90:1+ Gold to Silver Ratio is on the Cards.

 

Listeners to our channel are aware that we are bullish silver long term. Most are also aware that we ae quite bearish of this precious metal short term.

We have produced many videos and podcasts on this subject over the years and have frequently commented upon it in our weekly updates.

We had to smile a little when we saw over the past few days some videos appearing stating that a 89:1 or 90:1 Gold to Silver ratio is madness and that it is not sustainable. In fact, some claim that it defies the law of nature because silver does not come out of the ground at a ratio of 90:1 compared with gold.

This is true it does not. The ratio has vacillated over the years varying considerably decade to decade.

Steve St. Angelo (quite a popular precious metal analyst, commentator who is very bullish gold and silver) published an article in Money Metals News on August 21st, 2017 where he quoted:

“According to the best sources there have been approximately 173,000 metric tons (5.5 billion oz) of gold produced since 1493 and 48.5 billion oz of silver. This turns out to be a 9 to 1 ratio, which is the same as the ratio of silver to gold in the ground.

If we take the latest mining figures from the Silver Institute and the World Gold Council for last year, (2018) we discover that approximately 3,347 tonnes of gold were mined vs approximately 26,600 tonnes of silver – a mining gold to silver ratio of just under 8:1

So, it is true, it is no-where near the ratio of 90:1. But please quote us the economic theory or law that states silver and gold has to be priced consequentially and in unison with the same rate that it is mined.

If these items were perfect substitutes one for another, we may be having a different argument.

However, they are not. The majority of silver is used for Industrial purposes – almost 60% of its demand is from Industry (though it fell slightly in 2018). Industrial demand for gold is miniscule by comparison. In general, Central Banks and Governments see gold primarily as a monetary metal. Very few, if any, Central Banks and Governments hold silver for such purposes.

Now for those who claim the ratio has to correct and soon- sorry you are wrong. It may, but it doesn’t have to. Clearly these people are unaware that it was only some 28 years ago that the gold to silver ratio actually breached 100:1 – it happened on 1^st February 1991.

It is also interesting to note the trend at the low end of the gold to silver ratio.

In 1970 the low was 15.39 :1

40 years ago, the low was 17.93 :1

30 years ago, the low was 37.88 : 1

The lows hovered in the 30’s – 20 and 10 years ago

5 years ago, the low was 62.15 :1

3 years ago, the low was 65.50 :1

1 year ago, the low was 75.54 :1

And today the gold to silver ratio stands at 89:1

One can see the increasing lows since 1970, and therefore one has to ask, that if the trend for the Gold to silver ratio is rising generally over a near 50 year period, or at least the lows are rising, why should it all of a sudden turn around now and especially when Central Banks are purchasing more gold than they have for many years and world economies are forecasting sluggish growth ahead which undoubtedly will affect the demand for silver for industrial purposes?

Ponder that question and those comments for just a moment.

Now, we would like to quote a most interesting commentary by John Barker an Investment Executive at Sprott Global Resource Investments Ltd entitled “No Silver Lining” Published on November 1, 2018 – on his LinkedIn page.

We shall have to quote him in full so that we are not accused of cherry picking and he does point out that his theory could prove wrong. But let’s just listen to it for a moment:

“Investors should be aware of the possibility they are wrong; prepare for that scenario and not rely on predictions, nor always follow “their” crowd. Gold may be viewed as long term (inter-generational) wealth; not silver, which I believe will approach the price of specialty salts or zero (for the sake of being dramatic). Below are two key aspects as to why this scenario might play out and a possible solution is offered.

Gold/Silver ratio is at all-time highs.

Possible Interpretation: Weight to value ratio is horrible. Gold rose to be the dominant money by a spontaneous order not a planned (forced) order. The key characteristic is its high value to weight.

There is a tremendous amount of wealth in the world and a store of value must have a high weight to value ratio in order to be efficacious.

Silver is extremely annoying to store; central banks would have to store 75-80 tons of the stuff for each ton of gold. Even retail buyers of $10,000 worth of silver are annoyed, they feel like Pablo Escobar putting 100-dollar bills in the walls. There is only so much silver I want to hide around the house or store in multiple safes.

Technology has also made this irrelevant, you can now buy gold by the gram with online accounts. Mints also offer gold in 1 gram increments and thin credit card sized bars you can easily divide. The doomsday message to own junk silver or quarter ounce pieces is only to increase the money demand for silver which is dying. If you need to make a quick escape are you going to drag the silver around?

Some quick math to deal with the ratio: If gold goes to $2,500 and silver ratio goes to 40:1, silver will be worth $63/oz. This is a 4-5-fold increase from today’s price and sounds good. However, what is your average cost is the proper question.

Silver is convenient to believe in and marketed for lottery type gains, fear and greed always work. The lack of “money” demand for silver is driving this ratio and there is zero reason to suggest there should be “reversion to the mean” for the sake of returning to the mean. There needs to be a logical explanation for the ratio to return to the mean; not just “what goes up must come down.”

2: Industrial demand for silver is also at all-time highs.

Possible Interpretation: Money demand is dead.

This is the law of demand, specifically the change in quantity demanded, in full effect. As the price of a good/service falls, more will be consumed, and more uses found. Just as quickly as silver had 1mn+ uses it will have 1mn less uses as price rises, or the law of demand is not valid.

Silver enthusiasts are suggesting there has been a change in demand (curve shift), this could be true. If it is then, “money” demand for silver is falling off a cliff. Partial evidence for this is the amount of novelty coins on offer or selling quarter ounce pieces of silver to buy breadcrumbs when fiat money dies. If industrial use was really driving the price of silver rather than holding it up, than the ratio would likely be closer to 8 to 1 better than the 16 to 1 when gold and silver was money.

The law of demand and supply will be the final dagger in silver. I do believe silver will do fine in the next bull cycle for precious metals, there is sufficient demand (risk capital) on the side-lines to push it up, although I would argue some % of this is in marijuana stocks and cryptos.

However; as the silver price goes up the law of demand will kick in and the industrial consumers will substitute out. The law of supply will also rear its ugly head and supply will hit the market and technology could find a permanent cheaper replacement for silver which will spell its doom.

Asking “why,” ad infinitum is useful and to be skeptical. I am open to alternative interpretations. One open question is how much silver investing is there in China and or India. I frequently hear these two markets are large consumers of gold. Why not silver if they are substantially poorer than westerners and silver traditionally played a role for smaller purchasers and is sometimes referred to as the poor man’s silver?

One way to own it is through leveraged physical, a contract for difference . You can obtain leveraged bets from 500 to 1 and up. With this mechanism you know, to the penny, your downside and you may wager what you like for potential upside.

The silver miners are another way to go, but then you have to deal with operation risk, political risk, geological risk, managerial risk, etc. A specially selected basket of silver miners should fare well in ANY silver price environment, not just silver $100. Prepare for the scenario of silver $15 forever or only $50.

The key message here is to step away from your crowd for a bit and ask “why.” I would consider not to own silver as a store of inter-generational wealth. Use gold. This is not a prediction, only a possible scenario to prepare for. Comments welcome and please anyone with info on India/China please point me in the correct direction.”

Now we are not going to pretend that we fully agree with all of these comments but they are indeed worth considering. The key point he makes for us is when he states:

“there is zero reason to suggest there should be “reversion to the mean” for the sake of returning to the mean. There needs to be a logical explanation for the ratio to return to the mean; not just “what goes up must come down.”

Here he is absolutely right in our view. If gold and silver were perfect substitutes and both purchased purely for monetary means, then we would be the first to say this GSR must change and soon. But they are not. Can we see a correction? Yes in time, but we also believe it is indeed possible that the ratio can also rise to 100:1 as it did in 1991.

90:1 is on the cards and soon – we predicted this months ago it may take some digestion to see it go above 92 or 93:1 but we can indeed foresee that possibility too. Equally to be fair we can foresee it fall back to the mid 80’s. we do believe however that a reversion to 50:1 let alone 16:1 or 8:1 will probably not be witnessed in our lifetime.

What do you think?