Silver

New Fundamentals For Gold And Silver

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NEW FUNDAMENTALS FOR GOLD

When speaking of gold and silver, analysts and investors are always happy to share their viewpoints on the fundamentals for the two metals. Lately, the list of fundamentals seems to be growing.

When someone mentions housing starts and gold in the same sentence, it is indicative that analysis has become suspect, and the resultant observations are likely to be of little or no value.

Inferring correlative activity between gold and a host of other non-related items such as interest rates, social unrest, political turmoil, wars, existing home sales, retail sales, economic activity, etc., is confusing and unsupportable.

So-called fundamentals for gold are lumped into one big cauldron of boiling phrases and sayings. Investors can pick and choose which fundamental(s) suits them.

The definition of the term fundamental (noun) is  “a central or primary rule or principle on which something is based.”  

As regards gold and silver, each of them has one basic fundamental:

1) Gold is real money.
2) Silver is an industrial commodity.

Each of them has a secondary use that is similar to the primary fundamental of the other metal. Gold is real money, first and foremost, but it also has industrial applications. Silver is primarily an industrial commodity that has a secondary use as money.

The basic value of either gold or silver stems from its primary fundamental. This means that gold is valued for its role as real money and silver’s primary value stems from its use in industry. And the primary fundamental for each metal will always be the same, even though there can be changes in the relative relationship of primary and secondary uses.

For example, lets say that gold’s primary role as money accounts for 90% of its assumed value. The other 10% can be industrial uses, such as jewelry. If there is an increase in industrial demand for gold, as a result of increasing demand for its use in ornamentation and jewelry, the relative percentage in gold’s total demand increases. In other words, a possible new allocation might be 85% for monetary use and 15% for industrial use.

What is important to note, however, is that the total demand for gold does not change. The increase in industrial demand for gold supplants the investment demand. Also, whatever changes occur in the relative percentages will never alter the balance of the two in a material way or in a way that inverts the primary and secondary uses.

Primary demand for gold will always be for its use as money; and that value will always exceed any secondary applications in industry by a wide margin.

With silver, the example is similar, except that the industrial and monetary uses are reversed. Whatever changes or increases take place in silver’s use as money will supplant industrial demand by a like percentage. As with gold, the increase in its secondary use and valuation will never override its primary use. Silver will always be valued primarily for its use in industry – not for its use as money.

PRICE CONSCIOUS INVESTORS 

Even if most investors and analysts understood these things (they don’t), then they likely would ignore them – because they are boring.

Investors are fickle and price conscious. Most of them are not interested in value. They want to know when the price of something is going up, by how much, and why. The ‘why’ is mostly an after thought. Usually, ‘why’ enters the conversation after the price goes down when it was expected to go up.

That is when investors and their advisors start talking a lot about fundamentals. Since the fundamentals they talk about don’t apply to gold and silver, whatever logic they use is faulty because it is based on incorrect assumptions. This leads to unrealistic expectations.

Negative news in the headlines seems to be a reason to buy gold. A recent headline even proclaimed “bad news is good news for gold”. Apparently, some investors are thinking and acting with that statement in mind. Unfortunately, simultaneous events do not prove correlation.

So how do we explain gold’s price changes according to its fundamental above?
Gold is not just real money. It is original money. Gold was money before the US dollar. Its value is constant and unchanging. It is the ultimate store of value.

Gold is the measure of value for everything else. Everything else is assessed a value based on its price in gold – in grams, kilos, ounces, and fractional units of such.

This seems backwards to most of us because we are used to valuing things in terms of their price in dollars, or any other currency. But if we learn to understand it, we can better understand the following:

The rising price of gold in dollars does not mean that gold’s value is increasing; rather, it signifies a correlative loss in the purchasing power of the US dollar.

That brings us back to gold’s only fundamental: gold is real money. Anything else is a substitute.

In other words, NOTHING ELSE OTHER THAN THE US DOLLAR IS A DETERMINING FACTOR IN THE PRICE OF GOLD.

What we have said about gold, however, does not apply to silver. Silver is primarily an industrial commodity; and its price in dollars is mostly a reflection of its use in industry rather than its use as money.

Slowdowns in economic activity lead to declines in industrial demand. This is reflected by lower prices for industrial commodities, like silver. In fact, during every recession in the last fifty years – seven of them – the price of silver declined. (see: Prospecting For Silver During Recessions)

(note: silver’s price swoon in March-April 2020 at the onset of the current recession brings the number to eight)

As far as silver’s role as money is concerned, silver has not come close to replicating gold’s increasing price over time.

GOLD PRICE ANALYSIS

The US dollar has lost somewhere between 98-99% of its purchasing power over the past one hundred years.

When the gold price hit $2060 oz. last August, it was a one hundred-fold increase over the past century and represented a ninety-nine percent loss in US dollar purchasing power.

In inflation-adjusted terms, $2060 oz. in August 2020 is nearly identical to $1895 oz. in August 2011. Both peaks equate similarly to a ninety-nine percent loss in US dollar purchasing power.

The increase in the US dollar price of gold from one peak to the next (Aug 2011-Aug 2020) represents the actual purchasing power that was lost in those intervening nine years. 

Approximately midway between the two price peaks, the gold price bottomed at $1040 oz. in January 2016. This was a fifty-fold increase and reflected a ninety-eight percent loss in US dollar purchasing power.

TARNISHED SILVER

Whereas, gold’s price currently is eighty-five times higher than its original fixed price of $20.67 and indicates a nearly ninety-nine percent loss in US dollar purchasing power, silver’s price has risen only seventeen fold ($22.40 oz. divided by $1.29) over the same one hundred years.

In fact, in inflation-adjusted terms, silver is cheaper today than it was at $4.00 oz. in January 1974. (see: Silver Is Cheap And Getting Cheaper)

CONCLUSION

Many of the analyses about gold and silver are factually incorrect. They are lacking in fundamental support and have no historical precedent.

The logic used is faulty because it is based on incorrect assumptions. All of this leads to unrealistic expectations.

The expectations for a moonshot price trajectory, for either gold or silver, are wishful thinking. And to the extent they occur, they will be accompanied by conditions that negate the expected positive benefits (see: Gold’s Not An Investment – You Won’t Get Rich and Silver Fails Miserably To Meet Expectations)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

Still Waiting On Silver

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If you are still waiting on silver to bring you huge profits, your wait just got longer. Below is a chart (source) of SLV prices for the past week…

Silver prices gapped significantly lower at the open on both Thursday and Friday. The combined loss for the two days is almost six percent.

It’s true that two days price action doesn’t tell the whole story, but contrary to what usually happens in fairy tales, this story isn’t likely to end in similar fashion. The phrase “happily ever after” does not apply.

Nor can it be said with any conviction that there is a positive side to silver’s recent price action. No matter how optimistic silver investors are, false hopes are still “false”.

Below is a two-year chart of SLV…

While it is not drawn on the chart, there is an uptrend line of support which dates back to March 2020 and which was decisively broken earlier this summer in June. At that time, silver prices gapped down sharply, too; and again in August.

At this point silver prices are down more than 25 percent from their highs last August and appear to be headed lower.  It isn’t unreasonable to expect SLV to land somewhere around $18 and spot silver at $19-19.25 – at least temporarily.

IS SILVER REALLY CHEAP? 

In May 2021, I published an article titled “Are Silver Prices Really Cheap; And Does It Matter?” At the time, spot silver prices were approximately $27 oz.

The February Reddit false alarm was in the rear view mirror,  and the silver price seemed   to be consolidating at about ten percent below its high from last August which was in the vicinity of $30 oz…

“On an inflation-adjusted basis, most of the price history for silver is still under $20 oz. Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years.” 

Silver back below $20 oz. is like returning home after a fun vacation. Familiar territory, but not much to get excited about.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

Price Of Silver – 100 Years In The Making

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Sometimes fantasy becomes reality. At other times, a dose of reality will temper fantasies of outsized and unjustified proportion.

Some silver investors and analysts could use a dose of reality. Below is a chart of silver prices dating back to 1915…

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Waiting On Silver

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Expectations still abound for the long-awaited, vertical leap in silver prices.  We are told it is inevitable; and that it is supported by solid fundamentals. Those fundamentals include supply deficits, a return to the 16 to 1 gold-silver ratio, increasing monetary demand for silver, etc.

However, an examination of those fundamentals reveals a different picture.That picture is inconsistent with the call for higher silver prices.

SILVER SUPPLY & DEMAND, RATIOS

The supply deficits (gaps in consumption over production) have been talked about for decades.  In the 1960s and 1970s they were the principal fundamental justification in the case for higher silver prices.

Throughout the twentieth century, industrial use of silver increased to the point where the consumption of silver eventually exceeded new production. This is the start of the consumption/production gap to which people refer. The government  then became a willing seller in order to keep the price down.  The specific purpose was to keep the price from rising above $1.29 per ounce. This is the level at which the amount of silver in a silver dollar (not Silver Eagles) is worth exactly $1.00.

The huge price gains for silver that occurred in the 1970s were largely attributable to years of price suppression prior to that. Those years of price suppression, though, were preceded by decades of price support.

Neither price suppression, nor support, are significant issues at this time. The primary imbalance in supply and demand was corrected in the 1970s. If it hadn’t been, the silver price might be much higher than it is.

Expectations for a return to a 16-1 gold/silver ratio will go unfulfilled. The gold-to-silver ratio that existed one hundred fifty years ago was mostly the result of political influence and appeasement. There is no fundamental reason which justifies any particular ratio between gold and silver. (see Gold-Silver Ratio: Debunking The Myth)

Gold to Silver Ratio – 100 Year Historical Chart

As can be seen in the chart above, the gold-to-silver ratio continues to widen in favor of gold.

SILVER FUNDAMENTALS

Silver is an industrial commodity. Its primary demand is driven by – and its price is determined by – industrial consumption. Any role for silver as a monetary hedge is secondary.  This is true even in light of the significant increase in the amount of silver used in minting bullion bars and coins; particularly Silver Eagles.

The fundamentals simply do not support the bullish expectations for silver. Also, there are fundamentals that make silver vulnerable to a big price drop.

Deflation is a more likely near-term possibility than hyperinflation.  True deflation results in a decrease in the general price level of goods and services.

As an industrial commodity, the silver price would reflect the full brunt of deflation’s effects. The depression-era low for silver occurred in late 1932 at $.28 oz.  This low coincided with the stock market’s low.

Something similar happened in March-April 2020, when both silver and stocks declined by thirty-five percent.

Another possibility is that we might continue for several more years with relative prosperity and disinflation. This would not stop further price declines for silver.

SOME HISTORICAL PERSPECTIVE

After it peaked at $48.00 per ounce in 1980, silver’s price declined ninety-two percent over the next thirteen years. It reached a low of $3.57 oz. (February 1993) during the boom years  of the 1990s.

It has been ten years since silver last peaked at close to $50.00 oz. At the current price of approximately $25.00 oz., silver is cheaper by one-half. This is shown on the chart (source) below…

Silver Prices – 10 Year Historical Chart

 

Given that, does it matter much that silver has doubled in the past year. All of that increase is just a matter of recovering some lost ground.

Historically speaking, most of the reasons people give in support of dramatically higher silver prices, lose credibility when one looks at the facts.

CONCLUSION

Silver is ineffective as a monetary hedge because it is not a store of value. Silver would need to be over $100.00 per ounce right now to roughly approximate what gold’s current price of $1800 oz. reflects regarding the loss in purchasing power of the US dollar over the past century.

It is not remotely close to that number and there is no historical precedent to expect the gap between gold and silver to narrow in silver’s favor. As long as the US dollar continues to lose purchasing power, the gap between gold and silver prices will continue to widen in  favor of gold.

In addition, on the few occasions when silver has increased in price dramatically, it has given up most or all of the gains in short order.

In other words, there is likely more downside ahead for silver’s price. And it could be quite significant.

(also see $100 Silver Has Come And Gone)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

Is Silver Really Cheap; And Does It Matter?

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IS SILVER REALLY CHEAP?

Proponents of silver and their expectations for a much higher price have talked for years about the reasons “silver is undervalued” (their words, not mine).

Whether it is a deficit in new production of silver or the gold-to-silver ratio, there is always something to talk about; so let’s talk.

Below is a chart (source) of silver prices for the past century…  

Silver Prices – 100 Year Historical Chart

The chart is plotted using average closing prices for spot silver so the peak shown in 1980 is $36 oz., which is an average of closing prices for the month of February 1980. The peak intraday price was $49 oz. in January 1980.

In either case, with spot silver currently under $28 oz., silver is definitely cheaper than it was in early 1980.

That does not, however, make silver a bargain at its current price. The actual average price for the entire year 1980 was $20.98 oz.  With the average closing price for 2021 at more than $26 oz., then silver is more costly by an average of $5 oz., or twenty-four percent.

The two parallel lines identify a price zone for silver between $20 – $40 oz. The total time that silver prices were actually within that range or higher amounts to less than five years.

Since the chart includes a total of 106 years, that means silver has traded at prices below $20 oz. for more than ninety-five percent of the past century.

Conversely, we might say that silver at $27 oz. is not cheap. In fact, after adding the exorbitant premiums that accompany the purchase of physical silver (Silver Eagles, junk silver coins, etc.), silver is quite expensive; more than almost any other time shown on the chart.

However, a realistic assessment of silver prices is not complete unless we consider inflation-adjusted prices. Here is the same chart as above, but with silver prices adjusted for inflation…

Silver Prices – 100 Year Historical Chart (inflation-adjusted)

In the chart above, the same parallel lines of $20 and $40 are shown. On an inflation-adjusted basis, most of the price history for silver is still under $20 oz.

An imaginary line at $30 oz. compares more closely to the $20 oz. in the first chart and reinforces how significant the recent $30 oz. stopping point is in silver’s price history.

Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years. After adding premiums for actual physical silver in various forms, the acquisition price approaches $35-40 oz.

Some will argue that expectant price increases for silver will make any of this type of analysis unnecessary, or moot. However, the reasoning behind those expectations are more grounded in fantasy than actual fundamental fact.

SILVER SUPPLY-DEMAND GAP

One of the so-called fundamentals that seem to attract unwarranted attention is the  supply-demand gap in production (mining) of silver relative to consumption.

“The gap in consumption over production that existed in the late sixties and early seventies was one of several things that contributed to much higher silver prices. But when all is said and done, and after decades of ‘fundamental’ arguments about such an imbalance, silver has failed to show any further signs of a need for revaluation in price because of consumption/production gaps, past or current.”  (see No Silver Lining Here)

GOLD-TO-SILVER RATIO 

Another favorite argument trumpeted in silver’s behalf is the reliance on a return to gold-to-silver ratio of 16:1. The ratio currently stands at 67 and was as high as 120 last year. Below is a chart of the ratio…

Gold to Silver Ratio – 100 Year Historical Chart

Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward.  But, if anything, the chart (see link above) shows just the opposite. For more than fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.

In the Mint Act of 1792, the U.S. government arbitrarily chose a 16:1 ratio of gold prices to silver prices.  The actual prices were set at $20.67 per ounce for gold and $1.29 per ounce for silver.

“There is no fundamental reason which justifies any particular ratio between gold and silver.” (see Gold-Silver Ratio: Debunking The Myth and Gold-Silver Ratio And Correlation)

SILVER – WHAT NOT TO EXPECT 

  1. Don’t expect silver to outperform gold. Gold is real money and its higher price reflects the actual loss in purchasing power of the US dollar. As long as the dollar continues to lose purchasing power, the price of gold will continue to move higher relative to silver.
  2. Don’t expect silver’s price to rise if stocks collapse.  A collapse in stock prices more likely would usher in hard times economically; maybe recession or depression. Silver is primarily an industrial commodity, so it is very price sensitive to economic slowdowns. When stocks fell at the onset of Covid-inspired closures and shutdowns last year, the price of silver fell by a larger percentage, before moving higher along with most everything else.
  3. Don’t expect silver to rise above $30 oz. and stay there. That would be a refutation of everything we know about silver historically.
  4. Don’t expect a special circumstance or event to void any of the above. 

SILVER – WHAT SHOULD YOU DO? 

What you do depends on your reasons for owning silver.

  1. If you own silver and are expecting large-scale fantasy price increases, reread this article and the other ones referenced.
  2. If you got in early on the latest upswing and have some nice profits, take them.
  3. If you own some silver coins against the possibility of a collapse in the US dollar, keep them and go about your business.
  4. If you have  larger amounts of wealth you want to protect, consider gold. It is a much better choice.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT  and  ALL HAIL THE FED!

Big Down Day For Gold And Silver; More To Come?

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After a recent spike to the upside over the past seven days, both gold and silver have turned negative again and could be headed back to their recent low points reached early in the day on Monday, November 30th.

The movement in both gold and silver is evident of a decided shift in trend direction to the downside. What happens after prices return to their recent lows could prove interesting; or downright discouraging if you are expecting a resumption of the trend to higher prices.

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Silver Is Trapped Below $30

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Below is a chart (source) showing a 10-year history of silver prices. The prices are adjusted for inflation…

As you can see, the price of silver today is well below its peak price in 2011. At $24 per
ounce, silver is down fifty-six percent since August 2011.

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Gold vs. Silver – Absolutely No Comparison

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GOLD VS. SILVER

In the five months between March and August this year, the price of silver increased from a fourteen-year low of $11.77 per ounce to a seven-year high of $29.26. That is a whopping gain of one hundred sixty-three percent.

Meanwhile, gold’s price rose from its low of $1472 per ounce to a recent high of $2061. That represents a gain of forty percent, which is certainly a handsome number. Nevertheless, silver’s performance outshone gold by a ratio of four-to-one.

However, five months doesn’t tell the whole story. For those who were and are, hopeful that this is just the beginning of silver’s day in the sun, be warned. Looking at the bigger picture historically, silver can’t hold a candle to gold.

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Silver’s Apparent Recovery

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SILVER’S APPARENT RECOVERY

Some might say “Silver’s performance over the past several weeks has been nothing short of phenomenal.” Others talk and act as if all of their wildly crazy price predictions have already come true.

The chart (source) below is a one-year history of daily prices for SLV (Silver ETF)…

As of this writing, SLV is up forty-eight percent since striking its most recent low of $10.86  two months ago. It would not be excessive to call it an impressive rally of magnitude.

There are, however, some items of note that might dampen one’s enthusiasm if you are looking for an infinite extension of the current rally.

The rally has come immediately on the heels of a nearly forty percent decline in silver over the preceding four weeks. As such, it is, at this point, merely a retracement of previously lost ground.

In addition, silver is still more than two dollars per ounce lower than it was when the price price peaked earlier this year. This means that silver needs to increase by another fourteen percent just to get back to its February price point just before it collapsed.

Let’s remember – when silver was at $18+ three months ago, we were being told it was last call to own silver below $20 per ounce; and the silver bullet train was supposed to be fueled by an impending stock market crash.

The stock market crashed; and silver crashed faster and harder. What will happen to silver prices when stocks crash again?

While you are thinking about that, lets look at two more charts (source) The first is a five-year history of physical silver prices…

As you can see, viewing silver’s recent move within the context of a longer-term time frame, alters our perception. The potential for additional volatility in the silver price is evident.  However, the slope of the pattern, along with the overhead line of resistance, seems to indicate that the price of silver is well contained under $20 per ounce.

Finally, viewed within the context of a ten-year time frame, it would appear that silver’s recent rally is just a hiccup in its decade-long price decline since its peak in 2011…

In conclusion, not much has changed; silver’s potential for higher prices is quite limited.

With the winds of deflation howling ominously, it is more likely that the price of silver is headed lower.

As we have said before, it is prudent to own some silver coins (see my article on silver coin premiums) for exchange and barter against the possibility of a breakdown in the financial system and complete repudiation of the US dollar.

Other than that, your best bet for wealth preservation is gold; as long as you are not chasing the price.

(also see: Silver Loses Its Mettle)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

 

Gold-Silver Ratio And Correlation

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GOLD-SILVER RATIO

From Investopedia:

“Correlation is a statistic that measures the degree to which two variables move in relation to each other. Correlation measures association, but doesn’t show if x causes y or vice versa, or if the association is caused by a third–perhaps unseen–factor.”

In order for correlation to exist, there must be fundamentals that directly connect the two items being compared.

For example, there is a possible correlation between localized, bad weather and crop failures. But how do you predict the timing and extent, or the effects, to a degree that can be profitable?

And there certainly is a correlation between the price of labor and materials vs. the finished cost of building a new home. But there is no correlation between the price of labor and materials vs. the number of new housing starts.

We can find patterns and rhythm that might appear to be correlation (or inverse correlation) by plotting the price differential of any two items but it still does not imply correlation.

So, are gold and silver correlated?

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