Absurd Gold/Silver Price Ratio; Why $500/oz Silver Is Now A Certainty In The Future (SLV, GLD, AGQ, PSLV, ZSL)
Jeff Nielson: Arithmetic is a harsh mistress. Irrespective of how badly the banking cabal wishes to suppress the prices of gold and silver, and irrespective of how much brute force they are able to apply to the market over the short term with their (illegal) manipulations; the inexorable pull of supply and demand will inevitably overwhelm any/all such operations.
This is not the whimsical theory of some ivory-tower economist, but a simple fact of markets which has been demonstrated to us all in totally unequivocal parameters. Thus back in the “bad, old days” of manipulation – when the banksters still had large hoards of bullion to dump onto the market and crush the price – the price of silver was pushed to a 600-year low (in real dollars). What did the extreme manipulation of the silver market in the 1990’s reap for the banksters? A 1,000% increase in the price of silver over the following decade.
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The misunderstanding of most novice investors in this sector (and a source of tremendous frustration) is that these short-term episodes of manipulation somehow delay (or even prevent) gold and silver prices from reaching their “maximum” levels. In fact the precise opposite is the truth: each and every manipulation operation translates to even higher long-term prices for gold and silver. It’s all just simple arithmetic.
Perhaps the easiest way to illustrate these dynamics is through comparing the gold market and the silver market. While both of these markets have been subjected to extreme manipulation, it is clear that manipulation of the silver market has been much more severe. There are two related numbers which illustrate this point.
Knowledgeable investors know that the long-term price ratio of gold versus silver (i.e. over roughly 5,000 years) has averaged approximately 15:1. This closely coincides with the ratio of the natural occurrence of these two elements in the Earth’s crust (approximately 17:1). Not only did this price ratio remain relatively constant over several millennia, but the fact that the price ratio so closely mirrors the rate of occurrence of the two metals shows that (in relative terms) our species has demonstrated a roughly equal preference for the two metals throughout recorded history.
These facts establish beyond any possible contradiction that over the medium or long term the price of silver must remain at close to a 15:1 ratio versus the price of gold. There is only one factor which could alter this arithmetic: if our preference toward the two metals changed. Has any such change in preferences occurred? Yes. Silver has become much more popular.
This increased popularity comes in two distinct forms. Modern technology has established silver as the most valuable/versatile of all metals, with more new silver-based patents being created than for any other metal. Along with that there has been an even more stunning/dramatic surge in investor demand for silver – a consequence of silver being perennially and extremely undervalued.
In 2011, the United States sold nearly 40 million Silver Eagle 1-oz coins while only selling approximately 1 million Gold Eagles – a near 40:1 ratio. This ratio is more than double the 5,000-year price ratio, and more than double the relative natural occurrence of silver. In other words, over the long-term this demand profile is totally unsustainable – and must result in (first) the total depletion of silver inventories, and (second) a rise in the price of silver sufficient to stifle silver demand sufficiently for balance to be restored.
However, the demand profile of silver is literally only half the story here – and the supply-side illustrates the futility of bankster manipulation in even more absolute terms. Given that silver is 17 times more plentiful in the Earth’s crust, we would expect the world’s mining industry to be producing about 17 times as much silver as gold each year. In fact actual production numbers are nowhere near this ratio.
To attempt to conceal the ridiculous imbalance between silver mining and gold mining, the banksters report silver mine production in (Imperial) ounces, while reporting gold production in (metric) tonnes. Fortunately anyone able to employ a calculator can overcome this clumsy attempt at deceit.
Converting all mine production to ounces, gold mine production was over 100 million ounces in 2010 while silver mine production was a mere 735 million ounces. Thus we have the miners producing only approximately 7 times as much silver as gold in 2010, while investors are exhibiting a 40:1 preference in buying silver versus gold. Meanwhile the gold/silver price ratio is an utterly insane 55:1 at the present time.
Keep in mind that the preference for silver over gold industrially is just as extreme. While industrial demand for gold has essentially remained flat over recent years, industrial demand for silver has risen by roughly 50% over the past 10 years – and by 18% in 2010 alone. This rabid industrial demand for silver (along with relatively little recycling) has resulted in global stockpiles of silver being decimated, with silver inventories plummeting by 90% between 1990 and 2005 alone.
Conversely, virtually every ounce of gold ever mined is still available today. As a result of decades of yet another gross imbalance in this market, there is less silver in the world today (relative to gold) than at any time in thousands of years. A precise ratio is impossible to construct, however estimates range from a (conservative) 6:1 level to the estimates of the more bullish commentators in the sector, who insist there is more (above-ground) gold in the world today than silver. This means that relative to supply, silver is currently under-priced by a factor of ten (if not more).
At the same time that silver is at its most popular point in history, there is less of it around (relatively) than at any time in history. Anyone with the slightest comprehension of markets understands what must happen: the price of silver must explode to a level which simultaneously dramatically depresses demand, while causing an explosion in silver mining activity. And note that the current parameters discussed here were after the 1,000% price increase over the past decade. Not only has the supply-deficit remained despite that 1,000% price increase, it’s gotten larger. Thus we might (conservatively) estimate that another 1,000% increase in the price of silver might just be enough to restore balance to the market.
What we have observed generally with respect to the gold and silver markets over the past few decades is nothing more than a long-term illustration of the principles of supply and demand, along with the absolute dictates of arithmetic. The extreme manipulation of the precious metals sector during the last decade of the last century has led to massive price increases in the prices of gold and silver in the first decade of this century – despite the banksters redoubling their efforts to suppress these markets.
Silver was suppressed even more extremely during those previous years, and so it nearly doubled the gains of the gold market over the past decade. This is nothing but a reiteration of one of the most obvious common-sense principles of human commerce: if you put something “on sale” you will increase buying and burn through inventories. If you price something at an extreme discount, you simply burn through inventories much, much faster.
The gold/silver price ratio has once again reached an absurd manipulation-extreme. This in turn is conclusive proof of the current, ruthless suppression of silver taking place in this market – as unequivocally demonstrated by the supply/demand parameters previously detailed. What does this mean over the longer term? That $500/oz silver is now a certainty in the future.
Related Tickers: ProShares Ultra Silver (NYSEARCA:AGQ), Sprott Physical Silver Trust ETF (NYSEARCA:PSLV), SPDR Gold Trust (NYSEARCA:GLD), ProShares UltraShort Silver (NYSEARCA:ZSL), iShares Silver Trust (NYSEARCA:SLV).
Written By Jeff Nielson From Bullion Bulls Canada
Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada www.bullionbullscanada.com. He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and misunderstood) in the world.
Bullion Bulls Canada also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world’s most-promising discoveries.
One thing to consider here is supply and demand of gold and silver available to the market. It seems to me that the total of pretty much all silver supply ever mined has been available in the market as is evidenced by the fact that no central banks hold silver in any quantity, however the Federal Reserve and about every country in the world is holding gold. That gold is not being considered by the market in price discovery as it is currently unavailable. This means supply of gold is artificially reduced whereas supply of silver is not. Since the free market sets price (to the extent possible with all the short term manipulation we are experiencing) it is setting that price with a built in artificially low gold supply. It’s my opinion that this is partially (maybe mostly) responsible for the current disparity of current gold-silver ratios with respect to long term history (15 to 1 when centeral banks did NOT consume a vast majority of gold mining supply to hold gold as reserves and 40 to 1 while they do). If world events suddenly cause all that gold supply currently being held by governments of the world to come out of the vaults and become available to the market, Gold holders should be wary. Price of Gold and silver will temporarily trade places at least for a few years! This is a risk borne by holders of gold and NOT holders of silver, as no such supply of this magnitude of potentially available silver is known to exist.
Perhaps true; but already waited 535 years for a new high. Another 100 or so and I will be to old to care.
Ah. Thanks Tyson, that makes perfect sense. So obvious in retrospect.
Carl, we’ve SEEN it numnerous times in the past six months alone. Go to zerohedge.com. Every time there are huge swings in prices, someone picks up on a margin call or some other manipulation. I too used to be skeptical until I watched it play out in real time. It’s un-fricking-believable.
The question as to why is an age old one. You are a Slave, only silver and gold are for Kings and Gentlemen. Since debt is the currency of slaves you shoul dnot be allowed to have any.
But to answer the question without sacracsm, the central banks across the world want to keep investments in their fiat currencies. If silver and gold look to attractive then they will not be able to continue to float their debt based currenies, and the ponzi scheme will collapse. So they must manipulate the value (in concert with Wall Street banks like JP Morgan, Goldman)with paper silver and gold. One estimate has the ratio of paper silver to physical at 100:1. So it is easy to flood the market and make electronic silver/gold exchanges without actually having to take possession. Carl, it does not take the world only the central banks in the US, England, EU, China and India to put enough pressure on the market to manipulate the price. Five to six people can control the very small silver market to keep the ponzi scheme going.
The article does indeed seem to be reasonable, but I too question the manipulation of the spot price. All I can get from everything I read about it is the “power elite bankers” want to keep people from returning to any precious metal standard. This conspiracy would take the worldwide cooperation of governments and banks -and I find that possibility very unlikely.
The ratio has been written about so often it has taken on the mantle of propeganda for people either selling or heavily invested in silver. Not saying it isn’t true, but it is starting to be a tired topic.
That all being said, I invest in physical gold and silver alike. I am a buy and hold or “long” on precious metals. I have a set amount of my income which I trade for the physical metal on a monthly basis, and I have been doing it for years. Tracking the performance of this investment has revealed I am getting a good “return” -but I don’t look at it that way. When I “sell” my gold and silver it will be for something else of intrinsic value, not for “cash”.
I agree with everything in this article, and I have purchased an a** ton of physical gold and silver for all the reasons mentioned above and more (hello record dollar devaluation and hyper inflation). I know the price has been manipulated with margin calls while the value was going UP! So the question I have is WHY is the price being kept artificially low? Is it so central banks can aquire as much gold and silver themselves to get out of the dollar themselves? Any insight into this part of the equation would be appreciated.