Silver and Gold will move in opposite directions in 2011

Just my prediction: Silver up, gold down. As monetary fear subsides and manufacturing takes off the split will occur.

 

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If monetary fears subside, nobody is paying attention to the U.S. National Debt. That and the trillions in bad debt and unfunded liabilities the U.S. Gov't has guaranteed should keep monetary concerns in the Western World high. But as you are eluding to, "should keep" and "will keep" are two different things.

I do agree that silver has more upside than gold - even at $30/oz.

 

As a newcomer to bullion investing, I'd like to try and understand the reasons behind this. I've heard that one reason is the silver:gold price ratio is too high and silver has to go up more for the ratio to get to its historical average. But surely this could also indicate that gold is overpriced and has to fall.

Steve (a bit confused)

 

You aren't confused. You understand the situation perfectly. The ratio is just another bit of nonsense that folks have invented to give them the illusion that they understand the market. In reality, gold and silver are two commodities with different characteristics that move the prices up and down at various rates. It would be just as meaningful to construct a gold/oil ratio since both respond to inflation, or a silver/timber ratio because both respond to the economy. Any ratio that fluctuates between 10 and 100 is a pretty bad predictor of anything. It could go to 1:1 or to 200:1 or anywhere in between from here with about equal probabilities. But some people will say the ratio will contract, some will say it will expand, and half of them will be correct and imagine they understand the market without quite realizing that they are just predicting a coin flip.

 

I would disagree a little with Cloud, (of course). The ratio USED to be extremely important, as it was a very accurate approximation of the rarity of the two metal. It was 16:1 for millenia, and all bimetallic coinage was based upon this for 2500 years.

Today, however, it is exactly as Cloud describes, two commodities moving independently of each other. Silver is more industrial, and has less reserves but higher production. Gold is a mainly investment and jewelry metal with low production but high reserves. This is why they behave quite differently.

As to what they will do, gold may come down and silver up like the OP said, but do not underestimate that silver is more speculative right now then ever in history, and production is ramping up. For gold, do not discount strong Asian economies and their lust for gold and only gold as a store of value. My own prediction would be softening of both, but I am just throwing out some thinking points for others here.

 

Regarding 1, I have seen this repeated by others but I have never seen any verification of it with data. It seems to be another urban myth. From what I have seen, the ratio seemed to originate with the Bank of England in the late 1600's, but this might be wrong too. I doubt it was the case everywhere or even most places in the world for 2500 years. I don't even think that most parts of the world used bimetallic coinage for most of this period.

Regarding 2, China has long had a preference for silver as money and as a store of value.

 

Look in any book about greek coins, understand the conversion between the units of measure, then look at the weights of silver and gold in the coins. It is almost always at a 16:1 ratio in conversion. Rome the same, (before debasement), Byzantine the same, Europe the same, etc. Its not an urban myth, in fact our US monetary system was based on this from the very beginning.

EDIT: This is not always true around the world, as some cultures valued them slightly different. However, with increased trade the entire world began using the European ratio because if they didn't their undervalued metal would leave their country. East Asia would be an example.

China has had a history of treating silver as a store of value in Sycee, but China, India, and the rest of SE Asia today prefers gold for ease of use, cultural traditions, and the ability to have it as jewelry along with a store of value. I had to buy my wife about 10 ounces of it for our wedding, along with most other couples there, and I didn't buy an ounce of silver.

 

I looked into this in the past, and I'm fairly certain that your information is wrong. In Greece, the ratio seemed to be in the range of 3:1 to 10:1. In Rome, it bounced around a lot too. For most of history, the ratio seemed to be in the 8X to 12X range, and only started to rise after the year 1500 when the Spanish started taking silver from the Americas. I don't think it ever reached 16:1 prior to that time. The 16:1 ratio seems to be the exception, not the rule.

 

Although the ratio may be nonsense and illusion it does have force on the market because people still use it in their decision making process.

 

Ok, you caught me a little Cloud. In ancient Greece the ratio I just calculated was 13.84:1, and the Romans, who didn't have decent sources of silver, had a 12.4:1 for periods. I am man enough to admit it wasn't quite 16:1 until 1500, but it was pretty static for the last 500 years until recently. I cannot see anywhere in history it was as high as now, but that doesn't really tell you today if gold is overpriced, silver underpriced, or they now have no relation to each other, (like you and I feel).

 

I agree, which is just another reason why people tend to lose money.

 

There is no ratio in the united states of gold to silver anymore. The U.S. is no longer on the gold standard, and both metal's prices are dictated strictly by supply and demand, even if the supply or demand is dictated by an artificial shortage or surplus. I personally think the silver supply could change if silver mines were opened in some of the silver producing western states.

 

I'm not sure it is feasible. The permitting, capital, environmental waivers, infrastructure, drilling, etc... that would be necessary would make this a 5-7 year project with an uncertain outcome. Silver mines need pretty high grades of ore to make them economical -- much higher than gold. That's why silver is normally mined as a byproduct.

 

Thanks for the info cloudsweeper. I bet there are some interests in not making silver too plentiful anyway.

 

More silver is consumed than mined

http://www.gold-eagle.com/editorials_04/hommel080104.html

 

I would like to see the source of his assertion between supply and demand. The Silver institute states that over 700 million ounces were produced last year, with production going up every year for the last 7. Also, if silver is such a byproduct of other production, then all of the new copper and gold mines increase production further, regardless of demand?

Also, I do not think US production needs to increase, we are not longer a major miner of silver, ranking only #7 in the world, with less than 1/4th the production of Peru.

http://www.silverinstitute.org/production.php

 

http://www.silverinstitute.org/supply_demand.php

If you check the chart at the bottom of the page, it appears that total silver demand exceeded mine supply for every year reported.

 

This is because it was set in sovereign law to have this value. It had no bearing on the intrinsic value between the two metals. Even in the USA, the dollar was set to be = to a number of grains of silver. Gold was then set to a ratio of 16X this worth in weight. When the USA went to completely fiat money, there was no longer any tie between the two metals except as Cloud said, in people's minds.

The real reason Silver going up is this: The price of paper silver on the COMEX. It's got nothing to do with collectors buying coins and bullion. The action is taking place on the COMEX. Right now the banksters are producing unprecidented amounts of unbacked silver shorts on this futures market in hopes of bringing the price down. However their bluff is being called and large investors are holding these shorts knowing the COMEX can't deliver the metal. They are then taking a cash payout instead at a substantial premium. i.e. Invest a billion dollars today in silver contracts, hold for delivery, banksters are force to settle at 120% cash (or more) make $200M in 2 months. Great profit. It's this kind of activity that is driving up the price.

Guess who ends up paying the bill for this fraud?

It's going to break someone's back. Unfortunately for retail investors such as those on this forum, they can't get into this action as a single silver contract is 5000 ounces. But it does drive up the price of coins an bullion because these prices are set directly by this kind of activity. Keep in mind that it could collapse as quickly as it has risen and your $30/oz silver could return to $17/oz silver in a few months time. All it takes is for one set of players above to bow out of that game.

This occurs with gold as well but to a far lesser extent and it's not as susceptible to this kind of high stakes gambling. Beyond that, there is no relationship of gold to silver in terms of pricing. Keep in mind this. All central banks hold gold as part of their monetary reserves. About 70% of the USA's foreign reserves (I believe) are also in gold. So don't do as the bankers tell you do to, do what they do.

As for the OP's assertion, I don't think it will happen. As someone mentioned, all of the false + signs of the economy being fixed have come at the cost of trillions of $s being created by the Federal Reserve, and unprecedented amounts of US federal debt on top of that, and this is a time bomb that is affecting anything, and none of it good. Don't fall for the hopium crack pipe called economic recovery by borrowing.

 

Interesting. Looking at the demand graph, the only "uses" of silver that seem to be going up are investment and coins, which I would classify as investment as well. All of the "industrial" uses everyone touts so much is going down. To me Cloud that graph reinforces this is becoming a more speculative market, and all of this investment silver not really a use at all, but stored silver which will come back onto the market when investors sentiment changes.

 

Silver has one thing going on in its favor.....Highest conductivity of ANY metal. With China embracing the techno-boom, (as well as leading the way in manufacturing electronics) and India and Brazil emerging as well, the demand for silver in electronics will remain high for a long time.

Regarding jewelry....As Medoraman found out, there are many customs regarding marriage that involve gold. One would think that with gold holding on to its $1300 level that countries like India would have gravitated away from their customs, but the exact opposite is holding true. In China the demand for gold jewelry has not nearly diminished as much as some thought. (including me) Granted, the demand for silver jewelry has increased as it`s an affordable alternative to gold, but the Chinese are buying both gold and silver jewelry/bullion.

With emerging juggernauts like China and India, I`m not worried about the future of the PMs for a long time.