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Message:: [QUOTE="John the Jute, post: 566340, member: 17740"]The usual way is to study the ratio between the price of an ounce of gold and the price of an ounce of silver. The problem is determining what the ratio ought to be. May I take a few minutes to offer a historical approach to this question? It's a bit of a ramble, I'm afraid. The first clearly articulated gold-silver ratio was thirteen-and-a-third to one. This ratio of 40:3 was established by the classical Persian empire and it remained roughly right for about 2000 years, from 500 BC to 1500 AD. It wasn't rock-solid constant, though, which was a nuisance for countries with a bimetallic currency. Monometallism wasn't that convenient either; using only gold meant that small change was vanishingly small; using only silver meant that serious trading entailed the shipping of large weights of coin. Then came the start of European trade with the Americas. Not always a pretty story, it resulted in a lot more silver coming to Europe. As always, an increased supply led to a lower price ... and thus a higher gold-silver ratio. In the 16th and 17th centuries the ratio increased from about 13 to about 16. Oversimplifying somewhat, the Spanish used this new ratio for a currency where each coin was double the value of the one below. They had silver pieces of 1, 2, 4 and 8 reales, and gold pieces of 1, 2, 4 and 8 escudos. Since the two series had the same weights, the 1 escudo coin was worth 16 reales, or two silver pieces of eight. The English, of course, did things differently. When the Anglo-Saxon silver penny was introduced (in the 8th century in, ahem, the country of the Jutes) the currency was silver only. A penny was a coin made from one-twentieth of an ounce (22.5 grains) of alloy 37 parts of silver to 3 of copper. Since there were 12 ounces in a pound of silver, there were 240 pennies in a pound sterling, a number that the English were stuck with for the next 1200 years. In the middle ages, gold coins for trade were introduced, but sterling continued to be defined in terms of silver, so the gold coins had to be revalued upwards as more silver came on the market and the gold-silver ratio increased. In 1717, the Master of the Royal Mint, Isaac Newton, called time on this creeping revaluation by defining the value of the gold in the guinea coin to be one pound and one shilling. Not his finest move, since the silver in 21 silver shillings was worth more than the gold in a guinea, and much of Great Britain's silver coinage was melted down and sent abroad. The country had to make a virtue of necessity and develop a token silver coinage to go with this new gold standard. The young United States chose bimetallism, adopting a silver dollar of 8 bits that was very similar to the Spanish piece of 8 ... and a gold-silver ratio of 15 to 1. This ratio soon became too low: the opposite problem to Newton's. The gold in a $10 eagle was worth more than the silver in 10 silver dollar coins, so the gold eagles were melted down. In 1834, the official ratio was changed to 16 to 1. Then something strange happened. It took Great Britain a century to get a proper grip on token coinage, but, once it had, the combination of a gold standard with a token silver coinage was attractive. It avoided the problems of getting the gold-silver ratio wrong. Between 1870 and 1900 a host of developed countries went to a gold standard and ceased using silver a monetary metal. And the price of silver plummeted. Between 1870 and 1900 the gold-silver ratio increased from about 16 to about 32. And apart from the days of the Hunt silver corner, it hasn't been back since. When, 100 years later in 1971, Richard Nixon broke whatever links remained between the US dollar and gold, most fiat-money enthusiasts expected the gold price to plummet as silver's had. But it didn't. Instead of halving, the gold price has increased by a factor of 25. Or, possibly, the value of the dollar has decreased by a factor of 25. <img src="styles/default/xenforo/clear.png" class="mceSmilieSprite mceSmilie2" alt=";)" unselectable="on" unselectable="on" /> As a result of these happenings, conventional wisdom among gold bugs (and I do not regard "goldbug wisdom" as being a contradiction in terms!) is that gold remains a monetary metal, while silver (and platinum) are both monetary and industrial. Therefore, in times of boom, with accompanying inflation, both silver and gold will do well, with silver doing better than gold. Both metals are useful hedges against inflation. But silver is not a good hedge against deflation. With companies on the ropes, the industrial demand for silver (and platinum) will decline. Gold will hold its value and can be used as a hedge against deflation. As the cycle of boom and bust continues, one should expect the gold-silver ratio to go down and up. Which it has done, ranging from 30s to 70s with an approximate midpoint of 50 to 1. So in the medium to long term, I think silver is undervalued. But in the next 5 to 7 years, I think silver's value is going to be determined by our governments' success at handling the intractible problems they face. If you believe they will err too much on the side of caution and will not do enough to prevent deflation, you should buy gold. If you believe they will prevent deflation only at the cost of storing up massive inflation a few year's ahead, you should consider silver and platinum. If you believe they will get it just right, easing the money supply just enough to avoid deflation, and tightening it again just in time to prevent inflation taking off, then you have no need of precious metals! Later, John[/QUOTE]

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