The historic silver/gold price ratio was 15 or 16:1, but in recent years, silver is relatively cheaper ranging from about 40:1 to 80:1. On Jan 24th, 2003, with silver at $4.89/oz. and gold at $368/oz., the ratio is 75:1. This means that silver is currently undervalued, and cheaper than historic norms and thus it is a better investment than even gold if you want to “buy low and sell high”.
The supply and demand fundamentals for silver are extraordinary. There has been an ongoing supply/demand deficit in silver for 12 years. More silver is consumed by industry than is produced by mining and recycling combined. Some say this deficit reaches back 60 year, and has consumed virtually all the known silver ever mined since the beginning of the world. The annual deficit has recently ranged from 100 million to 200 million ounces per year. Annual supply is about 650 million ounces, and annual demand is about 800 million ounces.
Considering refined and mined known silver reserves, there is far less silver in the world than gold. About 150 million ounces of silver vs. 4000 million ounces of gold.
Most silver, 70-80% brought to market is mined as a by-product of copper mining, gold mining, or zinc and lead mining. There are very few silver mines in the world, since most are really copper of gold mines. Therefore, mild increases in the price of silver will not bring substantially more silver out of the ground. Much silver is consumed in photography; by Hollywood and medical photo imaging. There is so little silver used in each photograph, that price increases in silver will probably not reduce demand. With a relatively inelastic supply, and relatively inelastic demand, it will require a dramatic explosion is price to bring the supply and demand deficit back into balance.
Famous Billionaires have bought silver in recent years. In 1997, Warren Buffet bought 130 million ounces of real silver, due to the favorable “supply and demand fundamentals”, and although he bought as much as they would let him legally buy, his purchase was with about 2% of the value of his portfolio. Another billionaire who tried to follow in his lead would be unable to do so since there is less silver now available in the world to buy at the COMEX than what Buffet has, and less than that in know, reported silver reserves in the world. George Soros owns a large percentage of Aper Silver (SIL). Bill Gates owns over 10% of Pan American Silver (PAAS).
In the gold market, there has been a large increase in paper futures contracts, which are used to suppress the price. In silver, the relative amount of paper contracts is much larger. In other words, there are more paper shorts who will be caught in an impossible situation when the price of silver really begins to rise due to the fundamental supply demand gap. They will be forced to buy silver or go bankrupt. Either action will cause a dramatic rise in the silver price. If they default on the silver contracts, that will signal to the world the severe shortage of silver, and signal a great investment opportunity.
One of the cheapest ways to buy silver: You can buy U.S. coins dated 1964 or earlier, $1000 face value (4000 quarters, or 2000 half dollars, or 10,000 dimes), in a “bag” of “junk silver”, which contain 715-720 ounces of silver, depending on how worn the coins are. In the early 1980’s, when silver was $30-$50/oz., a bag of silver could be used to buy a house! Imagine buying the money for your next house for $3500 today by investing in silver!
You get so much silver for your money. A bag of junk silver weights about 55 pounds, and is the size of a bowling ball. If you invested $100,000 into junk silver coins, at $3500/bag, that would give you 28.50 bags each weighing 55 pounds, or 57 bags weighing 27 pounds each, or about 1571 pounds total. Could you imagine moving that much around your house if you have to move? Silver is so cheap it creates physical problems for investors today!
19 Reasons why it is a great time to buy gold
“Buy low & sell high.” Gold is at a historically low valuation. Adjusted for “money-creation” inflation of the U.S. dollar, gold is very cheap. If the U.S. gold reserve still exists, it would only provide about an ounce of gold to back every $32,567 dollars that have been printed or exist as electronic demand deposits in bank accounts, (M3). 8.5 Trillion dollars in M3 / 261 million oz. = $32,567/oz. for gold. Source of M3www.federalreserve.gov/releases/h6/Current/ $8.5 Trillion or (8,500,000 million) as of Nov. 2002 Source of U.S. Goldwww.fms.treas.gov/gold/index.html 261 million oz.
Gold is beginning to trend upwards, and has been in a bull market now for almost two years. Gold at $350 is up 37% from it’s low of $255 in July ’99 to Feb ’01.
Mining companies will probably reduce supply this year.
Recently, the large mining companies like Barrick, Anglo Gold, and Newmont have begun buying back their hedges, reducing the gold they sell forward at locked in prices. This means they wish to participate in any rise in the spot price of gold, and they expect gold to rise. Buying back their hedges also creates upward pressure on the gold price. As of the end of 2002, mines have 2700 tons of gold in hedges to buy back. Buying back this much gold will cause prices to skyrocket.
The supply and demand fundamentals are great for owning gold right now. About 4000 tons are consumed each year, and less than 2500 tons are mined each year. To keep the price low, banks and price manipulators must make up the difference with increased gold sales or loans feeding 1500 tons of gold to the market each year. This gold deficit cannot continue forever, the banks will run out of gold to sell, and when they do the price MUST rocket much higher.
Another default in gold contracts is imminent. See my essay, Impending Gold Futures Default. When gold contracts are defaulted on, the value of gold tends to skyrocket. The last time gold contracts defaulted was when the U.S. stopped redeeming gold contracts (called dollars) for gold in 1971.
There is a huge short position in gold that cannot be paid back at prices anywhere near to the prices that the gold was lent out. This will be the cause of the coming and imminent gold default. Some of these gold contracts are called “futures” or “options”, and are traded in New York at the COMEX. Most gold contracts, however, are traded “over the counter” and are not reported. The size of gold shorted into the market is upwards of 15,000 tonnes, or about half of the gold of the world’s central banks. The central banks typically report gold as still being “on the books” after it has really been swapped or leased out and is no longer in the vaults.
Those who have sold gold are finding it increasingly difficult to find any more gold to lend out. Default is coming. Those who own “paper gold”, or contracts, may not benefit financially during a default. They can change the rules for holding gold contracts at any time.
Keeping a portion of one’s portfolio in gold not only helps to reduce risk; it actually can dramatically increase returns. Gold stocks increased tremendously during the years after the great depression in the 1930’s. Gold stocks have rallied strongly since Jan. 2002. Several “unhedged” gold stocks have increased from 200% to 1500% since the year 2000.
Some people who have studied the gold market strongly suspect that the U.S. gold reserve is long gone. The last time our nation’s gold has been audited was in the 60’s. Even then, it was 1/3 the size it was at its greatest, down to about 7000 tons from 21,000 tons. Even if the 7000 tons were evenly distributed among the population of the U.S. who really own the gold, there would only be about 7/10ths of an ounce of gold per person in the U.S., no more than the 7/10ths of an ounce of gold there is in the world for everyone in the world.
The U.S. dollar is not immune to devaluation or inflation. It devalued 8% overnight in international trading at one point in the last few years. From 1913 to today, the dollar has already lost over 95% of its purchasing power. Is the last 5% somehow sacred or different? If anything, the trend will continue.
The dollar is overvalued. Many foreign nations have huge positions in U.S. bonds. If they sold these bonds, the dollar could plummet. Bonds are a class of investment that directly competes with gold as an investment choice. The bond market is huge, massive. The gold market is tiny. As the dollar decreases in value, the value of gold in dollars will increase. Talk of dollar devaluation is increasing rapidly in the media. The dollar is now falling.
The U.S. Trade deficit, which many are calling the “current account deficit” may help to cause the dollar to fall. They say that when a current account deficit reaches 5% of GNP, that typically, a nation’s currency will end up devaluing significantly to help balance out and end the trade deficit.
Alan Greenspan said the following in a speech to the Economic Club of New York on 19 December 2002: “Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from that of 1800. But in the two decades following the abandonment of the gold standard in 1933, the Consumer Price Index in the United States was doubled. And, in the four decades after that, prices quadrupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent over-issuance of money”.
In late November, 2002, Federal Reserve Governor Bernanke had the following to say when discussing the possibility of deflation: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.” He went on to say that, “If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation”.
Congress is not using standard accounting practices. They stopped counting interest on the debt as an expense, but it still has to be paid to those retired people and foreigners who own bonds. There never was a surplus under Clinton, because the national debt has always continued to increase every year. The real deficit (annual increase in the debt), due to the war on terror, and reduced tax receipts due to the current depression, is now estimated at over $500 Billion.
Congress will continue to spend more than it takes in taxes. This is a recipe for inflation. The war on terrorism and the spending appropriated for the twin towers has increased the money supply. This is inflation. The effects of inflation are increased prices. We will likely, therefore, see increased prices for gold.
China is in the process of legalizing gold ownership this year, and opening its gold market. China is growing increasingly wealthy, and, as all of Asia, their people have a very, very strong historic desire to own gold. Mongolia, the nation just north of China, spent 10% of its GNP on gold imports in 1999. It is estimated that China may demand as much as 500 tonnes of gold per year, an increase of 300 tonnes! October 28, China loosens grip on gold
JAPAN! Japan’s economy is continuing to falter, but they still have enormous buying pressure. The Japanese have plenty of yen that is worth multiple Trillions of dollars that is getting less valuable as time passes, while gold’s value is rising. Japan is BUYING GOLD IN A RISING MARKET. This is extremely bullish. Japan bought 10 tons of gold in the first two weeks of February 2002! Japan’s potential buying power exceeds U.S. potential buying power. If 1% of U.S. dollars, or M3, which is 85 Billion dollars, bought gold, at $400/oz., that would be 212,500,000 million ounces, or 6609 tonnes.