Wednesday, December 7th, 2016 MST

Gold to outperform silver?

Lawrence Williams, writing for mineweb.com, questions silver’s “tracking the price of gold.” He writes, “There is no longer any serious monetary element to silver . . .” In case Williams hasn’t noticed, there is no longer any serious monetary element to gold. No country backs its currency with gold; no currency has been convertible into gold since August 15, 1971 when President Richard Nixon closed the gold window.

Although the world’s nations (in many cases, those nations’ central banks) report their “gold holdings” to the IMF, they do not back their currencies with gold. In fact, under IMF rules, member countries cannot back their currencies with gold. Silver holdings are not reported at all to the IMF, but does that remove the “serious monetary element?” No, and here’s why.

Since time immemorial people have used silver as money, even more so than they have used gold. The Bible mentions silver more times than gold, and in more recent times silver was used as money in the United States for 32 years after Roosevelt required Americans to turn in their gold coins for paper money.

Although gold and silver officially have been “demonetized,” does that mean gold and silver are not money to the people? We do not think so.

Our experience suggests the only reason more money is invested in gold is that silver is much more difficult to handle and secure. Silver investors get fifty times the weight and more than fifty times the volume (because gold is more dense than silver). But, will “the masses” prefer gold to silver when they become precious metals buyers?

For the sake of argument, let’s say that “silver continues to track gold” and both double in price, putting gold at about $1375 and silver at $27. Then let’s say “the masses wake up” and see the need to own gold or silver. By the hundreds of thousands, they convert their $10,000 or $20,000 or $40,000 in savings to gold or silver. Which will they choose, gold or silver?

Let’s go with the $20,000 investor. At $1375 gold, he could get about fourteen 1-oz Krugerrands. However, if he chooses silver, he could get about 700 ounces of silver (Premiums guesstimated). Our experience causes us to believe that the masses will buy much more silver than gold simply because they will get much more metal for the money.

And, here’s the really important point: in the aggregate the masses have much more money than the wealthy because the masses comprise the bulk of society. We think buying by the masses will cause the price of silver to outstrip the price of gold. (This is not a prediction that the masses will wake up when gold hits $1375 or silver hits $27. We are making no predictions as to when the masses will become gold and silver buyers, only that they will before this precious metals’ bull-run is over.)

Additionally, Williams says that he is worried “that a huge number of new producers seem to be able to bring new silver production on stream extremely quickly.” In other words, he is worried that future production may increase more than demand, causing a surplus of silver. He appears to have overlooked the great 1970s precious metals’ bull market.

During that run, the price of silver rose many times more than the price of gold while literally billions of ounces of silver lay in warehouses around the world. Today, those warehouses claim to hold only a few hundred million ounces, and some of those claims are questioned by many analysts. Yet Williams is worried about silver not yet mined holding back the price of silver while billions of ounces in warehouses in the 1970s could not contain silver’s meteoric price rise.

For the buyers who can handle silver’s bulk and weight, we recommend it.

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