The Industrialisation of Silver: Get Your Pitch Forks Ready Silver Friends…

The Industrialisation of Silver: Get Your Pitch Forks Ready Silver Friends…

Alright silver fans, are you ready for today?

I’m about to tell you bunch of stuff you might not want to hear.

Oh, don’t worry. I’ve primed our customer service team for the avalanche of your thoughts.

Because after almost 12 years of being in the gold business, I have learnt one thing: gold investors are a passionate bunch, but you don’t mess with silver bugs.

In a late-night interview with South Bank Research on Tuesday, I said I believe that silver is most definitely set for explosive gains in the next few years…but reckon it’s slowly being revalued compared to gold as a monetary asset.

And no, I don’t mean that the white metal will be worth more.

In fact, I reckon it’s the opposite.

That is, silver is in the process of finding a new ‘average’ that will see it worth less relative to gold.

Alright folks. Settle in.

Silver fans, I just know you’re sharpening those pitch forks. But hear me out…

Did ‘spoofing’ stop silver from rising?

Yep, I know the crowd I’m picking a fight with. I’ve spoken to them, with them, and had many a drink with my silver-loving brethren.

And let me tell you this: Investors with a portfolio heavy on silver, will tell you that the metal is extremely undervalued.

In their eyes, the Hunt Brothers cornering the market in 1980 and utter price manipulation was evidence that silver was far undervalued to gold.

Then, of course, there’s the suppression of the silver price by JP Morgan.

Though, legally it’s not called that. The legal action by the US district court calls it ‘spoofing’, which is where traders from JP Morgan placed fake trades, but not executing them, in order to move the precious metals price in the direction that benefited the investment bank.

But that lawsuit was settled quietly last month, and JP Morgan is set to pay a billion-dollar fine.

Don’t get me wrong, silver has had a strong year, up 40% year-to-date. Almost double gold’s percentage gain for the same period.

Surely this year’s rally is only the tip of things to come.

The ending of JP Morgan’s artificial market intervention has long claimed that the silver price would explode.

And that the metal would finally see the rally and its ‘true’ price be reflected.

Fixing silver to gold caused problems right from the start…

With the days of silver manipulation done and dusted, there’s a bigger boom ahead. Finally, silver will revert to its ‘natural’ or ‘true’ value…which is what, exactly?

Perhaps the most common tool used to assess the value of silver, is the gold-to-silver ratio. That is how many ounces of silver it would take to buy one ounce of gold.

One fund manager has said that the gold-to-silver ratio is the longest running tracked exchange rate in human history, as it’s several thousand years old.

As the years have gone by, and silver has barely moved or double its value in a year, many silver investors will look at this ratio and suggests it’s moving back to a ‘historic’ norm. Then point to this ratio as further evidence that silver is undervalued.

And here’s the thing, when you look at the gold-to-silver ratio throughout history, it keeps moving ‘up’…

Before we get to my highly controversial musings, some history.

The formal silver to gold ratio was created by Sir Isaac Newton when he was Master of the Royal Mint. He set the silver to gold ratio at 15.5:1, that is, it would take 15 ½ ounces of silver to buy one ounce of gold in 1717.

That fixing may have had something to do with the natural ratio of silver to gold in the Earth’s crust, where silver is around 17 times more abundant than gold.

Newton’s work, however, is likely to have had more to do with fixing England’s dabbles with a medieval fiat currency, no doubt favoured the position of what precious metals were held by the Crown.

Newton’s fixed bimetallic policy was actually a failure. Something editor Greg Canavan over at our sister company wrote about a decade ago.

The short version is the Newton’s weight fixing led to a shortage of silver as people hoarded it, thinking it was more valuable than what the Crown declared.

A century later and the US was tinkering with their own fixed gold-to-silver ratio. Nonetheless, the setting had similar weights with similar outcomes.

Many analysts will argue that needing 15, 16, or even 17 ounces of silver to buy one ounce of gold should be silver’s natural ratio: it will eventually revert to this. Yet every time silver has been fixed to gold at this low level, it’s failed.

Some analysts take it one step further and suggest that if you look at the mining rate of gold-to-silver, the ratio should be much lower.

For every ounce of gold mined around the world only nine ounces of silver are mined. Therefore, the market should value the ratio at nine ounces of silver to gold…

The thing is the market doesn’t value silver this highly. And there’s a reason for that…

Past performance is no guarantee of future returns

As I’ve said, there’s been many who argue the case for silver to be revalued much higher than it is. That the current disparity between gold and silver will close.

And claim we only need to look back at the historic gold-to-silver ratio to see where it should be.

But here’s the thing with the gold-to-silver ratio.

Even during the years of the Bretton Woods agreement — where gold was pegged to the US dollar, the number of ounces of silver required to buy gold, averaged 40 ounces between 1944 and 1969.

And in the last 50 years that both metals have been freely traded, the gold-to-silver ratio has continued to move higher.

During the 1970s to 1990s, the ratio averaged 50.

In the past 20 years the ratio has averaged 65.

And over the next 20 years, I suspect this gold-to-silver ratio will increase to a higher long-term average again.

Why is that?

Simply put, we consume silver, and we store gold.

In other words, the use of silver is in the minutiae of our daily actions. Turning on a light switch, clicking on a mouse or tapping away on your smart phone. Gold on the other is much less useful and sits in vaults around the world doing nothing.

What’s driving the gold-to-silver ratio to a higher norm is the industrialisation of silver over gold.

Silver has been industrialised because of its incredible utility to society. And that’s what’s leading to the new high silver ratio.

There is no reversion to the historic mean. Rather the mean is dynamic, and slowly shifting upwards.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

PS: Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself. Download your free report now.