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The Silver Trap

Friday, 08 February 2013 00:00 Written by  Matthew Conlan

Confirmation bias negatively impacts human thinking on both sides of the sound money debate. If nothing else, I hope I have conveyed through my past articles that I’m a believer in sound monetary principals and a strong advocate of precious metals for personal and financial survival during the upcoming storm. I hold that for those on the other side of the aisle, Keynesians who have placed their faith in the folly of fiat currency and widely accepted investing options during this period (stocks and bonds), will be economically ruined over the next few years. I believe that one can even prosper during and after the impending upheaval if well positioned financially with physical specie and perhaps some well chosen mining and oil stocks. But it is also instructive to recognize the mistakes being made by those who share similar views so I and my readers do not commit the same errors. After all, it would be tragic on a personal level to have been so right in predicting and preparing for financial calamity but still to have lost out because of some overlooked assumption or nuance - right church wrong pew, so to speak.

So, while I can pen this article in a couple of hours, it has actually taken about a decade to write. In the early days of my conversion to the belief in precious metals, I saw silver as an even greater opportunity than gold for prosperity. On the surface, the arguments seemed compelling: not only has silver historically been a monetary metal alongside gold, but it is an industrial metal whose uses are growing year after year. While all the gold ever mined in the whole of human history remains accessible (anywhere from a total of 170K-175K tons depending on which report you read1), silver has been steadily consumed through industrial uses at a rate that leaves less recoverable above ground supply than gold (1-2 billion above ground ounces again depending on various estimates). Less aggressive silver enthusiasts say the ratio is closer to 4:1 favoring above ground refined silver over gold – still an impressive figure imparting scarcity and undervalue.

The industrial angle gets more interesting when explored further. Of all the elements, silver acts as the greatest reflector of light and carrier of electricity, and the second greatest (next to gold) in ductility. Silver is a natural biocide with multiple medical uses. And while silver’s traditionally largest non-monetary and non-jewelry use (photography) has been waning for years due to widespread digital photography, the slack has been more than amply picked up by industrial and modern, hi-tech applications: electronics, ball bearings, batteries, catalysts, smoldering, nanotechnology, RFIDs etc. The list is impressive. Silver is truly indispensable to the modern world.




Traditional monetary use and rising industrial consumption - sounds like a great 1-2 punch, right? Not only will the continued erosion of the World’s fiat monetary systems increase the demand for silver, but consumption of above ground mined supply will continue to increase thereby creating a supply squeeze that will send prices to the moon at some indeterminate point in the future. The most important concept I want to convey in this article is that as silver finds more industrial uses for which it is consumed in greater yearly quantities, the more it becomes LESS of a viable monetary metal and closer in function to platinum group precious metals (platinum, palladium, rhodium, etc).

The counterintuitive truth is that gold’s strength as pure money derives from its lack of industrial utility. Only a small percentage of yearly supply goes to electronics or other non-recoverable uses. This simple fact is often lost on those who focus on supply/demand fundamentals: gold’s supply remains relatively constant with a steady nominal yearly increase from world mine production of about 1¾% (roughly 2700 tons vs. total above ground supply of 170-175K tons2). A world monetary system of value must have a degree of predictability for which there is a steady, identifiable supply.

At this point, I need to explain that this is not an article positioning against the ownership of silver. Quite the contrary:first and foremost, once basic survival necessities have been satisfied, the conscientious prepper should acquire a modest amount of silver for barter purposes. Pre-dated 1964 U.S. dimes or quarters are 90% silver and widely recognized, making them ideal for smaller transactions in a sustained disaster environment or societal breakdown. How to define “modest” is a relative decision that the pepper should base on his personal risk analysis of how long and to what degree impending challenges will last. For the preservation of capital and unspent resources, however, silver has proven itself extremely unpredictable and volatile relative to gold. It is possible that silver might outperform gold on a percentage basis during brief periods due to this volatility, but not for an extended time. Silver is riskier than gold, not only because one can lose money during and after an economic crises environment, but because one is less likely to capture the potential gains being heralded by hard metal enthusiasts. My personal recommendation is to maintain a gold/silver investment ratio of about 2:1 in physical metal with a bias towards gold. When I use the term “investment ratio”, I am referring to the total dollar value of one’s personal physical silver and gold holdings, not the total weight since the price ratio is so much higher for gold on a per ounce basis.

Make the Trend Your Friend

Another statistic often quoted by silver bugs is the traditional silver/gold price ratio of 15:1. When the U.S. was on a bi-metallic standard until 1873, this ratio was held by monetary law and has become perceived as a natural price law. Indeed, the U.S. under the guidance of Alexander Hamilton set the price ratio at 15:1 in 1792, which had been used in Europe since the late 1500s. This only differs slightly from the traditional Roman ratio of 12:1 or 12.5:1 and the French ratio set in 1803 of 15.5:13. Consider another ratio that seems to support something closer than the current silver/gold price ratio of roughly 52.58:1 (COMEX $31.82 vs. $1673.10 as of 2/5/13) – the annual total worldwide silver to gold mine production which is 9:1. So, not only is above ground silver being consumed industrially while gold usage is minimal, but only nine times as much silver is being pulled from the ground every year as its yellow counterpart. By this thinking, diminishing above ground silver supply relative to gold points to a much narrower price spread and ratio between gold and silver.

While I acknowledge the potential for a violent price spike here, this will more likely pattern itself in the manner of an industrial metal, such as palladium in 2000 when Russian supply shortages due to politics combined with Ford Automotive Company stockpiling of the rare metal led to a rapid increase from $300 to $1100 per ounce. Prices plunged in 2001 partly due to metal substitution to platinum for catalytic converters and the Russian export quota problem finally working itself out. The fear of being denied supply cost Ford $1Billion4. This is the type of supply squeeze that commodity traders live for but are often very short lived and unpredictable.This is also where the retail investor is eaten alive. While silver is vital to many applications and its investment advocates claim substitution would not be possible for most of those uses, this claim is often falsely made by supply/demand fundamentalists about other commodities. When it comes to high prices for goods and commodities, the cure is always high prices. Again, this type of supply challenge may briefly lead to a temporary spike in the silver price, but militates against it performing as a monetary metal that will enjoy a longer term revaluation when the fiat system collapses.



In their advocacy to demonstrate gold’s ability to preserve value relative to fiat currency, gold bugs often remark that throughout history, an ounce of gold has maintained enough purchasing power to buy a fine men’s suit. Such thinking clearly cherry picks data points to support an easily disproven argument, yet is repeated time and again. While gold would have purchased a fine men’s suit at $850 an ounce in 1980 and $1673 an ounce today, what about 2001 when the yellow metal was priced at $270 or at $380 in 1992? Suffice to say, gold’s value, unlike fiat currency, can never go to zero. On the silver side, in another example of confirmation bias, silver bugs will often remind that the last time we witnessed the 15:1 ratio was very briefly in January of 1980, when we were experiencing another economic crises and national malaise which was finally brought to heel under the direction and political courage of Fed Chairman Paul Volcker. Therefore, adherents reason, it will happen again during the next crises. Yes, silver did experience an amazing rise during the 1970s, briefly touching $50 on 21 January, 19805. While gold ascended above $850 that same day6, I would argue that the rise in silver would not have been nearly as impressive were it not for the one hundred million ounce silver position the Hunt brothers had taken on the COMEX7. This is perhaps one of the most famous examples of market manipulation, yet silver proponents cite this as evidence that we will return to the 15:1 ratio.

In fairness, I do expect the silver/gold price ratio to close significantly from the current 50:1-60:1 range, but not to the degree and extended timeframe that would warrant long term physical silver holdings in lieu of gold. These movements should be viewed as opportunities to swap investment silver for gold when the aforementioned price ratios reach predetermined marks. Personally, I plan to swap ¼ of my silver supply at 40:1, ¼ at 30:1, ¼ at 20:1 and to keep the remainder for a potential spike higher. These ratios are not set in stone, but should illustrate a general idea as to how to position oneself as things deteriorate in the world economy. I have serious doubts that the ratio will even reach 20:1.

36 Year Gold Silver Ratio

Other arguments seem to lend further credence to the narrative of silver’s outperformance as an investment vehicle over gold but actually work against it. Silver bulls often mention the fact that 70% of mined silver comes as a byproduct of mining another alloy (copper, gold, etc.) which contributes to silver supply being somewhat inelastic during a demand spike because of the lack of primary silver mines which can ramp up production enough to meet increasing demand. True, there haven’t been many primary silver mines relative to the amount of silver produced annually. The problem with this argument is that it doesn’t allow that the current low price of silver (COMEX $31.82 as of 2/5/13) is the reason why. There exists the potential for many primary silver mines worldwide but feasibility studies have indicated they would not be profitable at the current price structure. Again, I’m not suggesting that silver is a bad investment or that silver won’t appreciate handsomely during the coming storm, I’m merely proffering that silver exists in great underground quantity waiting to be mined AT THE RIGHT PRICE. Gold is quite a different story.Geologist Keith Barron, founder and Exploration Geologist at U308 Corp., believes we have reached the point of “peak gold” as five million ounce gold discoveries are becoming quite scarce8. Even where there are high concentrations of gold, such as the Mponeng deposit in South Africa, feasibility, permitting, and labor costs are so high it can take 10 years and $200M to sink a mine shaft two miles underground before the first alloys are processed. Yes, at the right price gold production has been increasing, albeit only somewhat, and at much greater cost and effort relative to silver.    

Here’s where I need to reference another example of confirmation bias by one of the most prestigious silver proponents, Ted Butler, who has been writing and studying the silver market and its paper manipulations on the COMEX for over two decades. In early 2005, Butler wrote an article about shortages of underground silver as based upon the yearly released figures from the United States Geological Survey (USGS9). According to the 2004 annual USGS figures, 20,000 tons of silver are annually mined worldwide but there exists a 270,000 metric ton reserve (identified) and a 570,000 metric ton resource base (estimate) which implies worldwide production timeframes before complete resource exhaustion of about 29 years. A very compelling statistic: at those 2004 production rates the worldwide supply of silver would be completely mined within three decades. This would also happen before any other element. The problem is that had Mr. Butler performed even the most basic corroborating research on the same USGS website, he would have noticed that they had been reporting virtually the same reserve estimates for years. Currently, the earliest posted silver report on the USGS website has the figures for 1995 and lists a 280,000 metric ton worldwide reserve and a 420,000 metric ton resource base. Yes, the resource base actually increased over the 1995-2004 timeframe despite nine years of depletion. The most recent report (2013) lists nearly doubled worldwide silver reserves of 540,000 metric tons despite increased yearly production of 24,000 metric tons10. The USGS hasn’t posted a resource base estimate for silver since 2009, perhaps as a tacit acknowledgment that they have NO IDEA what the unidentified worldwide silver numbers really are. It never ceases to amaze how some advocates dismiss government figures as being false or doctored are quick to quote them when they support their theories.

Although this has been somewhat lengthy, I have only covered high level concepts addressing the silver argument and hopefully avoided going too far in the weeds. I have tried to be a dispassionate observer regarding gold vs. silver over the years and have no agenda regarding which outperforms the other. I merely want the majority of my investment capital in what appreciates the most while minimizing risk. The final argument I need to present in favor of gold has no hard data but is a valuable concept that will play a major part in determining this drama’s outcome:gold is the “metal of kings” and highly regarded not just begrudgingly by central bankers but also by the biggest and oldest money concerns on the planet. Russian Oligarchs, Middle Eastern Oil Concerns, European and American Old Money, as well as moneyed interests of the ancient Chinese and Indian cultures continue to silently acquire gold in great quantities. Though the “Powers That Be” cannot stop, but only forestall the collapse of fiat money and the unwinding of the 80 year debt cycle which is imminent, through size and muscle they can determine what the new monetary system will look like so long as it is based on value. They will go with gold. Do not expect a silver or bi-metallic standard. Yes, silver, the “poor man’s gold” will survive in a doomsday environment as barter for day to day exchange, which is why I would advise every prepper to first have a “modest” amount of junk silver for such purposes. Beyond basic survival, however, preppers should look to the yellow metal for preservation of investment capital and even the chance to prosper in the next turning.

Actionable Advice

1) After basic preparation needs have been fulfilled, every prepper should acquire a modest amount of “junk silver” for barter transactions.

2) For investment capital in precious metals, consider a ratio of 2:1 (2/3 x 1/3) by value, not weight, in favor of physical gold over physical silver.

3) Avoid gold or silver based ETFs. If you can’t see it and touch it, it might not be real.

4) Consider trading out of silver and increasing your gold position when the silver/gold ratio by price tightens. Again, I plan to swap ¼ of my silver supply at 40:1, ¼ at 30:1, ¼ at 20:1 and keep the remainder for a potential silver spike higher.













Disclaimer: I am not a financial advisor and encourage everyone to perform his own research before acting on any investment decisions.


Last modified on Friday, 08 February 2013 20:56
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