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:


  1. 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.

  2. Dave,

    What do you think about the news regarding financing for SDRG?

  3. 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.

  4. 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.

  5. 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!

  6. 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??

  7. 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?

  8. 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?

  9. 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.

  10. 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.

  11. 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).

  12. 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.

  13. 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!

  14. 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.

  15. 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.