You know their story as well
as I.
Hard-core silver bugs believe that the so-called “poor man’s
gold” is still money. And some are apparently near-religious in their
convictions that the United States of America should return to the bi-metallic
monetary system that was established in 1792 and officially done away with in
1900.
The US was on a defacto
silver standard for eleven years starting in1933 when Roosevelt devalued the
dollar by 70% and made ownership of gold bullion illegal. In 1944, the Bretton
Woods Agreement established the American dollar as the world’s reserve currency
backed by gold and ended that silver relationship.
Monetary silver’s finality in
the US of A occurred from 1964 to 1970 with a series of Congressional Acts that
ended the redemption of silver certificates, first for silver coins then for
bullion, and ceased the minting of silver coinage.
Once its value as money was
extinct, silver became predominantly an industrial metal and has been exactly
that over most of the last 50 years. 70% of new silver is a by-product of base
metal or gold mining and production is largely dependent on the prices of these
primary metals. 60% of the silver mined every year is now consumed by
industrial applications with 40% used for jewelry, silverware, coins, and
metals.
Although silver functions
mainly as an industrial metal, it is strongly tied to the price of gold and is
generally more volatile during upside and downside moves of the yellow metal.
In times of financial distress and economic calamity, silver tends to behave
more like a precious metal with widespread hoarding and speculation trickling
down from the gold market.
Silver aficionados are
adamant that the gold to silver price ratio should be less than 20:1. Their
argument is based on the silver content in the Earth’s crust at about 16 or 17
times that of gold and the ratio of silver to gold mined per year is around 9:1.
Accordingly, they claim it is
not a matter of “if” but “when” the price ratio will revert to its normal level of 16:1. Because this ratio
has not happened since 1884, the silver promoters cry “market manipulation”.
They apparently don’t savvy that 16:1 was a product of government manipulation.
In my opinion, this is an illogical
idea that ignores historical precedence for gold and silver values.
It is indeed true that over
the 228-year history of American money, the gold to silver ratio was less than
20 for 97 of those years. That is 42% of the time but let’s take a closer look
at the facts:
·
93 of those years
occurred when the price ratio of gold and silver was fixed by fiat at 15:1 (1792-1833)
and then 16:1 (1834-1884).
Outside of this 93-year
period when gold and silver prices were government-controlled, annual gold to
silver ratios of 20:1 or less occurred only over four other years. These
anomalous ratios were mostly caused by extraordinary government interventions designed
to either boost or reign in the price of silver.
·
In 1890, Congress,
in a disastrous attempt to raise the price of silver, required that the US Treasury
purchase domestic silver bullion, mint coins, and issue redeemable paper
certificates. This Act led directly to the Panic of 1893.
·
With gold at a
fixed price and huge debts from World War I piling up, a brief surge in the
silver price occurred in 1919 but was unsustainable.
·
In 1967 and 1968,
Congress allowed the price of silver to float freely after five years of price
suppression and failed attempts to prevent hoarding and melting of coins. These
were the last two years when silver bank notes issued in various tranches from 1878
to 1957 were redeemable in bullion. Silver bounced above $2.00 and the
gold-silver ratio dropped precipitously during this period.
In addition to the yearly
ratios, monthly gold to silver ratios were less than 20 in the first half of 1970.
Note this was when the dollar was collapsing and the official $35 per ounce gold
price was no longer working. It was a year prior to Nixon’s first in a series
of three executive orders that ended Bretton Woods, the gold standard, and
floated the dollar against other world currencies.
During the failed attempt by
the Hunt Brothers to seize control of the world silver market in early 1980,
the gold to silver ratio was less than 20 for two months.
Here’s our chart of monthly
average gold-silver ratios since 1970:
We are now three months shy
of a 50-year record of freely-floating gold and silver prices; the mean
gold-silver ratio is 56.9 and the median is 58.6.
Note that both of these
statistical measures are somewhat skewed to the low side because we have chosen
to include abnormally low values during 1970 and the first half of 1971. This
1.5 year period illustrates conditions prior to the beginning of US executive actions
to abandon the gold standard.
When the price of silver
spiked to its all-time high in April and May of 2011 before quickly cratering,
the monthly gold-silver ratio briefly fell below 40 for the first time in
nearly 28 years. Folks, that’s more than twice the previous low established during
the Hunt Brothers’ debacle.
Certainly the current gold -silver
ratio in the mid-80s is highly anomalous, and I would expect it to drop going
forward.
But based on the nearly 50-year
record, I suggest that the gold to silver price metric has entered a completely
different paradigm post-global economic crisis of 2008-2009. The case can be
made that we have seen the last of abnormally low gold to silver ratios in the
mid- to upper teens, 20s, 30s, and perhaps the 40s.
Some CEOs of struggling
silver miners with obviously vested interests have repeatedly forecast prices
of $50, $100, $175, and even $300 or $1000 for an ounce of silver over the past
three years. I don’t need to name names because if you don’t already know who
these people are, little due diligence is required.
Let’s explore the
ramifications of outrageously high silver prices predicted by the
aforementioned CEOs. In the table below, we have listed various silver prices,
the range of gold to silver ratios over the past eight years, and the resulting
gold price.
We have ignored predictions
of $300 and $1000 per ounce for silver and can speculate this particular CEO
was in some altered state of mind when he suggested them.
There is no doubt that a $20
silver price is reasonable and seems likely occur in the near term. But I think
the higher predictions go from improbable to ridiculous to ludicrous.
So folks, here’s the really
bad news:
Were gold to reach $2500,
$5000, or $10,000 per ounce in the foreseeable future implies that the economic
system is on the verge of collapse, the US dollar is in hyperinflation mode
and/or is no longer the world’s reserve currency, and resource and/or religious
wars are raging across the planet.
These buggy-brained or
perhaps certifiably insane silver CEOs should be careful what they wish for. I
trust each has a bug-out bag by the door, and lots of gold, guns, gas, and
goods stashed wherever he/she/it plans on staging a last heroic stand as the
world regresses to survivalist lifestyles.
The good news is that a $100,
$175, $300, or $1000 per ounce silver price in my lifetime (or yours) is about
as probable as this:
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgment:
Lukas Smith is the research assistant for
MercenaryGeologist.com
.
The
Mercenary
Geologist Michael S. “Mickey” Fulp
is a Certified Professional
Geologist
with a
B.Sc. in Earth Sciences with honor from the University of Tulsa, and M.Sc. in Geology
from the University of New Mexico. Mickey has 40 years of experience as an
exploration geologist and analyst searching for economic deposits of base and
precious metals, industrial minerals, uranium, coal, oil and gas, and water in
North and South America, Europe, and Asia
.
Mickey worked for junior explorers, major
mining companies, private companies, and investors as a consulting economic
geologist for over 20 years, specializing in geological mapping, property
evaluation, and business development. In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient, and is bilingual in English and Spanish. From 2003 to
2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British
Columbia.
Mickey is well-known and highly respected throughout
the mining and exploration community due to his ongoing work as an analyst, writer,
and speaker.
Contact
:
Contact@MercenaryGeologist.com
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