Does Silver have More Potential than Gold?

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Mr. Fri's picture
Mr. Fri
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Does Silver have More Potential than Gold?

I put this post on the "Gold's Near-Term Outlook" thread but was asked to post if elsewhere since it's really a silver question.

This is a question I've been thinking about for a while and was hoping y’all could add some insight?

I've hear arguments that silver has a much higher upside potential than gold. This is based on a few things:

(1) The Gold/Silver price ratio has historically been 15/1 but now it’s around 72/1.  If it goes back to the ratio that it seems to like during less volatile times, then silver will increase 5X of what it's now in addition to whatever gold rises to. (Assuming that gold doesn't go down to bring them closer together.)

(2) Silver is a metal used in industry so the reserves become depleted from uses which makes it hard to recover (i.e. silver in electronics manufacturing). With a decreasing supply and increasing demand (electronics, etc.), this metal will be a lot more valuable in the future.

(3) The above-ground reserves of silver is getting smaller whereas gold is getting larger.  The numbers I heard said in 1940 there were 2 billion ounces of gold and 10 billion ounces of silver above ground. Gold mining and silver usage changed that so in 1980 there were 3 billion of gold and 3.5 billion of silver. And in 2006 there were 5 billion of gold and 1 billion of silver. Thus, silver is becoming more rare as compared to gold.
 
My question is this; if it’s true that there is much less silver above ground than 20 years ago, then why hasn't silver increased in value like gold?  What happened to the 15/1 ratio? (Yes, the accuracy of the statistics I heard could be the problem but I wouldn't think there has actually been 5X more silver mined than gold in the last 20 years.)  I’m thinking that the answer might have something to do with gold increasing in value due to the cultural aspect of holding gold in countries like India where average family incomes have been increasing.
 
Obviously it would be important to get a handle on this if silver is positioned for a large increase in the event of a decreasing (or collapsing) dollar.  On the other hand, if there's a logical reason for silver values to stay low, one wouldn't want to put too much of their savings into silver.

><>Larry

BSV's picture
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Re: Does Silver have More Potential than Gold?

Mr.Fri:

The arguments you put forward have good reasoning behind them. But what makes you think that markets are rational? Perhaps they are in the long term. In the short term, they are not. We will fnd out in due course what "Mr. Market" thinks about silver. In the meantime, we are speculating.

That said, I'm planning on buying a bit of silver bullion in the hope and expectation that it will be a good long term investment. If not, I will feel free to blame you. Okay? Can you please let me know your addess so I can send "Mikey" to even the score if your predictions don't work out.

Ragnar_Danneskjold's picture
Ragnar_Danneskjold
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Re: Does Silver have More Potential than Gold?

15:1 was an artifact of having a fiat gold/silver standard vs using one or the other as currency and letting the other float.

Also, there is more than one way for the ratio to get back to 15:1. Silver could stay at current price and gold could fall.  Or silver might rise some and gold fall some.

I wouldn't get hung up on the ratio, but since Nixon closed the gold window, "normal" ratio seems to be 40~60:1. 

FWIW....I have silver, but I'm buying gold too.

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Re: Does Silver have More Potential than Gold?

Mr. Fri. When silver was used as a monetary unit and store of wealth, it was officially set by the governments at 8:1. Thats the last official ratio that was mandated by law.

 

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Re: Does Silver have More Potential than Gold?

 

fwiw, my simple mind says to own some amount of both.  As far as what %age to put into one vs the other; to me that begs the question as to whether one is buying it strictly for appreciation purposes or rather as a store of value.   If buying for appreciation, then one would use whatever fundamental analysis or technical indicators that one prefers...if buying as a store of wealth and/or medium of exchange should SHTF, then 20/20 hindsight will ultimately show which %age would have been the best.  

JL Lord

 

Mr. Fri's picture
Mr. Fri
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Re: Does Silver have More Potential than Gold?
BSV wrote:

The arguments you put forward have good reasoning behind them. But what makes you think that markets are rational?

Good point.  However, I would expect silver to increase as the industrial demand rises.

Ragnar_Danneskjold wrote:

15:1 was an artifact of having a fiat gold/silver standard vs using one or the other as currency and letting the other float.  I wouldn't get hung up on the ratio, but since Nixon closed the gold window, "normal" ratio seems to be 40~60:1. 

Thanks, this is the kind of information I was looking for.  Since the world economy is so large I guess it not possible for any major currency to be tied to gold again. 

SPM wrote:

Mr. Fri. When silver was used as a monetary unit and store of wealth, it was officially set by the governments at 8:1. Thats the last official ratio that was mandated by law.

 

What do you mean it's the official ratio?  Could you explain this a little?

Quote:

That said, I'm planning on buying a bit of silver bullion in the hope and expectation that it will be a good long term investment. If not, I will feel free to blame you. Okay? Can you please let me know your address so I can send "Mikey" to even the score if your predictions don't work out.

Uhhh.. I have to go now...  You'll find me at over at the firearms thread.

 

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Re: Does Silver have More Potential than Gold?

I've been pondering this as concept as well. I believe the 15:1 ratio was fixed back in the colonial era when our currency was real money. It has been much higher than that over the recent past, and near record ratios now. I read somewhere that newly mined silver to gold is in the 15:1 ratio.

In addition to your arguments we also have:

- Most silver is mined as a by-product of other metal mining activities. Many mines are shut down now. There could be a long delay in new silver if silver demand went up.

- China is moving strongly into commodities

- Silver ETFs and other paper silver holdings may be way over-leveraged. A call on those holdings could cause a real shortage problem.

- As gold goes up in price, PM investors may turn to the more affordable silver.

- As gold price goes up, jewerly manufacutrers may start to use more silver (pure speculation here)

- Silver is at a fairly low price right now

- Silver is being 'rediscovered' for it's antibacterial properties (increased industrial use)

On the downside:

- Silver doesn't get the same 'respect' as gold, I think due in part to its dual use as money and industrial metal

- The premiums on buying silver are much higher (percentage) than gold. This is one of my main problems with it.

- The weight to value ratio compared to gold is huge. I just bought some silver and what a difference compared to the equivalent value of gold!

But, as mentioned, the markets are  irrational. People have been saying silver is due for a major breakout for many years. I believe that is becoming more likely, especially when the economy starts moving again.   

I'm glad to see this discussion. I have posted before on it but have seen little response. I have seen more than one analyst predict silver reaching parity with gold. I'm not too sure about that, but even if it got back to the 15:1 ratio it would be a major break. I'm no expert and barely an amateur at this, so don't make any bets on what I say. But it is intriguing.

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Re: Does Silver have More Potential than Gold?

Mr. Fri - Going back and re-reading, I don't think it was officially set at any ratio. My apologies for bad information. I read that in current times, the price of silver partly fluctuates based on how many people think it is a store of monetary wealth. When the gold/silver standard was lifted for a fiat system (1930s), thats when silvers ratio went up to 50:1 and higher. The ratio its found in our earths crust compared to gold is 10:1 to 17:1, depending on who you listen too.

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Re: Does Silver have More Potential than Gold?

The simple answer is yes, and here is a great article that explains why.  http://www.hardassetsinvestor.com/features-and-interviews/1544-david-mor...

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Re: Does Silver have More Potential than Gold?

There's another thing that hasn't been brought up yet. Historically, silver has been "peoples" money, while gold has been rich man's money. For everyday purchases like groceries, silver had been preferred due to its lower unit value. While the wealthy (and central banks) have realized to some degree that gold is a hedge for inflation and may become money again, most "normal people" have not had the same realization about silver. When the dollar hyperinflates and TSHTF, people are going to realize the value of silver for everything from buying milk to paying the rent.

Also about silver: my article Walmart Can Save the World and the related thread on this forum.

Mr. Fri's picture
Mr. Fri
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Re: Does Silver have More Potential than Gold?

Hogeye,

That's true if one intends to be using gold and silver to pay for groceries and put gas in the car.  However, if one uses PMs to store their wealth then the metal can always be exchanged for whatever paper money is in vogue at the time and use the paper for purchases.  I seriously doubt that we will revert back to a society where we use gold and silver coins for everyday shopping.  Since gold accounts for about 0.6% of the wealth in the world, the large majority of people will need to use something else than gold and silver coins.

SamLinder's picture
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Re: Does Silver have More Potential than Gold?
Hogeye wrote:

There's another thing that hasn't been brought up yet. Historically, silver has been "peoples" money, while gold has been rich man's money. For everyday purchases like groceries, silver had been preferred due to its lower unit value. While the wealthy (and central banks) have realized to some degree that gold is a hedge for inflation and may become money again, most "normal people" have not had the same realization about silver. When the dollar hyperinflates and TSHTF, people are going to realize the value of silver for everything from buying milk to paying the rent.

Also about silver: my article Walmart Can Save the World and the related thread on this forum.

Actually, hogeye, the idea of using silver has been discussed in the "Golds near future" thread as many of us are aware that gold is too expensive for everyday transactions. Many people buying PM's are buying both gold and silver for the very reasons you mention.

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Re: Does Silver have More Potential than Gold?

Once TSHTF I expect the gold/silver ratio will constantly change as it did in the past, but don't forget copper for those smaller purchases.

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Re: Does Silver have More Potential than Gold?

I love Silver as it's more rare than gold and has more industrial uses.  Plus, it's still considered a "money" metal unlike platinum or palladium.  Enjoy!

 

Is silver the new magic bullet for investors?

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540Many investors have their eye and money on gold as the asset class to watch in the near future as global money printing has its inevitable effect on inflation, crashing bonds and hiking interest rates.

In this environment gold will soar as a money of almost fixed supply. It takes only a tiny shift of cash from bonds to gold to begin an enormous price spike for gold.

Investors can be forgiven for being a little skeptical after the recent modest price performance of gold, although even the anti-gold bugs concede that gold has been a good store of value through the early stages of the global economic crisis.

Future prospects

You really have to look forward, however, and think how major asset classes are likely to perform from here.

Do equities look a good bet with profits diving and real estate prices falling? Do bonds look attractive with governments planning huge issuance programs? And which currency will devalue next?

Gold offers protection against devaluation and an over supply of bonds as no government can print gold. Equity rallies in a bear market are temporary and easy to misjudge. Shorting stocks is also a matter of market timing which can be got wrong.

Besides you need to catch the next big thing to succeed in investment, not jump of previous bandwagons that might show some signs of new life.

Add all the global stimulus packages and bank rescues together and you have a massive requirement for governments to create money, either issuing bonds or printing money. That will happen, and that will create inflation, and that will mean a higher gold price.

It is just a matter of waiting patiently long-of-gold until it happens. But if you want to leverage your precious metals then there is a growing body of precious metal insiders that tip silver as the better option.

Silver bullet

The world’s stock of silver is one hundredth that of gold and the current price makes this metal arguably the most depressed commodity of all. It has never traded at even half its 1980 high, although it has recently come close to the average price for that year.

When the gold price lifts off then the silver price should take off by at least a factor of two, and the gold:silver ratio drop. This is also the historic pattern, with silver the better performing metal in a boom, albeit with higher volatility than gold. So if you are looking for a magic bullet to boost your portfolio, silver should be your asset class of choice.

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