The Golden Truth: The Gold/Silver Ratio Plummets

Friday, February 18, 2011

The Gold/Silver Ratio Plummets

The gold/silver ratio is an indicator with a few thousand years of track record. When ancient Rome was on a strict gold/silver standard and in its peak as an empire, this ratio was fixed at 8. For most of the balance of history up until the founding of the Federal Reserve in 1913, this ratio typically averaged around 15. Many of us believe that we will eventually see a GSR of 15 and maybe even lower. Here's where we are now:

(click on chart to enlarge)

You all can work out your own math in terms of price targets using a GSR of 15. I know we will see at least $3000/oz gold eventually (and I believe a lot higher but most of you would not believe my target range so I'll keep it to myself and close colleagues). But assume $2000/oz gold and and GSR of 20. That yields $100/oz silver. Not a bad ROI, so who cares if you pay $33/oz and it corrects to $30 before heading higher?

Silver has been ramping in price over the past few days. Given the degree of paper short interest vs. actual availability of physical supply to deliver - I'm referencing 1000 oz. bars and not 1 oz. bullion coins or lesser "junk" silver - it could get pretty "messy" to the upside in the silver market. Yesterday I was chatting with with a long-time expert in the precious metals market - and someone who I believe is as knowledgeable about this market as anyone actively participating now - who thinks that the house of cards that is the U.S. could potentially cave-in this year and the melt-up in the precious metals could be breathtaking. Of course, that will also lead to the implementation of unprecedented Governmental authority in this country and a lot of pain for most you out there.

For all of those who do not believe that the above scenario is possible in this country, I will resurrect a previous "Friday, enjoy the weekend" tune - Buona fine settimana a tutti:

15 comments:

AnonymousFriday, 18 February, 2011
wasn't 1980 an anomaly? The run-up caused by the hunt brothers led to a subsequent crash. It wasn't driven by macro fundamentals that are comparable over time. I don't see how you can use that period as a means for rationalizing such a low ratio is coming.
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AnonymousFriday, 18 February, 2011
Dave,

What do you think about the news regarding financing for SDRG?
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Dave in DenverFriday, 18 February, 2011
Anonymous, the "crash" was engineered by the Comex changing the rules and only permitting selling and no buying of silver futures and I believe they suspended deliveries PLUS Volker jacked interest rates up to 21%.

If you think 1980 was anomoly, then what about the 2000 years before 1900? The world was largely on a strict gold/silver standard for about 95% of the time before then.
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Dave in DenverFriday, 18 February, 2011
re: SDRG - I don't know if there is any news. Maybe someone is covering a short. I dunno. If you find anything please post it here.
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bobbiFriday, 18 February, 2011
poor anonymous, he has a job in the 'new' economy where he sits in his cube playing World of Warcraft with his on line BFF until his over lord gives him a carefully typed 14 point san serif memo to post at places like this

it's not just a job, it's a pretension!
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EconomicDisconnectFriday, 18 February, 2011
They upped margin requirements for some metals to 50% and silver STILL ran today! I was shocked, and on an OPEX day too, scary. Do they make silver plated bongs??
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AnonymousFriday, 18 February, 2011
Silver Dragon Resources Inc Closes $2.5 Million Financing
Thursday, 17 Feb 2011 04:58pm EST

Silver Dragon Resources Inc announced that it has closed a convertible financing of $2.5 million over a four-year period with Tonaquint Inc.

Dave: do you have any insight into why ECU was down today?
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AnonymousFriday, 18 February, 2011
Now silver is finally taking off have dumb companies like HL and CDE decided to hedge all their silver so they have no exposure anymore to the price. Or is the action in the stocks particularly CDE just shorts still in control?
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Dave in DenverFriday, 18 February, 2011
Thanks for the SDRG post.

Not sure about ECU but I an inquiry in to the one of the largest holders who watches every tick in the stock. Looks like someone decided to exit a position but I'll post any color I get.
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Dave in DenverFriday, 18 February, 2011
RE: hedging: Are you sure HL is hedging? The only time they've hedged that I'm are of has been when it was required by their bank lender and it was always only a partial hedge. If you have a news link that states they are hedging I'd love to see it.

CDE is another story. It's overvalued on a mkt cap to resource ratio basis and it has lame mananagement. The only time I do anything with CDE is I short it for a trade when it has price spikes.
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AnonymousFriday, 18 February, 2011
This doesn't say HL and CDE are hedging but it sure puts a floodlight on them in an article on hedging.

NEW YORK, NY--(Marketwire - 02/18/11) - After a volatile January, silver prices have been on the upswing this month, surging close to 10 percent and touching new 31 year highs as an increase in producer hedging has tightened silver supplies and boosted prices. Hedging programs allow producers to lock in current silver prices for future production, guarding against any potential price declines in the future. Banks which execute these forward sales borrow silver from the spot market, which reduces the physical supply of silver temporarily. On the downside, analysts warn that an increase in hedging could be taken as a bearish signal for silver prices as it directly increases selling pressure in the market. The Bedford Report examines the outlook for the Silver Market and provides research reports on Hecla Mining Co. (NYSE:HL - News) and Coeur d'Alene Mines Corporation (NYSE:CDE - News).
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Dave in DenverMonday, 21 February, 2011
Be careful with how much of what you read in the mainstream media that you are willing to believe, especially w/regard to precious metals. I would believe that CDE maybe doing some hedging because their management sucks. But I'd be shocked if HL is. And even if a company is doing some partial hedging at these levels, I wouldn't fault them. Mining companies are in a business to produce profits and cash flow and if you can guaranty a portion of your revenue stream, as a business you are supposed to do that. Silver be volatile even thoough we know it's ultimately going higher.

BUT as for media myths, just today it was brought to my attention that there was a rumor in London that the Company that Carlos Slim has huge position in was hedging via JPM. A long-time colleague of mine did some discovery and found out the rumor to be total bullshit.

It is in Wall Street's best interests right now to scare anyone they can into selling. When Wall Street starts to try and "scare" us into buying, that's when we start selling.
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JDTuesday, 22 February, 2011
Dave,

What do you make of this new scenario where the metals are outperforming the miners. Also the Majors are outperforming the Juniors. I know Faber came out recently and said over the short term he was more bullish on gold than silver and the metals over the miners. He didn't really give a reason other than he expected weakness across the board in stocks. Thanks!
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Dave in DenverTuesday, 22 February, 2011
Faber has been off the mark on the metals for as long as I've been doing this. I remember back in 2005 and gold was pushing 600 and he said gold would go back to 400 and then it's a buy. He was wrong. LOL. I don't listen to Faber - he's wind-bag who likes to hear himself talk.

I like the whole sector, i like the stocks here and like the GOOD juniors the most.
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AnonymousTuesday, 22 February, 2011
Still holding SDRG as I still think there is a chance of something big to happen on this lotto ticket. While additional financing doesn't guarantee success, in this case, SDRG really needed it. As far as Hazout, I too have been disappointed with him but hopefully he's being watched like a hawk with the new investors pouring in.

Charts look bullish and they had a nice follow after exploding on Friday. I'm not pushing people to buy this but if you own this stock already, I wouldn't be so quick to sell it either. Lots and lots of potentiAl with this property despite shitty management.
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Add comment

Why Gold?

Gold is the world's oldest currency. You exchange your fiat currency (dollars, euros, yen, yuan) into gold as an insurance policy against catastrophic Central Bank and Government policies which serve to destroy the value of fiat currencies and destroy democracy.

Gold can ONLY be considered an investment to the extent that it remains significantly and historically undervalued in relation to the fiat currencies against which its value is measured. Otherwise it remains the world's oldest currency and is completely free from the counterparty risk associated with currency by Government fiat (i.e. fiat currencies rely on a Government's "full faith and credit.")

Quote Of The Month Courtesy of "Jesse"

Unfortunately for Larry Summers, Ben Bernanke, and their friends at the BIS, they have not yet figured out how to print physical gold, silver, and other essential commodities, and the world is reaching the point where it might simply start ignoring the New York based markets with respect to essential commodities such as basic materials, oil, foodstuffs, and the like, as they become increasingly irrelevant, fraudulent, and Orwellian. And then where will the financial engineers be, except with no more excuses and no place to hide?

Here is the link to his entire commentary, well worth a read:

http://jessescrossroadscafe.blogspot.com/2010/07/gold-daily-chart-shock-and-awe-for.html

Great Quote From Jim Rogers On Govt CPI Reporting

JR: I mean, we have inflation now. If you go to the shop, whether it’s groceries, or education or insurance or health care, prices are going up for everything. The government lies about it in the US. Some countries lie, many countries don’t: Australia, China, India and Norway. Many countries don’t lie about it and acknowledge that we have inflation. Others lie about it, the UK and the US, but if you go shopping you know prices are up.

Q: Are you saying that the American Consumer Price Index (CPI) published by the US Bureau of Labor Statistics is a lie?

JR: In my opinion, yes, of course it is. Have you looked at it? They’ve changed their accounting several times in the past few decades. When housing was 20% to 25% of the CPI and housing was going up, they didn’t count it, saying rents weren’t going up, and then when home prices started going down, they counted it. It’s the same with many things. It’s staggering some of the tortuous reasoning that the BLS has used over the past 25 or 30 years. When the price of gasoline goes up, they say it’s not really going up because it’s better gasoline, better quality, therefore you’re getting more for your money. I mean, it’s endless, the stuff that they say and for some reason people sit there, although more and more people are catching on, and accept what the government says.

source: www.clusterstock.com

Quote of the Week

"The primary function of a Central Bank is to engage in the massive transfer of wealth from the middle class to the wealthy elite. The Federal Reserve was set up to do this with the blessing and support of Congress." - Dave in Denver

If you refuse to believe the above, please read "The Creature From Jekyll Island: A Second Look at the Federal Reserve" by G. Edward Griffin and then explain to me why the Senate voted down the Vitter Amendment and Congress refuses to pass a law requiring a full audit of the Fed, even though the Fed is using taxpayer-backed money to bailout Wall Street and Europe.