Silver Will Outperform Gold When Fiat Dies

March 14, 2007

Two recent articles stated a theory that silver-to-gold price ratio will increase when the economy is strong, and decrease during financial meltdown (or inversely the gold-to-silver price ratio will decrease when the economy is strong, and increase during financial meltdown):

The theory is apparently based on correlations since gold and silver were replaced as money by fiat with the 1913 Federal Reserve Act. I contend that these myopic near-term correlations are aliasing error, and will not hold true as precious metals re-assert themselves as money in inevitable bust of the current epic fiat credit boom (see my previous articles for more on "inevitable").

The 600 Year Gold-to-Silver Price Ratio chart (please click this link before clicking the prior link, as that website sets a cookie in your browser before letting you view the chart) clearly shows that the historical ratio is nearly constant at roughly 15 up until the 1800s, when the European bankers began to spread fractional bankinginto the new American colonies.

Note the increase in the gold-to-silver price ratio (decrease in silver-to-gold price ratio) actually started decades before the 1920s boom ended in 1929. The increase coincided with the massive increase in silver supplies due to "Western Silver Discoveries", and probably also exacerbated by the official takeover of fiat in 1913. Notice the downward spike in the ratio from 1932-35, which I explained in my prior article "Fiat Price Of Silver Is Deceptive", was due to US government manipulation of the silver price in order to cause a depression in China and force them off a silver legal tender money standard. Thus monetary demand for silver was removed/reduced in the most populated nation on earth.

Note the second drastic rise in the ratio started around 1964, when silver was removed as money from USA coin, flooding the investment market with 2 billion oz of silver. Notice it only took one billionaire investor (Hunt brothers) in silver to spike the ratio back down to roughly 15 in 1980, even with the 2 billion oz supply overhang.

Today the 2 billion oz of silver is arguably gone, consumed at roughly 100 million oz per year by industrial demand hence. The 600 year silver chart clearly shows that silver price has been on a downward trend as fiat rose to power as money. When monetary demand for silver and gold return in the inevitable bust of the current epic fiat credit boom, one needs to consider that the total value of all available supply of silver is miniscule compared to supply of gold, and supply of gold is miniscule compared to the supply of fiat.

In short, I contend that silver will return to at least 15 ratio (the approximate natural rarity ratio), and probably much lower, due to monetary demand and decades of excessively low silver-to-gold prices destroying most all primary silver production. The monetary demand will swamp industrial demand by orders-of-magnitude. And as the economy crashes, most silver is produced as a by-product of base metals, the number of unhedged primary silver mines can be counted on one hand (zero actually producing now), thus the supply of silver will decrease as the economy is turning downward due to decrease in base metals, while monetary demand skyrockets.

Disclaimer & Clarifications: I am not an investment advisor, consult your own. Also regarding my prior aticle "Gold Value Increases During Extreme Deflation (or Inflation)", I was not implying that gold price will go to $1. I contend that at the end, there will be only dollar debt remaining on net balance sheet (net worth will have moved out of fiat). The debtors (holding no gold or silver) will be happy to have their debt revalued lower relative to gold, the gold holders will be happy to receive some gold instead defaulted dollar debt, and the indebted gold holders may lose their gold via means-tested bankruptcy laws. The Amero will likely be fractionally backed by gold, with the fractional nature insidiously hidden to appease the majority who want to continue to use debt. There has never been a 100% gold standard, and there will never be as long as some people want to use debt, because debt is impossible on a 100% gold standard. Proof: 1 oz of gold compounded at 3% since 0 A.D. is orders-of-magnitude more gold than exists on earth.

The volume of all the gold ever mined can occupy a cube 63 feet on each side.

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