Buy Silver Bullion Coins

With Sprott planning to buy another $32 million worth of silver, is the price going to take off again, or continue its pattern of a nervous advance alongside any gold price increase?

Lawrence Williams
August 19, 2011
www.mineweb.com

LONDON

It is interesting to look at the price movement patterns for gold and silver of late. Normally if gold is on a tear, silver jumps up, as one commentator described it, like gold on steroids. Likewise when gold falls back silver is prone to plunge. But we have seen none of this in the past two or three weeks when gold has moved up and down quite drastically. Initially silver remained virtually unmoved while gold fluctuated wildly - unusual behavior for ‘poor man's gold'. And only now, with gold reaching for, and achieving new records, has silver been seemingly reluctantly dragged up along with it and at long last appears to be shaking off its stuttering performance. Does this change in behavior mean a rerating is taking place?

Perhaps not yet. Silver investors are naturally nervous, particularly following the sharp fall in their favored precious metal at the beginning of May - a fall so severe that it may have seen some new investors in the metal withdraw from silver forever. It is taking time to get over this setback but in recent days seems to be recovering its luster - and there is one move apparently under way which could drive silver very rapidly to big new highs.

Pre-eminent silver bull, Eric Sprott, has told King World News that he will be selling a further 2 million shares in the Sprott Physical Silver Trust which will make available another $32 million which will be used to buy physical silver to that value. Sourcing the 800,000 ounces or so of physical metal may put a squeeze on the market if some silver analysts are correct, and this could cause the silver price to accelerate- and along with gold's spectacular surge could drive silver back to the $50 level and higher very quickly. Sprott himself affirms strongly that he believes the silver price should be over $100, although this would suggest a 16:1 gold:silver ratio which, if it comes, may still be a way away yet timewise. The current gold:silver ratio on this morning's prices with gold at $1860 and silver at $41.30 was 45 - if silver does indeed start to accelerate this may come back down to below the 40 level short term (which would put silver at above $46.50 at an $1860 gold price) and then, if Eric Sprott is correct in his basic assessment , the ratio would gradually move downwards, and the silver price move upwards faster than that of gold in percentage terms.

But, some gold analysts are predicting a sharp correction in the yellow metal which they feel would be a natural result of what some see as an over-rapid rise in the metal price. If this happens will silver stay put - as it did during the last short-lived correction in the gold price of a couple of weeks ago - or revert to its old pattern of turning down much faster than gold in a declining gold price situation?

Even if this is the case, the true silver bulls would just see this as a great buying opportunity in what they view as a long term upwards bull market in precious metals within which category they see silver as the potential star performer. But it could well be a bumpy ride.

Tim Kiladze
August 18, 2011
www.globeandmail.com
Eric Sprott, the perennial gold enthusiast, has his sights set on a new precious metal.

Mr. Sprott's charitable organization, The Sprott Foundation, is selling two million units of its gold holdings and using the money to buy silver.
The move comes as gold veers close to $1,800 (U.S.) per ounce, and less than a week after Mr. Sprott had declared the metal "the investment of the last decade" in an interview with GoldMoney Foundation. "I think silver is going to be the investment of this decade."

Since the commodity boom kicked into high gear last fall, Mr. Sprott has been touting silver's merits. To demonstrate his conviction, he set up and invested his own money in the exchange-traded Sprott Physical Silver Trust, which buys silver bullion and stores it at the Royal Canadian Mint. Investors in the trust can cash in their units, or take delivery of silver in physical form if they wish.

He also launched a Silver Bullion Fund that enables investors to speculate on the metal's market price, but without the physical redemption option.

Until Wednesday, though, Mr. Sprott was still committed to gold, as its price rose to new highs. It could be that he is simply cashing in on a rapid rise in the price of Sprott Physical Gold Trust units, which are up 21 per cent since July 1, and of which he personally holds six million units, separate from the foundation's holdings.

On Wednesday, Mr. Sprott said his comment about silver does not mean he is abandoning gold altogether. "Anything I said about it being the resource of the last decade was not to suggest that it wasn't going to do well this decade," he said. "It's just I think silver will do better."
He bases that conviction on supply constraints: The amount of gold already mined is about 100 times greater than silver, yet for each dollar invested in gold, another dollar is currently being invested in silver. "By definition, you can't keep buying it at 1-to-1 and have the price stay the same" when the supplies are so different, he said.

Moreover, the price of gold is trading about 45 times the price of silver. Historically, the ratio has been about 16 times and Mr. Sprott thinks the two metals will move back in line with that ratio.

But not all silver assets are on equal footing. Mr. Sprott has been selling some of his own units in the Physical Silver Trust. In the past month, Sprott-related funds have sold about $23-million of his Silver Trust units, and earlier this spring they sold $34-million. Mr. Sprott said he is simply taking advantage of the trust unit's 20-per-cent premium to the fund's net asset value. (The premium has shot up since the fund was introduced last fall because of heavy retail demand, which means investors are paying more than the underlying metal's value per unit.) He is reinvesting the proceeds in other silver investments, including the Silver Bullion Fund.

Asked if investors in the Physical Silver Trust should be alarmed that he's cashing in, Mr. Sprott said "Anybody can do it any time they want to," and added that his sales are "all in the public domain," because he must report them to the U.S. Securities and Exchange Commission.
He also doesn't apologize for shifting more of his attention to silver, and is still touting his gold trust to retail investors who think economic turmoil will send bullion prices higher. "I think silver will outperform gold this decade, so why wouldn't I position myself, position our accounts, that way?"

Although the foundation announced that it would reinvest its money in the silver sector, it is interesting that it did not specifically say where it would invest, either in Sprott Physical Silver Trust, or the metal itself. But if you look at Sprott's recent selling activity, it's clear that money will go into the metal. In the past month or so, Sprott has sold about $23-million of the Silver Trust units. That comes on the heels of sales this spring worth about $34-million of the trust's units.

The sales have been pointed out by blogger ' kid dynamite.' While he acknowledges that Sprott is reinvesting the money back into silver, he points out that the Silver Physical Trust currently trades at about a 20 per cent premium to the net asset value. By exiting, Sprott captures that premium and then buys the metal at fair value.

Buying the metal ties back to Mr. Sprott's recent comments about being bullish on silver. In the GoldMoney interview, he pointed out that the physical amount of gold above ground is about 100 times greater than silver, yet people are buying the two metals on a 1-to-1 basis. That means the price of silver has to go up, he argues.

Plus, gold is trading at about 45 times the price of silver. Historically, the ratio has been about 16 times and Mr. Sprott thinks we will get back in line with that number.

But he isn't sure of the timing. "When it actually happens, I don't know," he said in the interview.

Greg Hunter
August 8, 2011
www.usawatchdog.com

I have thought about this economic collapse title for months. I held onto it and figured I would know when the right time was to put it out there. Today is the day. Watching mainstream media (MSM) this weekend, you would think a one notch downgrade to America's debt doesn't really matter. For example, former CNBC anchor Erin Burnett said Friday night on CNN the downgrade was "already priced into the market." The panel spoke as if the first U.S. debt downgrade in history was no big deal. To that I say, positively absurd!

The gold market must think the same thing I do because when the Asian market opened, the price of the yellow metal shot up more than $27 an ounce, which is another all-time high. At around 1:30 am today it was up $50 and ounce another all-time high! I don't know where gold will close in the U.S. market, but I think it is safe to say gold (and silver) prices are going much higher. On the other hand, stock prices are headed much lower. I'll be shocked if the Dow doesn't end 300 points lower today. I wonder if the Plunge Protection Team (aka the Presidents Working Group on Financial Markets) will step in front of this runaway locomotive.
China also thinks the U.S. debt downgrade is a big deal and a big negative future trend. CNBC reported yesterday, "The man who leads one of China's top rating agencies says the greenback's status as the world's reserve currency is set to wane as the world's most powerful policy makers convene to examine the implication of S&P's decision to strip the United States of its triple "A" rating. In comments emailed to CNBC, Guan Jianzhong, chairman of Dagong Global Credit Rating, said the currency is "gradually discarded by the world," and the "process will be irreversible." (Click here for the complete CNBC story.)

There are those, this week, that said the downgrade of the U.S. credit rating will be a "wake-up call" for Washington politicians. Some pundits claim this might pull both parties together, get something done for the good of the country, and finally deal with the immense problem of debt spending and entitlements. I think this will end up becoming a battle cry for both Democrats and Republicans in the 2012 election. Both are blaming one another for the downgrade. Yesterday on "Meet the Press," Senator John Kerry (D) trotted out some new partisan language and called the S&P action on U.S. debt a, "Tea Party downgrade because a minority of people in the House of Representatives countered even the will of many Republicans in the United States Senate who were prepared to do a bigger deal." Speaker of the House John Boehner (R) said this weekend, "Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground."
 
The political sniping over the weekend signals that both parties know the economy cannot be fixed anytime soon, let alone before the 2012 election. So, the blame game is what we will be stuck with as the American economy continues to sink. Forget about the "Select Committee" of 6 Democrats and 6 Republicans getting any deficit reduction deal. The fight over spending cuts and tax increases is stuck in a feedback loop. That is part of the reason why S&P cut the credit rating of the U.S. Nothing is going to get done on the debt, at least not before the country goes off a financial cliff. In cutting U.S. debt, S&P also ultimately cut the value of the dollar. Almost all borrowing costs at all levels will rise, and the dollar will sink right along with the slowing economy.

Economist John Williams of Shadowstats.com has been warning for months about a sudden dollar sell-off. According to Williams, $12 trillion liquid dollar assets are held outside the U.S. (dollars and Treasuries). If the holders of these assets throw in the towel and cash out, there could be a severe dollar sell off. That could spike inflation, cause interest rates to surge and eventually plunge the country into a hyperinflationary depression, according to Williams. A special Shadowstats.com report put out yesterday said, "Lack of confidence in the U.S. dollar has been pushed to a new and more dangerous nadir in the last two weeks. Dollar selling has been exacerbated by the contentious and virtually meaningless debt deal negotiated by the President and Congress, by Standard & Poor's downgrading the rating on U.S. Treasuries to "AA+" from "AAA," and by mounting market recognition of the ongoing U.S. economic and systemic-solvency crises. Pending still is the Fed's move to QE3.
 
The dollar's back is close to being broken. Despite near-term interventions and extreme volatility, the heavy dollar selling that follows will be highly inflationary. . . &#34

The kind of impact we are going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don't ignite when the long rough ride is over.

Gold hit $1600 in London this morning and silver $40, although both fell back thereafter. But the barrier has been breached which would seem to be paving the way for further rises ahead.

Lawrence Williams
July 18, 2011
www.mineweb.com

LONDON
Gold cracked the $1600 barrier, albeit briefly initially, this morning in London, while silver moved back up through the $40 mark as the safe haven aspects of the precious metals began to take hold once more on perhaps the increased understanding by the whole investment community of the global economic perils ahead. Whether this $1600 level can be returned to, and increased, through the day - and in the U.S. - obviously remains to be seen, but the fact remains that a psychological barrier has been overcome. Past patterns suggest that the metals may trade at close to this level and either make a substantial breakthrough, or consolidate at just below.
Silver back through $40, and the further small fall in the gold:silver ratio (GSR) to a fraction below 40:1 does seem to be a further indication that investor interest in this metal is again coming to the fore with the April fall-off quickly being forgotten. But silver's reputation as the ‘devil's metal' as far as investment is concerned should act as a cautionary warning, but as long as gold stays strong silver downside is small. But if gold should see even a temporary fallback then the corresponding drop in silver could be sharp.
Silver's proponents point to the increasing uses of the metal in such spheres as biocides and water purification as being a major positive factor, but it is both speculative and safe haven investment that is the driving force here - industrial usage is currently only a minor part of the silver equation. As Rhona O'Connell points out in today's article on Mineweb - see Comex silver longs bound higher - but much of it is short covering extraneous technical commodity market factors may well be distorting the picture here as well.
The European debt crisis is definitely not going to go away and if one of the more vulnerable European economies is actually allowed to default (and one does not see how some kind of default can be avoided for Greece) then the knock-on effects on the other crisis hit countries and the banking system as a whole, could be dire. The emergency funding for Greece that was recently agreed appears only to be sufficient to postpone the inevitable and we could be looking to an autumn of ever escalating financial meltdown. If Greece defaults then one finds it difficult to conceive that Ireland and Portugal would not follow suit almost immediately, and then the pressures on the much more significant economies of Italy and Spain would be close to overwhelming. European banks would crash like ninepins and with the interconnections within the global banking system many non-European banks would collapse as well.
There is a sideshow in the U.S. at the moment too which is helping gold as Democrats and Republicans are playing a game of brinkmanship over the U.S. debt ceiling. If agreement can not be reached on raising the ceiling, and failing a Presidential bending of the rules, the U.S. itself could go into technical default in two weeks' time and the psychological financial repercussions of this could also be enormous. One suspects that a compromise will be reached at the 11th hour, but if intransigence on the part of the parties involved means that this drags on beyond the deadline then the effects on the financial system could be worse than the Lehman Brothers collapse.
Governments and central bankers are aware of the perils ahead and one suspects that they will somehow manufacture a solution that will ward off the seemingly inevitable, although whether they can do so to the satisfaction of the credit ratings agencies remains to be seen. Ratings downgrades lead to higher interest rates being applied and at current debt levels the amounts involved in resultant increased payments just make the likelihood of pulling out of the downward spiral almost impossible.
These are difficult - indeed exceedingly dangerous - times for the global economy and whether or not the politicians and central bankers can bring us back from the brink has to be questionable. In such times of uncertainty gold is likely to maintain its historical pattern of being the investment choice to preserve wealth, however anomalous this may seem in this day and age, and silver will likely follow suit on gold's back.

James Turk
May 31, 2011
goldmoney.com

Silver is the volatile precious metal. For example, a few weeks before the collapse of Lehman Brothers in September 2008, it took 51 ounces of silver to buy one ounce of gold. At the height of the market turmoil one month later, it took 84 ounces of silver to buy that same ounce. What makes silver so volatile? The demand for silver is "elastic" -- to put it into economic terms -- while the demand for gold is "inelastic".

When demand is elastic, it means that people's preferences are changeable. An inelastic demand means that the item will be acquired regardless of its cost. As an example, the rising price of petrol and diesel fuel in recent years has hardly reduced the demand for it. Fuel consumption has not dropped as its price has risen. People are generally not price-sensitive, at least at present prices, though the demand for fuel may become more elastic at higher prices.

When problems of national currencies increase the demand for gold, it is in fact an increase in the demand for precious-metal-money. Silver of course meets this requirement, as it is a precious metal, and like gold, it too is money. Functionally, silver is a good substitute for gold. Both are tangible assets, and both are money that does not have counterparty risk.

Thus, any increase in the demand for precious-metal-money impacts both gold and silver. However, this increase in demand has a bigger impact on silver because of its elastic demand.
Demand is impossible to measure, but we can see the changes in respective demand for the precious metals by movements in the gold/silver ratio. Movements up and down in this ratio clearly show the ebb and flow of demand between gold and silver.
When people move out of national currencies and into precious-metal-money, money moves into both gold and silver, and the gold/silver ratio falls. Eventually, this flow reverses if people's confidence in national currencies returns. It does so when the monetary problems that caused them to flee the currency in the first place (for example, rising inflation, bank crises, or other problems) are solved. The impact on silver is greater than the impact on gold because the demand for silver is more elastic than the demand for gold, so the ratio rises.
While I am very bullish on the long-term prospects for gold, I am even more bullish on silver. Historically, the ratio of these two precious metals is about 16-to-1. Therefore, as both gold and silver climb higher in this current bull market as a safe haven from national currency problems, I expect silver to climb even faster than gold, with the result that the gold/silver ratio eventually approaches 16-to-1.

A big attendance at this year's New York Hard Assets event has the chance to listen to a number of eminent specialist commentators, with gold and silver dominating.

Lawrence Williams
May 10, 2011
www.mineweb.com

NEW YORK
Speaking to a packed audience (standing room only) at The New York Hard Assets Conference yesterday, Eric Sprott reiterated his well-known views on gold and silver the former he called the investment of the decade and the latter the investment of the next decade. Sprott was among the Keynote speakers at this year's event which attracted potential investors looking to learn more about investment in commodities and mining companies (mostly junior miners), with the featured speakers being big attractions for the audience.

Like most of the other keynotes, the Sprott's comments covered what virtually all the precious metals bulls see as the key drivers of the markets, namely the U.S deficit, excess printing of money by most major economies, the political unrest in the Middle East, North Africa and elsewhere, the depreciation of the dollar, accelerating global inflation, fear of debt defaults, the growth of wealth and investment in gold and silver in Asia etc. Indeed fellow keynote speaker Jeff Nichols came up with 11 such factors driving up prices. All the main speakers viewed the recent heavy downturns in commodities prices as being a blip in an ongoing upwards path.

While most of the speakers point to the money supply situation in the West as being the root cause of likely future inflation in both Western and Eastern economies, Martin Murenbeeld, one of today's keynote speakers, told Mineweb that China too has been stimulating - perhaps overstimulating - its economy in a similar way and blaming current Chinese inflation on the U.S. Fed is rubbish.

Coming back to Eric Sprott - he raised the specter of market manipulation so beloved of many of the precious metals bulls, pointing to silver falling $6 in 13 minutes on Monday in an extremely thin market when some key market players like China and the UK had public holidays. Coupled with the raising of margin requirements on COMEX, he saw this as a major effort by some of those with huge silver short positions to mitigate some of their losses. "If this doesn't show market manipulation I don't know what does" said Sprott.

Jay Taylor, speaking earlier in the day also raised the specter of the U.S. economy and its lack of growth, even though some official statistics may suggest it is beginning improve. "Think about what's really going on" he opined, "Not what the establishment wants you to think is going on!" Taylor puts total debt at $57 trillion if you take into account not only Federal debt, but state and municipal debt, credit cards etc. He reckons U.S. government policy is failing as in the 1930s when there were years of depression, high unemployment etc. He too pointed to the real price of gold rising in what has been the bull market of a lifetime.

Overall the Hard Assets conference organizers have done a pretty good job in pulling in a number of very well-known names in the precious metals and economic sectors to boost the audiences in the hope that many will stay in the auditorium area and listen to the junior miners and explorers presenting their projects - a number of whom have some very interesting stories to tell anyway. The difficulty for the investor, as always, is picking the wheat from the chaff. In a precious metals bull market junior companies can provide huge returns when they are successful - but then most aren't! Caveat emptor.

Opinion: The reasons for the U.S. confiscating gold no longer apply. Bullion coins, not numismatics, the best hedge against meltdown.
Richard (Rick) Mills
March 6, 2011
COQUITLAM, BC (AHEADOFTHEHERD.COM)

Current Federal Reserve System chairman Ben Bernanke believes a simple recession was turned into the Great Depression by the Federal Reserve of the day not doing enough while the money supply contracted 31 percent between 1929 and 1933.
This reduction in the money supply was caused by no less than three bank runs between late 1930 and March 1933. Bank deposits formed 92 percent of the money in circulation at the time and 10,000 banks failed with the loss of $2 billion in deposits.

"The Fed failed to inject enough money into the system to sustain the desired minimum level of monetary aggregates. Because it failed to do this, the public run on banks resulted in a contraction in the money supply, which caused the Great Depression." Milton Friedman
Bernanke, a monetarist like Friedman, believes if the Fed had provided enough money to the large banks and bought US securities then these banks would never have fallen. Bernanke is, today, putting what he believes to be the fix for our current economic woes into practice:
giving money to the banks cutting the prime interest rate the Fed charges commercial banks buying treasuries

The Federal Reserve is providing liquidity and increasing the money supply.
So why didn't the Feds of the time simply increase the money supply by turning on the printing presses much like Ben "helicopter" Bernanke is doing today? Well, at that time the US was on the gold standard and the amount of credit the Federal Reserve could issue was limited by the Federal Reserve Act which required 40% gold backing of Federal Reserve Notes, paper money, issued. Back then if you had $10 in your pocket, you knew, that somewhere, there was $4 worth of gold backing that "promise to pay" in your wallet.

But the Fed's back was up against the wall, they were running out of room to issue more notes. They had almost hit their issue limit on credit that could be backed by the gold in their possession - they needed more gold to issue more credit.

Their need was made worse because during the bank runs Federal Reserve paper money had been exchanged for Federal Reserve gold. Since the Federal Reserve was already hitting its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Something had to be done.

On April 5, 1933, President Roosevelt signed Executive Order 6102 making the hoarding of gold certificates, coins and bullion illegal. This order, by confiscating Americans gold, increased the amount of Federal Reserve owned gold thereby making an increase in the availability of Federal Reserve Notes or credit possible.

Thus, the reason gold was confiscated back then doesn't exist today. Today no country is on the gold standard (the US cut the last ties to gold in 1971) and the US Federal Reserve's ability, or any countries ability, to create credit, print money, is no longer tied to how many ounces of gold a country has.

The flip side of this unfettered creation of money is inflation - and this is of course exactly why someone might want to own gold and silver. But there is something potential gold buyers need to be aware of.

THE SCAM

It is true gold was confiscated in 1933 - but now you know the why and you also know that the reason for confiscation back then doesn't exist today.

So the next time you read an article about how your government is going to confiscate your gold - all of it except rare collector numismatic coins - track it back to its original source. Too many times you will find that it has, as its originator, a gold numismatics merchant. The patter is always the same - "Your gold is going to be confiscated, buy rare collector coins because they won't be confiscated."

Gold numismatics were not confiscated in 1933. Order 6102 specifically exempted "customary use in industry, profession or art." The same paragraph also exempted "gold coins having recognized special value to collectors of rare and unusual coins."

The US Constitution's Eminent Domain Clause says - "nor shall private property be taken for public use, without just compensation." When gold bullion was confiscated compensation payment at the official gold price of $20.67 an oz was considered just, after all, that was the price of an ounce of gold.

But the confiscation of rare gold coins, called numismatics, would have been stealing private property. Legally just compensation would have had to been paid but for that to happen each gold numismatic would have had to been individually graded and priced - a huge and expensive time consuming task the government was unwilling to take considering the small amount of gold that would have been recovered.

So let's revisit - "Your gold is going to be confiscated, buy rare collector coins because they won't be confiscated." We know the reasons Americans' gold bullion coins were confiscated but gold numismatics weren't. For today's gold buyers, who still fear confiscation, the problem is: are the coins some gold dealers want to sell you actually gold numismatics and for a gold bullion investor - versus a coin collector - are they worth buying? Unfortunately the answers are maybe not and no.
Gold numismatics are rare collectors gold coins that trade at high premiums to their intrinsic gold content value. These coins are extremely rare, or one-of-a-kind, that collectors (there's that qualification again) purchase for their historical and aesthetic qualities.

Gold merchants can sell rare gold coins for a healthy markup, sometimes as much as 25 percent and more. The fierce competition in the gold bullion coin market often limits profit margins to maybe 3% over the spot price of gold.

American Gold Eagles, the Canadian Maple Leaf and South Africa's Krugerrand are all examples of gold bullion coins. Their value is derived entirely from their gold content. They are universally recognized and the value of these coins is easily verifiable. The reality is that too many coins sold as "numismatic" or "collectible" are ordinary gold bullion coins sold at high mark-ups to make fear mongering dealers extra profits.

If you want to own gold, the safest way is to buy one, or a mix, of the three gold bullion coins listed above, pay the 3% above spot and quit worrying about confiscation. Gold numismatics are not a store of value nor a better safe haven in a meltdown situation than gold bullion. Think about all the money you'll save. Maybe you'll buy some silver!

CONCLUSION

Gold bullion coins are a better store of value then gold numismatics - if social order breaks down and a collector needs to trade one of his collectables he's going to receive the exact same amount of goods that I would receive using gold bullion. That's because the transaction will be valued based on gold content and purity, not historical and aesthetic qualities.

Investors buy physical gold because it is a store of value - a way to protect your wealth from the relentless devaluation of fiat currencies - and a safe haven in times of turmoil. Your job as a retail investor, if you believe in gold and the ongoing devaluation of fiat currencies, is to buy as much potable, divisible gold with your dollars as you can. Buying gold numismatics is not the way to do this and buying gold numismatics that aren't... well that's being taken advantage of, to put it politely. Is this con game on your radar screen?

If it isn't, and you're a gold buyer, it should be.

More Silver Info

The last time the gold:silver ratio stood below this level was in February 1998 just after silver rallied 33% in 5 weeks, much is the same in the current situation but, investment demand is much higher.

Rhona O'Connell
March 8, 2011
www.mineweb.com
LONDON

The last time the gold:silver ratio stood below 40:1 was in February 1998, just after silver had staged a 33% rally in five weeks, while gold had gained just 4% over the same period (which commenced at the start of the year). The contraction in the ratio over the period was from 48.4:1 to 38.1:1.

This time, some thirteen years on, the gold:silver price ratio is trading at between 39:1 and 40:1 and a similar contraction has taken exactly the same length of time. This time however, gold and silver are trading at over $1,440 and $36, while back in 1998 they were at $300 and just over $7.

So where are the similarities and the differences between then and now?
This time the silver price has bounded up as a result of a sustained belief (whether right or wrong) in gold's upside on the back of prevailing geopolitical and inflationary concerns. Both gold and silver are already in sustained bull markets, while in 1998 the change in ratio marked the start of a shift in sentiment, albeit one that was buffeted by subsequent external events.

Silver investment can often exceed that of gold for more than one reason: a) the history of silver's higher volatility over gold, prompting professional activity with a view to gearing up on returns; b) silver's lower unit price, which attracts some smaller-scale investors who want exposure to precious metals because of inflationary fears in particular and who don't necessarily have enough wealth to invest in the yellow metal to any meaningful level; c) in the United States in particular, silver has a long-standing investment tradition. This is because of the period when the dollar was on the gold standard and private individuals were prevented from holding gold, so they used silver as a substitute.

Twelve years ago; professional attitudes were probably the driver.
At the start of 1998, gold was starting to stage a recovery after a long period of uncertainty, characterized by intermittent announcements of large-scale central bank sales that unsettled market sentiment; this was augmented by increasingly heavy mine hedging and these two fundamental elements, combined with anti-inflationary fiscal policy, had kept gold prices under some pressure.

What was different about the start of 1998 was the putative formation of the European Monetary Union, which gave the markets a degree of comfort and reduced the expectation of official sector sales. (This, of course, was latterly to be stymied by the announcement in May 1999 by HM Treasury in the UK of the proposed disposal of up to 40% of UK gold holdings; sentiment then changed substantially as a result of the institution of the first Central Bank Gold Agreement in September 1999). Investors started to return to gold and silver was a natural beneficiary of the change in sentiment.

The differences between now and then. Nothing, in terms of industrial demand
Over those five weeks in early 1998 the net long speculative silver position on COMEX rose from 8,813t to 9,500t, a gain of almost 700 tonnes or 8%. This time around the shift has been from a net long of 6,710t to 8,780t, a gain of 2,070t or 31%. but from a much lower base.
Interestingly enough, silver fabrication demand in 1988 was just over 26,000t; in 2010 it was very close to the same level, suggesting that the market itself is not much deeper than it was in the late 1980s. In fact, on the basis of LBMA clearing figures, the December 2010 daily average clearing rate was just below 100M ounces, less than one-third of the clearing numbers for end-1997.

The structure of the demand side has changed with industrial demand fluctuating, but photography and jewellery+silverware falling substantially. Coin demand, by contrast, has been growing steadily.
... but plenty in terms of investment

Sustained retail demand has helped the rise in silver's price in recent months, reflecting the continued awareness at the retail level of the "affordability" of silver by comparison with gold. This has been particularly marked in the Far East, where silver bars have been scarce and commanding high premia, while India and the Middle East have also been strong buyers.

The ratio; a life of its own and an important indicator
As a result the ratio has to some extent taken on a life of its own and been traded as an outright entity in the bullion markets. Now at 13 year lows it is not in uncharted territory, but is certainly oversold.
While the markets remain bullish about the outlook for gold on the back of sustained inflationary and geopolitical fears, silver is likely to continue to attract attention. The outright price may make silver unattractive for fresh bull positions, but technically-driven and momentum trades may yet see prices higher if the political situation is not resolved with a minimum of further trauma. Silver has frequently been the leader among the two "precious metals" because of its lower unit price and higher volatility; the ratio can therefore be regarded as a similar leading indicator. In fact it is probably one of the most significant indicators in terms of precious metals market sentiment and, so, when it comes to looking for guidance, the chart should be watched closely for signs of reversal. Even stabilization would be significant; a bounce might well trigger stops.

Charles Kadlec
February 22, 2011
www.blogs.forbes.com
As silver climbed above $30 an ounce on Monday for the first time since 1980, traders and analysts were cautiously bullish about the metal's ability to keep outperforming gold and stay at 30-year highs.
The stakes have seldom been higher. With the unemployment rate still above 9%, and federal debt at record levels, this latest error by the monetary authorities is likely to be the most costly since the Great Inflation of the 1970s. Monetary instability will slow employment growth and further erode confidence in government at the same time that higher interest rates will add billions of dollars to the interest cost on the national debt. Yet, failure to act in a timely basis will lead to an even greater crisis.
When it arrives, the Federal Reserve and its defenders will call it "cost-push" inflation and blame it on economic growth, the weather, Arab sheiks, China, and perhaps greedy companies and labor unions.
The actual cause of the looming crisis is the same as the cause of the Great Inflation of the 1970's: a too easy monetary policy that has devalued the dollar by 40% against gold during the past two years.
I choose gold as the reference point for the dollar's value because it has the remarkable characteristic of maintaining its buying power in terms of other goods and services over long periods of time. As a consequence, the dollar price of gold is the best, though imprecise, real-time measure of the price level. Other, more traditional measures, such as the consumer price index (CPI) are merely lagging indicators of inflation or deflation that has occurred already.
I also choose gold because I remember what happened after President Richard Nixon in August 1971 severed the link between the dollar and gold. At the time, those who warned that the rising price of gold was signaling higher inflation ahead were widely dismissed as "gold bugs." The conventional wisdom then, as now, is that economic slack would protect the U.S. economy from inflation regardless of what happened to the value of the dollar in terms of gold.
But it didn't work out that way.
At first, the conventional wisdom seemed to hold. The rate of inflation as represented by the CPI slowed in 1972 to 3.2% from 4.3% in part because of wage and price controls, and then rose 5.6% in 1973. But, in 1974, the CPI jumped 12.2% in the face of rising unemployment. Shocked and dismayed, the purveyors of conventional wisdom made the circular argument that the unexpected rise in the overall price level was caused by the rise in commodity prices, especially the tripling of the price of oil. In other words, they blamed rising prices on... rising prices!
But, those who followed the price of gold were not shocked. For example, the sudden tripling in the price of oil between 1971 and 1974 roughly matched the tripling in the price of gold over the same time period. In other words, the rise in the price of oil was simply the mirror image of the preceding devaluation of the dollar against gold.
In the last two years, the price of gold has increased around 75% -- roughly half the increase of 1972 and 1973. Last week's inflation reports indicate that this devaluation of the dollar will hit the CPI in the year ahead just as it did in 1974.
The price of crude materials in the Producer Price Index (PPI) increased by 3.3% in January alone and now stands 21% above where it was just six months ago. Moreover, during the three months ending January, the rate of advance in the producer price indices for intermediate products and finished goods have all accelerated into double digit annual rates of advance.
This upward adjustment of prices to the cheaper dollar is beginning to flow through to the consumer. For the past 3 months, the seasonally adjusted annualized rate of advance in the CPI is up to 3.9%, with food and energy prices – the items that have the greatest short-term impact on a family's budget -- accelerating to 3.1% and 27% over the same 3 months. Given the relative magnitudes of the dollar's devaluation against gold, it is reasonable to expect consumer prices to be rising at a 5% plus annualized rate in the months ahead.
Fed Chairman Ben Bernanke's assurance during last December's interview on 60 Minutes that he was "100% certain" the Fed could control an outbreak of inflation above 2% was hubris. These data show that inflation has already broken out, and that there is little the Fed can do to stop the price indices from reflecting the dollar's devaluation of the past two years. And, his statement last Friday in Paris at a meeting of the finance leaders of the Group of 20 that "resurgent demand in the emerging markets has contributed significantly to the sharp run-up in global commodity prices" ignores the central role of the dollar's devaluation on rising global inflation.
Moreover, Bernanke's promise to respond to higher inflation by raising the Fed Funds rate carries with it significant additional risks. Slowing the economy reduces the supply of goods and services relative to the supply of money, which itself can be inflationary. In addition, higher short-term interest rates increase the opportunity cost of holding currency and checking accounts, and therefore will lead to an increase in the turnover or velocity of money. That too will add upward pressure to prices.
The experience of the 1970s illustrates the danger. The Fed raised the Fed Funds rate from a low of 3.3% in February 1972 to more than 10% in July 1973. But consumer price inflation continued to accelerate for the next year.
To avoid another extended period of high inflation and interest rates, the Fed and the Obama Administration need to acknowledge that the current, paper dollar system is deeply flawed and prone to error and instability. The alternative is a rules-based system in which the Fed begins to use quantitative tightening and easing to steady the value of the dollar as represented by the price of gold. A monetary system in which the dollar is as good as gold -- for all of its imperfections -- would quickly deliver price stability, low and stable interest rates, and increased financial security to the American people.