Silver and gold ratios and old/new currency exchange rates

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TD's picture
TD
Status: Bronze Member (Offline)
Joined: Jun 7 2009
Posts: 51
Silver and gold ratios and old/new currency exchange rates

I’ve had some random thoughts of late that I would like to share in order to perhaps get some feedback from the group.

1)    I’ve always heard that gold is a retainer of value. That “an ounce of gold a hundred years ago would buy a new suit, and an ounce of gold today will do the same”. (lately I’ve read in a couple of places “two suits” instead of “one”…. Not sure what that’s about). In the past year I’ve seen the cost of an ounce of gold rise significantly, but suits at my local shop haven’t risen at all. Is this an indicator that we are not in an inflationary cycle, but rather the beginning stage of hyperinflation?

2)    When a currency collapses is an exchange rate officially established between the old currency and the new? Or is the old currency allowed to go to absolute zero? What is the historical precedence for this? (Argentina and Weimar?) It would seem that an exchange rate would need to be put in place or how would one settle a loan if all the old currency was used for lighting fires or wiping rear ends?

3)    I’ve been thinking of putting my house on the market in the coming Spring. I was contemplating the idea of “what happens if during the listing we enter a period of hyperinflation and dollar become worthless”… would I be legally obligated to sell my house for worthless pieces of paper? Should I consider putting some kind of hyperinflation clause in the listing contract? And, how would that read? And, what would my broker’s reaction be? lol

4)    I notice that many years ago a one ounce silver coin was priced at a dollar, and a one ounce gold coin was priced at twenty dollars. The Mint is still printing one ounce silver dollars, but the one ounce gold coins are shown to be fifty dollars. Was this some attempt by the government to establish a new ratio between the two metals?

5)    The ratio between silver and gold prices seems to be shrinking. One of the enticing benefits of investing in silver is the potential of greater returns as these two precious metals attain their historical value ratios. If, and when that is attained, should we consider converting our silver into gold?

aggrivated's picture
aggrivated
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 527
Re: Silver and gold ratios and old/new currency exchange ...

Disclaimer-I am not a PM guru, but a novice investor.  I will comment on questions #1 and #5. 

#1  On the issue of 2 suits for an ounce of gold, I would go for a more simple comparison, such as a commodity like bread.  So much of what affects prices these days is because of our globalized labor pricing (which is why most stuff is made in cheap labor countries).  Bread is not usually made far away, unless you are buying Scottish shortbread.  There are other factors that affect wheat, like too much land devoted to growing 10% of our gasoline, but as a whole a local food is a better guide.  I have heard houses used for comparison, but you have to factor out bubbles like the one we are exiting right now.  Suits may not have gone up, but take a look at some commodities and the ratio is more stable.

 

#5  Silver is much more volatile than gold, so many investors try to use the quick runup of silver to allow them to then sell when the silver/gold ratio is small and then buy gold which is more stable and will hold the value.  Franklin Sanders at 'The Money Changer' is an advocate of this concept and has some good info on his site about how to work with it.

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