Thursday, April 22, 2010

Got Gold Get Silver - The Coming Short Squeeze in Silver

One way to measure the potential investment upside of silver is to measure it against gold.  Right now the gold/silver ratio is around 63.5.  In the last couple years years it's been in the 80's and as low as 48.  At the peak of the last precious metals bull market in 1980, the ratio touched down around 17.  I fully expect that the gold/silver ratio will once again go at least as low as 16, which is a long term historical norm (i.e. 100's of years).  In Rome before The Fall, gold and silver were exchangeable at a ratio of 8.

Why is this you might ask?  Silver is poor man's gold, making it the 2nd best ultimate form of currency.  When gold is over $2000/oz, it will be unaffordable for most people to buy much gold to protect themselves.  But at that point if the gold/silver ratio is still around 60, the price of silver will be a much more affordable $33/oz.  I suspect that the ratio will be a lot lower by then. Furthermore, because the relative price of silver is much lower than gold, it is more "fungible," meaning it's more practical as a currency for everyday mundane use. 

The chart below - inspired by DC from NJ - is another way of measuring the relative strength of silver vs. gold.  As you can see, silver  has been in a steady climb in price relative to gold and is currently chewing thru a lot of "resistance," as defined by the two horizontal black lines.  Hedge funds currently like to "game" the gold/silver ratio, which may slow down the ultimate price movement of silver against gold.  However, given that the total market value of all the available silver in the world is small compared to gold, when the "poor man's gold" effect really takes hold, expect the price of silver to really rocket higher.  Eventually that ratio will decline to a level that is much more consistent with the ratio that held for centuries.

(click on chart to enlarge)

Here's two charts to add some historical perspective:

One other thought to keep in mind.  The Big Wall Street Banks are short paper silver in an unbelievably insane amount.  For instance, look JUST at the silver futures short position on the Comex, most of which is held by JP Morgan.  As of last week, the total net short position reported by the "commercial" category - largely a handful of NY banks - was 58,235 contracts.  This represents 291 million ounces of silver.  Against this, as of today, the Comex has 50 million ounces of deliverable silver.  If a little less than 20% of those holding long positions ask for delivery, the Comex will default.  The price of silver will do a moonshot. 

Now think about the ramifications if what the Comex reports as inventory is really part of the fractional bullion system in place that has been verified by lawsuits, GATA and even LBMA operators...I'll leave the rest up to you.  Suffice it to say that the last two times my fund took delivery of Comex silver, we had to wait several weeks before the bars showed up.


  1. Dave,

    You show two charts that go back 600 years and the only transient abberation of the G/S ratio is our own industrial age. I too am inclined to believe we will revert to historical norms. This portends a screaming Silver move.

    Joe M.

  2. Yup. And the aberration coincides with the disconnecting of gold from backing currency.

    I don't think we'll go back to the ratio of Roman times, but I think we'll touch down again somewhere between 16 and 30

  3. Somewhere the Hunt Brothers are drooling.

  4. Dave what sort of sick joke is this, now its widely acknowledged after the Madoff debacle and the subprime fiasco, the SEC have their heads shoved up their ass... The SEC for god's sake!!! The very people who are supposed to be enforcing the law. But NOOOO when the gold community talks about how the big banks are shitting on the precious metals with the complicity of the CME, we are labeled as cooks and "troglodytes" (lolz).

    The system is rotten to the core. Electing a different politician will change absolutely the f"k nothing, not Ron Paul not even JC himself can fix this stench of filth corruption pervading the system. I mean can you imagine JC's reaction with whats going on now, when He turned the tables on those small time money changer crooks 2000 years ago?!

    Just look at these headlines?!

    [The SEC's "Very Damning, Very Sad" Track Record: Simon Johnson and Martin Wolf Discuss]

    [Obama lectures Street bankers]

  5. Agree on all counts anliu. The system has been overtaken by thiefs.

  6. LOL Hopium. Are they still alive? I think Lamar actually owns the KC Chiefs. He's drooling from overpaying that QB they picked from New England LOL

  7. Now this is my kind of story! Hi Ho Silver, AWAY!

    Ok, I am already on vacation mentally.

  8. Spear fishing, snorkelling, windsurfing - it's better in the Bahamas. LOL. Outside reversal day to the upside today in XAU/HUI - not always perfect indicator, but technically is very bullish.

  9. Wait, you want me to spearfish a bull? Dave, now you have lost it!

  10. LOL. The only spearing I want to see right now is Denver spear a 1st round pick. They keep trading down, although now they've traded back up to 22. No clue who they'll take.

  11. What a great move by Denver. Clear the Pats best went that way! Thomas is a push off physical WR, I loved him.

  12. Ya. He's Brandon Marshall w/out the character baggage.

    I dunno about the Tebow pick. Intriguing at best...

    I was expecting the Broncos to reinforce their

  13. Personally I think we are heading to what the term is called the "Havenstein moment".

  14. No doubt Hopium. I take it you read Turk's latest piece. Turk is one of the best market analysts out there. He gave me input on my GLD report when I was working on it.

  15. Jim Willie's latest talks about a USD revaluation. Heard anything about the new whistleblower info? Gold is reacting to something.

    Joe M.

  16. Joe, I can't find any news that would have triggered this move. The point spread between the SPX and gold futures contracts has tightened in $11 this a.m. So money has moved into gold relative to stocks.

    Maybe a delayed move in response to the huge Treasury issuance announced yesterday for next week.

  17. Your views on this topic are really interesting and appreciable.


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