-- Posted 14 August, 2009 | | Discuss This Article - Comments:
The following is an interview I did recently discussing the gold/silver ratio. This topic seems to surface from time to time and Tom Jeffries and I explored it together.
Tom Jeffries: David Morgan is one of the worldís foremost experts on silver. I would like you to check in with Davidís excellent Web site, silver-investor.com. Thatís where you can check out Davidís monthly investment newsletter, The Morgan Report (full disclosure: I read it every month myself). And there is a ton of excellent resources for the investor of all stripes.
You talk many times in your lectures, and youíve talked in The Morgan Report recently, about something called the gold/silver ratio and where itís going. Can you talk a little bit about that?
David Morgan: It is a controversial subject. There are a lot of people who donít put any credence into it at all, there are some people who put a whole lot of credence into it, and then there are people, like me, who absolutely put some credence into the ratio.
The basics of it are thisóand I like to go for the long-term version, soóstarting at the 12th century or so and going to present time, if you looked at every one foot in length being 100 years (or one century), you would see throughout the entire timeframe that you would have several feet in length and it would only be in the last 19 inches of that chart where the ratio got above 16 to 1. (Note: a discussion of this is done by Franklin Sanders in his book Silver Bonanza.)
In fact, the ratio from the 12th century to roughly the 17th century was about 12 to 1, which is what I call the ďnatural ratioĒ at that time, and I define the natural ratio as the amount of silver to gold in the earthís surface. Right now itís less than 12 to 1, having dropped down to about 8 to 1, which means that thereís about eight ounces of silver in the earthís surface for every ounce of gold.
So thatís the natural ratio, and that ratio held for hundreds and hundreds of years with the free market making the determinationóamazing! Then, Sir Isaac Newton monetized it at a ratio of 15.5 to 1 after England was having a terrible time with their fiat money system. Newton came in and put them on a gold standard and then, with his brilliance, he picked a number basically based on the marketplace (at that time), which determined that the correct ratio of silver to gold was 15Ĺ ounces of silver to 1 ounce of gold.
And thatís what we called the monetary of the classic ratio, and that held roughly from the 17th century for hundreds of years through about the 1873 timeframe. Then there was The Crime of 1873, which we donít have time to go into, but that was roughly where silver was demonetized in the United States, and after that, youíve seen the ratio undergo some really wide swings.
Itís gone up as far as 100 to 1 a couple of times, and weíve seen it just kiss the classic ratio of 16 to 1 for a day. In modern times, meaning during the last big run-up in January of 1980, it got back to classic ratio, but again, it was only for a day or two at the most. And then the ratio dropped off.
So having given you all that background, what does it mean? For some it means you can trade the ratio, which is something that I do personally. Secondly itís a good indicator for the overall direction of the market as far as Iím concerned. When silverís leading gold, weíve got more momentum in the metals than when itís not, and silver has basically outperformed gold since 2003 until recently. In other words, in the ratio from 2003, the bottom of the silver market, and when gold was at $252 in 2000, silver went from the 80 to 1 ratio down to about 55. Currently it is around the 65 to 1 level.
And it was working its way even lower when we had this credit crisis surface, which didnít surprise me. We got a big spike on the ratio and actually it got to around 90 to 1óagain, very temporarily, maybe for a day or two.
I think it shows that silver is still undervalued to gold, but Iím open-minded enough to think that maybe something else is going on. In an absolute all-out deflation, which would be the betterógold or silver? The preponderance of evidence is that gold does better. I wrote a paper on this; it was in The Morgan Report, and I also did a couple of speeches on this subject. The record is mixed as far as how silver does in a deflation.
Gold is pretty much known to do well in deflations, and this is all history. And because it is history, it doesnít absolutely guarantee you that the next time around gold will do great in a deflation, but it certainly implies that it will.
As far as silver is concerned, there have been times that silver did better than gold in a deflation, and many times where it did not. But overall itís done fairly well and it held its purchasing power, so even in a deflationary scenario I wouldnít give up on silver. But as far as what will it do, if we look at it today we would say gold has actually done better than silver here in the last several months, because the ratio has gone from the 55 to 1 back to around the current 65 level.
Regardless, the overall perspective would be, how is silver doing against all other financial assets, including gold? And the answer to that is, essentially, gold has done best against all other financial assets, the general equities, the mining stocks, housing sector, bonds; and silver has done better than the base metals and most other sectors.
Silver is partly industrial and partly monetary and you can argue all day if itís both or not. Iím absolutely convinced that itís both. Iíve never argued that silver is just money. I have argued very strongly that silver is money but itís not only money; itís certainly an industrial metal as well.
In summary, if [our readers] thinkóas I doóthat the main problem ahead is a currency crisis with the U.S. dollar, then I would urge you to study what silver did during the last period (most recent) during a prelude to a currency crisis. Basically, it outshone almost everything! The problem is people are too shortsighted and look out only so far, not realizing that once everyone understands that the death of the dollar is imminent, there will be a mad rush for the precious metals both gold and silver!
Mr. Jeffries: David, always a pleasure to have some time with you. We really get a kick out of talking with you, but also I also commend you, too, for the learning. We always have some great information.
And that concludes this weekís missive.
It is an honor to be.
Mr. Morgan has followed the silver market for more than 30 years. He wrote the book Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals; it is both a free site and does have a members-only section. To receive full access to The Morgan Report, click the hyperlink.
-- Posted 14 August, 2009 | | Discuss This Article - Comments: