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FreeMarkets (42.09)

Silver Is VERY UNDER Priced [in gold]



May 05, 2011 – Comments (2)

You can do all the fancy analysis you want, but the fact remains that over the last five years, silver tracked gold but lagged behind.  In the last three months it has blown past gold (on a % basis) and it has recently dropped below $40.  So is Silver under or over priced.

Let's make a simple argument - assume that gold is fairly valued at $1,500/oz. (If you don't think gold is fairly priced, simply multipy or divide the value from my forumula below to find the price YOU think silver should trade for in dollars.

Since the ancient times it is estimated there is 158,000 tons of gold mined by man, and 1,300,000 tons of silver (SOURCE: gold / silver).  There is approx. 8x more silver than gold, which you could argue would put the proper price of silver at 12% of gold, or about $187.

One could also argue that silver has significant value in electronics (more so than gold) and obviously in jewelry (less so than gold).  It's value in industry may also prompt one to assume silver should be around $200/oz today (assuming gold is priced correctly).

One SHOCKING stat, most people don't think about, is that based on current world population, there is LESS than 7 oz of silver for every human being on earth (and less than 1 oz of gold).

BUBBLE?  I think not!

Now you need to help me. Here's what I can't figure out.  Why can I paste this image w/not problems, but the graph doesn't work?


 But this image (which you obviously DO NOT see) never appears (it's a graph .gif file).  I've tried bmp's, jpg's, and tiffs.  Also, how do people get video files embedded?


2 Comments – Post Your Own

#1) On May 05, 2011 at 8:34 AM, FreeMarkets (42.09) wrote:

PS: Neither picture showed up (even though one did on the preview)? :-(

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#2) On May 05, 2011 at 3:53 PM, rfaramir (28.63) wrote:

Demand for silver and demand for gold are largely separate. They are different commodities, useful for different things, so they are valued differently, since value is subjective.

I don't see where it is easy to find how much silver is "above ground," ready to be traded at the right price. Gold, while somewhat elusive, is much better tracked. Gold is hardly ever lost in manufacturing, at least not in any quantity. Some of it is even being recovered from past use in printed circuit boards. Silver is still not worth recovering from similar uses, and it has many unique uses which are also essentially irrecoverable.

There's disagreement (among sources I've seen) about how much gold and silver occur in the earth's crust, but it ranges from 15X to 25X silver:gold. Recent yearly amount mined is about 8X. Amount of yearly production that gets "used up" is much higher for silver than gold, I don't see good figures on how much more, but I'd guess around 25-70% silver versus 2-10% gold. (Note: jewelry use, is not "used up" for either PM. Although it counts as an industry 'use', it is almost always recoverable.)

It is clear that silver supply is getting tighter all the time (used up at a higher rate than it is mined). Gold supply is much more near constant, as it is mined at a higher rate than it is used up, the rest being stored and mostly available for trading (though there's no glut: investing demand remains high and yearly mining is a tiny fraction of above ground stocks).

So, it's clear silver and gold are different, and their supply is dissimilar. Why then are they even put in the same category? In a word: Money. While gold is more durable, they are almost equally useful as money, and both have been for thousands of years. They both have exchange value above and beyond their use value. And when people exchange different kinds of money, they are very interested in the exchange rate, hoping that it is either constant or whichever they are holding is appreciating. This tends to make the value of the two converge on the "right" ratio over time on the free market.

So what's the "right" ratio? I still don't know! :-) For one thing, we don't have a very free market in silver or gold. For another, both have dropped out of direct use as money for generations, so their use value still dominates their price, though exchange value is making a big comeback. The closer the fiat currencies get to death, more the exchange value of PMs will rise (as measured in those currencies and in relation to each other).

I long for the day the dollar is backed with 100% gold reserves (and fraction-reserve fraud is outlawed). But, realistically, that may not be in my lifetime. We may replace the dollar with a fraud basket (all fiat), a partial-fraud basket (with some commodities), or fractional commodity backing long before we get to the economic stability and liberty of an ideal free market money situation (gold or silver or both, I don't care much which, just not bi-metallism).

Lastly, exit strategy. We don't have to have one! Eventually, gold or silver or hopefully both will become money again. Paper money substitutes (generally more convenient than coin) will be directly convertible into and out of real specie money, so you won't need to "sell" your PMs at the "top" of the fiat market, you'll just *spend* them. If a particular fiat currency literally goes to zero, the price of anything else (a PM in particular) in terms of that currency will be infinite, so there won't be a "top" to sell at, and you wouldn't want what you got in return. So don't bother looking for one, at least not an ultimate top. Sure local discrepancies where one PM or the other is "too high" sell some of it and buy the other, if you dare to time the market (we all do to some extent). But the end I look for will be when the dollar is declared (again) to be X grains of gold (or Y grains of silver), exchangeable at your convenience. The only question is when, and how many dollars will have been printed by then, which, together with the audited quantity of gold the dollar backers own, will determine X.

Just so I don't weasel out totally, my predicted 'final' ratio of silver to gold will be between 8:1 and 20:1, both ends are defendable. I have no idea when. And it won't really be 'final' as gold and silver mines get discovered at different times and depleted at different rates. But it should become stable enough that we no longer have to watch it carefully. Someday.

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