February 24, 2009
Silver - More Upside Than Gold?
About 10 years ago, M3 was about $4 Trillion, and silver was at $5 an ounce. By the spring of 2008, M3 exceeded $13 Trillion, and silver was at $20 an ounce. Relative to the recent increase in money supply, silver is as cheap as it ever was and we believe along with gold it is an opportunity of a lifetime.
The historical price ratio of gold to silver shows that about 15 ounces of silver would buy one ounce of gold, a 15:1 ratio. Today, the gold to silver ratio is about a 70:1 ratio (with silver at about $14/oz and gold at about $980/oz.) If the gold to silver ratio returns to historical levels within the next 5 years, from 70:1 to 15:1, you could potentially make almost 5 times more money investing into silver rather than gold.
More than all of the silver produced by mines each year is consumed by industry, jewelry, and photography which leaves little to no room for substantial investment demand. In our opinion, a marginal increase in investment demand will drive prices sky high. Think about it, when gold is becoming too expensive to be used as money and paper money fails, silver is the only thing left to use as money. We have consumed nearly all the silver in the world, we continue to consume more than we mine, and the world has totally abandoned silver as money. But whether you know it , or can accept it, silver is money. Silver is the only commodity that can be used as real money besides gold. The problem is most people don't know what real money is. Let us break it down for you.
To function as money, a monetary item should possess a number of features:
To be a medium of exchange:
• It should have liquidity, and be easily tradable, with a low spread between the prices to buy and sell, in other words, a low transaction cost.
• It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, or water are not suitable as money even though they are valuable.
• It should be durable. Gold or silver coins are often mixed with 10% copper to improve durability, and coins are made with ridges around the rim to prevent coin shaving or debasement.
To be a unit of account:
• It should be divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again, with a low percentage cost.
• It should be fungible: that is, one unit or piece must be equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.
• It must be a specific weight, or measure, or size to be verifiably countable. You must be able to weigh, measure, and count, your unit of account!
To be a store of value:
• It should be long lasting, durable, it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs, are not generally suitable as money.
• It should have a stable value.
• It should be difficult to counterfeit, and the genuine must be easily recognizable.
To be anonymous:
• Money should not be subject to government tracking
• It should be useable for purchases in a black market
• It should not require equipment, tools or electricity to use
• It should not require a mark, or image, to be valuable, but rather, be a just weight, and measure.
So, if you want to “make money”, you should try to acquire things that have the above characteristics aka “real money”.
Did you know the average one ounce of silver on eBay is selling for about $20 while silver is currently trading for only about $14 per ounce? This is an unbelievable 43% premium people are willing to pay on eBay for physical silver. This is an important sign that silver is undervalued and poised for a huge rally.
It is highly possible we could see silver move much faster than gold this year. If silver heads back to its historical gold to silver ratio of 15:1 and gold goes to $5,000 within 5 years, we could potentially see silver head to $333 an ounce. This is a 2,279% gain from the current price. In the shorter term if gold goes to $1,500 by the end of the year and the gold to silver ratio drops to 35:1, the price of silver could go to $42, a 200% gain from the current level.
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