consider to be valuable.

  • We can start with the aBantu who value cattle, women and children.
  • The child of the digital age values code.
  • The tribes of the Amazon value fire, and will risk life to steal someone else's embers.
  • Japanese honour
  • (insert your list here)

I think that Nicolle Foss is onto the right attitude. Whatever you own must be unfettered- you must own it outright. When all the promises to pay (cross my heart and hope to die), dollar bills are no longer seen as "money", there will be a mad scramble for Real things. Things, that to me, put food on the table, beer in my glass and keep me and mine warm and dry at night.

 

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