Gold & Silver Forum - Silver Headed for Higher Ground

Historic Silver - Headed for Higher Ground

February 23, 2005
David Morgan
Silver Investor

With the rise in silver prices these past two years, silver is becoming an ever-more attractive and exciting metal to investors. This is not fluke. Many understand that although the price has risen in U.S. dollar terms, the true gain has not been significant yet! Since the U.S. dollar has almost constantly been losing purchasing power these past several years, price alone does not tell the full story. In fact recently a reader asked if they were too late to enjoy any further appreciation in silver's value. Silver is merely getting started in terms of how well it will perform not only against the U.S. dollar but all currencies eventually.

Given where silver has been and where I think it's headed, I thought I would take the opportunity, below, to present some history about silver to explain why I am so confident in silver's performance today, and even more optimistic for tomorrow.

Sometimes, we get carried away with our current investment situations and lose track of the "bigger picture." We start to think that every tick upward is a countdown to an immediate explosion in price, and that every downward move presages a drop to low and disappointing prices. Living in the moment, as we often are, we are all guilty of this from time to time.

Of course there are plenty who will encourage the latter view. The kind of price rise that silver has been enjoying, and gold too, are "dead-cat bounces" if you believe many on Wall Street.

This is where knowledge of history is helpful. Wall Street won't ever explain to you that silver has been a valuable metal for thousands of years, as much as 10,000, 15,000 or even 20,000. It's malleable, useful, and is satisfying to the touch and beautiful to look at. People almost instinctually understand this.

Since most on Wall Street won't explain it to you, even if they knew it themselves, you need to understand silver's history for yourself. You need to read up on it and bear in mind some basic, historical truths. Understand silver's history and you can put the inevitable ups and downs of the market into perspective and tolerate more price volatility. Silver has been around a lot longer than you have. It will still be sought after, and gaining value in a fiat-money system, long after you are gone.

THREE POINTS FOR SILVER

When examining silver as a valuable investment today, one should keep in mind the following points.

Monetary function: Silver has had a monetary function far longer than gold, being used as the most common medium of exchange in everyday commerce since well before the time of Christ. In fact, silver again lasted longer than gold as a medium of exchange (real money), surviving until 1965, whereas gold ceased to circulate among the people in 1933, being reserved for balance-of-trade payments until the gold window was closed in 1971. Silver has enormous attractiveness and staying-power when it comes to free-market monetary decisions - and no doubt if people were free to circulate whatever kind of money they chose, silver would again become the common man's first choice.

Store of value: It is also worth noting that in a true gold standard, many financial planners would be out of business. As absurd as this sounds, follow the logic. If the monetary system were based on honest weights and measures, you would know, when you first entered the work force at, say, 20 years of age, exactly how much you would need to save by age 65 for retirement. Why? Because your purchasing power would remain constant. Under an honest monetary system, interest rates are stable and long-range planning is simplified. In a true gold standard, purchasing power actually increases slightly over time so that an ounce of gold would buy slightly more after 35 years than it did when you originally entered the work force. For thousands of years, silver has held its value, becoming steadily more useful as an industrial metal while retaining its position as a precious metal second only to gold.

Undervalued status today: In consideration of silver's monetary role, we need to examine historic ratios between the values of gold and silver. Historically, silver was valued at approximately 1/12 the price of gold or what I call the natural ratio. Once silver and gold were both used as money, silver was 1/16th the price of gold. This is what I refer to as the "classic" ratio or monetary ratio. This 1/16 ratio held from 1700 to 1860, one hundred and sixty years. Only in recent history has the gold/silver ratio risen above the "classic" 16:1. If we use the classic ratio, then one troy ounce of silver would be over $25 USD with gold at $450USD. This seems crazy, but it actually is normal from a historic point of view. A menu in the 1850s might offer a meal for 5 cents. If you worked as a miner during the great silver rush in Virginia City (Comstock Lode), you were paid two silver dollars per day as wages. The five cents would be 1/40th of a day's wage. Taking that to the present time, a person making $5.00 an hour ($40 a day) is able to buy a 99-cent hamburger at several fast food outlets. This is equivalent to the 1/40th comparison. Looked at historically, silver has a long way to travel up once a breakout begins.

THE TRIGGER?

Silver's value is pent up and steady market pressure will unlock it over time. Whether the value is realized all at once - highly doubtful - or over a period of months and years, no one can say with any accuracy. But as my little historical overview above shows, the reality of silver's value and its erratic upward moves in the last few years are no flukes. Silver is volatile but the major trend is up and we are very early in the major trend.

Where might the trigger lie this time? Probably what will trigger a substantial move in the market is industrial silver demand from China - a vast country in the throes of a compressed industrial revolution.

In a recent article, I referred to the industrial pressure from China plus inflationary pressures around the world as the "Silver Trap" - and concluded that: "Silver is going through the roof, in my opinion, because of the twin pressures of inflation and industrial demand and increasing industrial demand from China. More than gold, silver is going to come under pressure because it is an industrial as well as precious metal."

I also wrote, "We are on the cusp of breaking out of the Silver Trap - and the force of the explosion may be mighty indeed. The twin drivers of inflation and high demand are providing the fuel, and the takeoff is underway. The market is a mighty force and cannot be denied - not now, not as it affects the silver market, indeed the precious metals markets in general."

No one can predict how long it will take for silver to reach its true value, but almost everyone, when confronted with the facts will admit that silver is a long way from that point yet. Usually it takes protracted bear markets - commodity markets - several years to reattach silver (or gold) to a realistic market price.

Are we in such a market? Yes, we are. The pressure on silver supplies is strong and growing more powerful every day - and the demand from Asia and from China in particular for industrial silver will only continue to strengthen. The recent price rise in silver was encouraging, but even were silver to dip again, those who understand silver's history would merely look on those dips as buying opportunities.

I believe we are on the brink of a historical re-evaluation in silver prices. Those with a basic knowledge of the history of the "white metal" and its ability to retain value over time, will be the ones who will find it easiest to tolerate the entire wild ride (and it will likely last throughout this decade and maybe beyond) as silver finds newer and much - very much higher - ground.

I will close by reminding readers that in numerous other articles and white papers I have stressed that physical silver is not the only kind of way that investors position themselves for the ongoing upward movement over the next half decade. It is important for investors to invest in real silver and gold. However, the leverage in stocks, especially small mining stocks is quite extensive, if one is positioned correctly. My newsletter, the Silver Investor, contains such choices - and recently we have been focused on one opportunity in particular, in northern China.

http://www.gold-eagle.com/editorials...gan022305.html

THREE POINTS FOR REALITY:

When examining silver as a valuable investment today, one should keep in mind the following points.

Monetary function: Silver has had a monetary function far longer than gold, being used as the most common medium of exchange in everyday commerce since well before the time of Christ. In fact, silver again lasted longer than gold as a medium of exchange (real money), surviving until 1965, whereas gold ceased to circulate among the people in 1933, being reserved for balance-of-trade payments until the gold window was closed in 1971. Silver has enormous attractiveness and staying-power when it comes to free-market monetary decisions - and no doubt if people were free to circulate whatever kind of money they chose, silver would again become the common man's first choice.

The key word here is "had". We are talking past history, as there is no currently circulating official silver currency anywhere in the world today. The freedom of the masses to "choose" silver as a currency is another thing not likely in the cards. "Money", a societies "first choice" of circulating currency will always revert to the most liquid or most accepted form of exchange vehicle, whether paper, twinkies, silver, gold, or ???? We are not even close to returning to PMs as every day "spendable" forms of currency or exchange because of the general lack of wide-range acceptance of PMs as "money". Tried to spend a silver or gold coin lately, expecting to receive full value in the exchange ? That is a very sobering exercise in futility.

Store of value: It is also worth noting that in a true gold standard, many financial planners would be out of business. As absurd as this sounds, follow the logic. If the monetary system were based on honest weights and measures, you would know, when you first entered the work force at, say, 20 years of age, exactly how much you would need to save by age 65 for retirement. Why? Because your purchasing power would remain constant. Under an honest monetary system, interest rates are stable and long-range planning is simplified. In a true gold standard, purchasing power actually increases slightly over time so that an ounce of gold would buy slightly more after 35 years than it did when you originally entered the work force. For thousands of years, silver has held its value, becoming steadily more useful as an industrial metal while retaining its position as a precious metal second only to gold.

Great....... nothing wrong with a little stability in our financial lives. But "store of value" is a relative term. Nothing (over time) retains a set value in comparison to anything else. Nothing has "held its value for thousands of years" in this sense. And if the assertions that silver supplies are "nearly exhausted" are true, returning to silver as a primary or "token" currency to gold would be very difficult indeed. So long financial planners. Now if we can just figure out how to reduce the overpopulation of lawyers.

Undervalued status today: In consideration of silver's monetary role, we need to examine historic ratios between the values of gold and silver. Historically, silver was valued at approximately 1/12 the price of gold or what I call the natural ratio. Once silver and gold were both used as money, silver was 1/16th the price of gold. This is what I refer to as the "classic" ratio or monetary ratio. This 1/16 ratio held from 1700 to 1860, one hundred and sixty years. Only in recent history has the gold/silver ratio risen above the "classic" 16:1. If we use the classic ratio, then one troy ounce of silver would be over $25 USD with gold at $450USD. This seems crazy, but it actually is normal from a historic point of view. A menu in the 1850s might offer a meal for 5 cents. If you worked as a miner during the great silver rush in Virginia City (Comstock Lode), you were paid two silver dollars per day as wages. The five cents would be 1/40th of a day's wage. Taking that to the present time, a person making $5.00 an hour ($40 a day) is able to buy a 99-cent hamburger at several fast food outlets. This is equivalent to the 1/40th comparison. Looked at historically, silver has a long way to travel up once a breakout begins.

Regardless of historical price ratios, voodoo technical analysis, what silver did during the artificial manipulation during the Hunt years, classic or natural value ratios, past wage levels, or the cost of a McDonalds hamburger, any commodity or item of trade is worth precisely what you are willing to sell it for and what someone else is willing to pay for it AT THE MOMENT. "Perceived value" or wishful thinking only plays out to the up or down side when that perception affects the actions of those actually trading the item involved. "Perception manipulation" seems to be the name of the game in silver these days, attempts to make scarce something that perhaps is not so scarce as we are lead to believe. The same old worn out rhetoric about diminishing supplies of silver have been touted since the 60s. Very little of it is new or original to the likes of Butler, Morgan, Hommel, or other silver "experts".

The only "historic ratios" between gold and silver are those artificially bestowed by governments or via market supply/demand, with the exception of the true "natural" ratio of the presence of the two respective metals in the ground. What the ratio "should be" is alot harder to determine than what it actually "is" at present...... usually more speculation than anything. Assuming there is a "correct" ratio, or that the ratio will ever return to any particular level can be a big mistake, just as assuming "known" silver supplies really bear any real meaning in comparison to what is actually out there.

"The numbers" in silver have been bantied around since the late 60s, and according to some of the earlier writings, we should have been "out of silver" a long time ago. According to Butler and others, the numbers are getting very low, yet there is still silver available. Nobody out there knows the real numbers where silver availability is concerned, and never will. For the most part, it's all an investment sales pitch, and as others point out........ "wearing very thin". Where did Butler's writings originate, and who bankrolled most of his work but a major silver dealer ? How much silver does he own himself ? How many of the "gurus" have their money where their mouths are ?

You see, the problem is that the claims as to silver supply always stop short of anything even remotely close to reality. The assumption that "official supply" numbers are representative of true above ground silver supplies is very misleading, but used as "statistical" because anything beyond recorded numbers cannot be proven or disproven one way or the other. This is why silver is touted as such a fantastic investment to begin with...... because incomplete information (and outright misinformation) can be spread for marketing purposes with little or no rebuttle and the "gurus" know that there is no earthly way to prove or disprove their claims. This supposedly makes them "experts" in their field because nobody challenges their claims.

Knowing the "REAL NUMBERS" as to privately held silver inventories compared to COMEX or similar documented inventories (if that were even possible) would likely send most silver investors into a cold sweat. And it is just that "impossibility" of knowing the complete numbers that keeps the silver myth alive and well.

We talk about "market manipulation" on both sides of the PMs (silver and gold), but do we ever stop and think or wonder just what is REALLY behind the silver tout ? Which metal has historically been the REAL threat to the financial fiat elite and continues to be looked upon as the supreme financial commodity throughout the centuries ?

Is silver just another side-show to help take the attention (and purchasing power in the way of fiat) away from gold in the same way some of us suspect the exchange traded (paper) gold funds are ?

Sometimes we just refuse to see things that are plainly in view right under our own noses, or to at least consider possibilities that things just might not always be as they appear.

"Tell a lie big enough and often enough, and it will eventually be accepted as the truth".

"Make a statement that can neither be proven nor disproven, and you will remain relatively safe in your assertions".

The only blind faith I care to stake my and my families future on is my faith in GOD. For anything else, I'd like to see a little more convincing reasoning than the same worn out drivel being preached about "silver shortages". When diminishing supply stories stopped working, we started seeing more and more COT figures, technical analysis, wild suppositions, and anything else that could coufuse the situation and make the case for silver "sound good". The only thing that doesn't seem to make silver sound good as an investment these days is a good old fashioned dose of REALITY.......the reality that silver remains cheap, and for a likely reason. Wishful thinking doesn't equal scarcity.