Every couple weeks a news story will drop regarding some other stupid thing our government is doing that is destroying the value of our currency. And with almost complete certainty, within a few days another article will pop up somewhere claiming that Gold and Silver are on the verge of skyrocketing to unimaginable highs. The most recent of this put silver at around $250/oz. While I would love nothing more than to have my silver holdings gain 800%, with a little research I’ve found this is highly unlikely. Now this post isn’t intended to argue the intelligence of our political overlords, or make some bold claim regarding how safe the US dollar is as an investment, but rather provide a few things I’ve thought about on why these articles are pretty much bogus. So here’s the list:
#1 History Tells Us Otherwise
If you were to look at the spot price of Silver today compared to 50 years ago, you would think Silver is at an all time high. Well, that’s only half true. While the number next to the $SLV ticker symbol is larger than it ever has been, that number doesn’t account for inflation at all. According to the inflation calculator:
“What cost $24.00 in 1833 would cost $561.95 in 2012. Also, if you were to buy exactly the same products in 2012 and 1833, they would cost you $24.00 and $1.08 respectively.”
So what is my point? Well that $24 number is the current spot price of silver. In 1833, according to kitco’s charts, Silver was at around $1.29/oz. Paying attention to that last line about costs in the respective years, Silver then, hasn’t really changed in price at all. Silver is still really only about a dollar or so an ounce, and it’s that our paper money is simply worth significantly less. So what does that mean really? Well aside from the fact that the dollar has less buying power, and silver simply gets you more monopoly money than it used too, not much. Silver has been historically a very cheap commodity. That hasn’t really changed much.
The next part of the history lesson (albeit a very brief one), is people often refer to this magical 16:1 ratio in the value of Gold to Silver, and why that gives us some sign as to the upside of silver. Where did this number come from, and why should you care? Simply put, this was the going trade rate of a Denarii to an Aurei or some number of Silver coins into Gold coins. The exchange rate was roughly 16:1. This practice has continued off and on depending on the availability of both metals and personal preference since.
As far as the US is concerned however, this ratio hasn’t been as such since around the mid 1800’s (1861 to be exact) as seen by these two tables:
You can see if you do the math that Silver has traded anywhere from 12:1 up to 65:1 with Gold over the last 200 (ish) years and in most cases averages around a 25 to 30:1 ratio.
So what does this mean really? Well mathematically it means that when gold hit its all time high of $1895/oz, if Silver actually traded at 16:1 it would still only be $118/oz. Don’t get me wrong, that nothing to scoff at, especially if you bought Silver when it was around $4/oz, but still, in order for Silver to hit that $250 mark, not only would we need that magic ratio, Gold would have to be around 4,000 bucks an ounce. Bleah! In reality, if we use the more historical average, at Gold’s Peak of $1895/oz, Silver would generally be at around $66/oz. So from this little nugget we can draw that the current top end of Silver based on the last 170 years or so is around $66, which is clearly not close to the $250 we so hoped for.
#2 Market Manipulation
One of the most common themes amongst metal bugs is the complaint that the Precious Metals Market is being terribly manipulated. True. There is plenty of evidence to suggest such things if you do a quick Google search. My question is though, what makes you think that is going to stop anytime soon? People often assume there is a top end to greed. That maybe one day, after the hateful rich folks have gobbled up enough Gold and Silver, they’ll stop manipulating the market and let the price go to where it ought to be so they can be even richer than they are now.
The problem is that assumption is foolish. Most people who only see green aren’t generally thinking about the long term. They are trying to grab as much cash as possible and they do so by tanking the price and raising it by a small margin. Their profit comes in volume, not in value. If you can ensure you get to buy 10 tons of Silver at $18/oz and sell it at $25/oz, and have the ability to repeat endlessly, there are no reasons to ever let Silver (or Gold for that matter) reach their actual dollar value. You’re getting paid, and you are doing it with very little effort. Those in charge of the manipulation don’t care if the average Silver bug makes any money. You the home-gamer can’t buy at the level they do, so the couple dollar difference means nothing. As such, with very little incentive to change their ways, this pattern seems likely to continue almost indefinitely. I mean really, if it ain’t broke, don’t fix it. Right?
#3 The life of an Industrial Material is Short Lived
I could also label this section, “Technology is a thing” and the point I think is still there. Since the beginning of the computer era, Silver has played a valuable role in the construction of electronics for its ability to conduct electricity. This is also why it’s been used in things such as Solar Panels and other such materials. Unfortunately for Silver, technology and innovation both still exist, and the need to find better and cheaper options is always upon us. “So what?” you may say. “Silver is still top dog in those departments.” Well, not anymore. Introducing Graphene, the miracle material!
If you didn’t bother to read the article, basically it does everything Silver does, but better, and cheaper. Currently it is still being explored and isn’t taking over in the next few months or anything, but within 3-5 years, Silver will likely lose most if not all of its value as an industrial material.
#4 Old and Busted vs New Hotness
One of Silver and Gold’s staple uses has historically been for crafting jewelry. Due to their intrinsic beauty and rarity, they make for a nice way to flaunt how much better you are than all your friends. Sadly, it’s becoming the case that Gold and Silver are losing their luster with new metals such as Platinum or Palladium, which have an equally beautiful look, and about a gajillion times the rarity. Since like in the earlier section technology and innovation haven’t ceased to exist, the ability to shape and work with these metals is becoming cheaper and more readily available every year. What does this mean? Well, think of it this way: If you want to impress your gal with some fancy jewelry, are you gonna go with Silver, in which the intrinsic value of the ring (or whatever) is about 20 bucks (given their weight and purity) or Platinum, which is worth about 200 bucks for the same size and weight? Clearly one is much better for wooing than the other, right?
Of course it can be argued that not everyone can afford these top tier metals and so Gold and Silver will always have a place as they are more affordable. True, but as things tend to go historically, the old and cheaper options tend to phase out after some time. Don’t believe me? Take a look back at the Roman Empire. Bronze and Iron jewelry was quite the deal for the lower and middle classes. Over time though, as things like Gold and Silver became more obtainable, the Bronze and Iron rings and bracelets fell out of favor and eventually vanished for good.
#5 Limited Supply Doesn’t Equal Unlimited Demand
Much like in the earlier sections, it is important to note that precious metals don’t follow the traditional supply and demand model of price. While it’s true that whatever there is for these metals is all there is, and all there ever will be, that doesn’t necessarily entail they should have a high price. Or in other words, rarity doesn’t have to equal cash. I own lots of things that are rare, or one of a kind. They are worth pretty much nothing. Why? Nobody else would ever want them. Once Silver loses its value as an industrial metal, its desirability as jewelry, and its need for a backup currency (maybe we’ll move to bottle caps like in fallout. Who knows?), the fact that there isn’t any available won’t mean much at all. If nobody wants it, then who cares how much there is of it?
While I would love nothing more than my Silver to skyrocket in price to $250 or even $500 an ounce, I find based on a few seemingly reasonable observations, that it more likely than not it will float between 18 and 70 dollars before eventually dying off and becoming altogether worthless. On a final note, no I won’t sell and or give you all my Silver. Just because I think it will always remain cheap, doesn’t mean I can’t hope I’m wrong. Also, if you’re interested in more of my ramblings, find me on Google + or hit me up on twitter. The links are all about the site if you’re having trouble.