Doug Casey: Speculate on Silver, Not Gold

Guest Post by Doug Casey

The ratios between various commodities are absolutely important.

For instance, there’s a certain amount of substitutability between copper and aluminum for electrical conductors. So the price ratio between the two of them is important in deciding which to use.

There’s a ratio between the price of hogs and the price of cattle. People will buy one or the other, depending on the price ratio between them. This is true of all commodities. Prices are relative. And always changing.

Take another example: The price ratio of palladium and platinum is very important. Both are used as automotive catalysts. It determines when you use one or the other, because there’s a lot of substitutability between those things as well.

As far as gold and silver is concerned – let me be clear on this – there is no magic fixed ratio between them. The US government arbitrarily fixed the ratio between gold and silver at around 17-1 for almost 200 years – a bimetallic standard. That was foolish – but possible – in technologically simple times.

It’s a mistake because the market, not politicians, should determine ratios. So what should be the approximate ratio between gold and silver?

Some rough numbers: There are probably about 6 billion ounces of gold that have been mined since the dawn of history; most of that is still above ground, and available.

It’s not like copper or aluminum or iron, where it’s “consumed.” Gold is held, because its primary use is money. How much silver has been mined? In the Earth’s crust, there’s probably about 10-15 times more silver than there is gold. And that’s reflected in the annual production figures: roughly 80 million ounces of gold, 800 million ounces of silver.

But if there are 6 billion ounces of gold above ground in inventory, there is nowhere near 10 times that amount of silver in inventory above ground. At this point, there are probably only about 2 billion ounces of silver in inventory. It used to be almost on par with gold as money, but that’s changed. Now it’s mainly a specialized industrial metal. So it’s “consumed” in much the same way as copper or aluminum.

Incidentally, the amount of silver in inventory is now less than it ever has been, because not so very long ago – up to 1965 – there used to be 2 billion ounces floating around in US coins alone. It’s also gone from photography, which consumed about half up to about 2000. Its price has held up surprisingly well, considering its two major uses have disappeared, and production keeps going up.

Anyway, coming back to the point on ratios, what should the ratio between gold and silver be? Right now, it’s close to 100-1. So gold is expensive in terms of silver. Silver is cheap now; it’s an excellent speculation.

There are more technological uses developed for silver every day than for gold – because it’s cheap. True, gold is the most inert, the most malleable, and the most ductile of all metals. But silver is the most electrically conductive and the most optically reflective of metals. They’re both high tech metals, where new uses are being developed constantly.

The interesting thing is that silver is a much, much smaller market than gold. And when the public gets manic in a monetary crisis, silver is much more volatile, since it’s a much smaller market. People rush to buy gold and silver, which they think is one thing.

That’s a good reason to be in silver right now, when the markets are weak and it’s cheap. Another point that should be made is that almost all gold mines now are very profitable. In fact, production costs are dropping with the price of oil – which is a major cost.

But there are very few profitable standalone silver mines. It’s mostly a byproduct of gold, copper, lead and zinc. So if gold goes to $5,000 an ounce, which it will at some point, in terms of present dollars, there will be a lot more gold production.

But if silver goes to $100 an ounce, which I think it will, there won’t be an awful lot of new silver production, because it’s mainly dependent upon lead, zinc, copper, and gold production. So I think the play right now is probably in silver.

That said, it takes so much silver to be of value that I do my saving in gold, not silver. To put it in as simple a way as possible: gold is for saving, silver is for speculation.

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