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Gold vs. Silver – Precious Metals Supply and Demand

Summary:
Is Silver Still Useful as a Monetary Metal? The price of gold jumped a whole twenty bucks last week. We imagine that the marginal gold bug is relieved to be rid of his gold, in this opportunity afforded by the highest price since early April. OK, all kidding aside, the price of silver went up a penny. The gold-silver ratio keeps hitting new highs recently (this is actually a long-term trend, frequently interrupted by strong rallies of silver against gold). Is silver losing its usefulness as a monetary metal? [PT] We now have a new high in the gold-silver ratio. This can keep going up forever, right? The silver bugs don’t mean to imply that silver is being demonetized. However, when they say that silver has been in deficit for decades,

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Is Silver Still Useful as a Monetary Metal?

The price of gold jumped a whole twenty bucks last week. We imagine that the marginal gold bug is relieved to be rid of his gold, in this opportunity afforded by the highest price since early April. OK, all kidding aside, the price of silver went up a penny.

Gold vs. Silver – Precious Metals Supply and DemandThe gold-silver ratio keeps hitting new highs recently (this is actually a long-term trend, frequently interrupted by strong rallies of silver against gold). Is silver losing its usefulness as a monetary metal? [PT]

We now have a new high in the gold-silver ratio. This can keep going up forever, right? The silver bugs don’t mean to imply that silver is being demonetized. However, when they say that silver has been in deficit for decades, they mean the stocks are being consumed.

If that were true, it would mean that silver’s stocks-to-flows ratio would be moving toward that of any non-monetary commodity’s ratio, such as oil or copper. Is it really true?

Some forces will tend to push in that direction. Digital gold accounts allow for small fractions of an ounce, thus solving one of the problems solved by silver. Small gold units like the Aurum, available down to sizes of 0.1 gram, also solve the problem.

We don’t think either of these eliminates the need for silver. Digital accounts are, well, digital. They do not solve the need to have the metal in hand. To redeem it, and take it home. Aurum, apart from not being ubiquitous to 7 billion people, also has a greater bid-ask spread.

For the wage earner, setting aside 10% of his weekly wage, silver is the most marketable commodity in the small—i.e. the most hoardable. If one is making $500 a week, 10% is about four silver 1-ounce coins or rounds. They heft nicely in the hand, and the frictional cost to get into and out of precious metal is lower than for gold of that value.

There is much current discussion of whether or not there is rising inequality, a growing gap between capitalists and workers. The Left is pushing this idea, because it supports their a priori conclusion: to tax the #$*&%! out of the rich. To equalize them.

The Right says no, poor people have iPhones and Netflix (in the US) or at least ample food in the rest of the world. The Right seeks to head the Left off at the pass. They think to deny the observation and hence avoid the prescription.

Readers know that we blame the Fed and its falling interest rate, for the rising (paper) value of assets and downward pressure on wages. In economics terms, each drop in the interest rate causes an increase in the marginal productivity of labor. Not an increase in productivity. The margin goes up, i.e., the hurdle.

We have an interesting data point in the rising gold-silver ratio. Those who would set aside some of their wages to buy silver are under pressure. There is less pressure on gold, whose buyers include many non-wage-earners.

Fundamental Developments

Anyways, let’s look at the supply and demand picture of gold. But, first, here is the chart of the prices of gold and silver.

Gold vs. Silver – Precious Metals Supply and DemandGold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose, to a new high over 89.

Gold vs. Silver – Precious Metals Supply and DemandGold-silver ratio: a new high for the move

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold vs. Silver – Precious Metals Supply and DemandGold basis, co-basis and the USD priced in milligrams of gold

There was a big drop in the dollar (the inverse of the rise in the price of gold, in dollars). Not so much change is apparent in the scarcity (i.e., the co-basis). The gold basis continuous had a bit of a move.

The Monetary Metals Gold Fundamental Price was unchanged at $1,372.

Now let’s look at silver.

Gold vs. Silver – Precious Metals Supply and DemandSilver basis, co-basis and the USD priced in grams of silver

Silver—both in terms of price and scarcity—is more volatile. And it’s easy to see the changes in the co-basis that correlate nicely with the changes in the price (of the dollar, measured in silver). When silver sells off, it is in futures. And when silver is bought up, it is via futures – predominantly.

The Monetary Metals Silver Fundamental Price was up a bit, to $15.46.

Let’s look at the gold-silver ratio. Not the price of it, which as we noted above was over 89. The ratio of the gold to silver basis, and the ratio of the gold to silver co-basis.

Gold vs. Silver – Precious Metals Supply and DemandThe ratio of the gold-to-silver basis and the ratio of the gold-to-silver co-basis

The ratio of the bases has come in a bit, but it is still right around the maximum achieved in the last few years. A higher ratio of the bases suggests that silver is likely to outperform gold.

This bears watching.

© 2019 Monetary Metals

Charts by Monetary Metals

Chart and image captions by PT

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

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Gold vs. Silver – Precious Metals Supply and Demand 
 

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Keith Weiner
Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He writes about money, credit and gold. In March 2015 he moved his column from Forbes to SNBCHF.com.

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