Silver

Silver is looking interesting. It fell from $47.94 in 2011 to $15.20, spot, in early November 2014. This is after the 2005-2011 rise from $7.50 to $48.

This is interesting because there are three considerations for investing in silver. Each is based on sound reasoning, but has been eternally denied by pricing.

The fundamental case for silver is that it occurrs in the earth’s crust at a ratio to gold of about 16:1 to 18:1. Should the gold:silver price ratio be the inverse, something like gold being 17 times more expensive than silver? The Gold:Silver ratio is about 73:1. Either gold is horribly over-priced or silver is horribly underpriced. As a footnote, Bob Hoye has said that the ratio was seven to one in Biblical times.

Shortage or no shortage? Since the late 1800s the US has been stockpiling silver. The stockpile has dwindled and that is why silver was taken out of American coins and Silver Certificates were removed from circulation. The argument goes, that the price of silver has been priced downward into the future with ever increasing paper promises. This argument is very old and was around when I first became interested in silver around 2005.

At first glance, gold is the opposite. Most of the gold that has ever been produced has been horded. Little has been used for industrial production. If this were all there was to it, we could conclude that silver is even more rare in comparrison to gold than we thought. But, there are worrisome claims that gold stockpiles have been loaned, sold off, and double counted. So far as a ratio is concerned, we might not have any idea.

Inflation or deflation? Over the last century the US dollar has lost about 95% of its value. The main reason for this has been money creation through debt. While money can be wantonly printed into existence, it is more commonly debted into existence. A deflation could erase all of the infation that has occurred over the last century. In a deflationary environment, dollars would be better to hold. But in an inflationary environment, silver would be better to hold.

Economic contraction or expansion? A lot of silver is produced as a by-product of mining for other metals. So an economic expansion would produce more silver while at the same time spur more cosumption for industrial uses. The same reasoning applies in reverse for a contraction. So economic expansion is not likely a critical consideration for silver.

In summary, the reasons to buy or not buy silver, are as good now as they ever were. The only thing that has changed is the price. It is impossible to know for sure if the recent $15.20 price was pointing the direction for deflation and/or repudiation of the silver logic, or if it was the last chance for a real bargain that silver watchers have waited for, for such a long time. The link isBrotherJohnF’s commentary: http://youtu.be/ylLaZaZkf2U

I am not offering advice.  I am throwing out thoughts and hoping even more come back.

Please let me know what you think.

%d bloggers like this: