The Fallacy of Gold and Primacy of Silver

The decade long flight of wealth from fiat currencies and naked stocks, to gold, as a safe haven to guard against economic chaos and worldwide depression, is a curious aberration of market speculation. Considering the vast amount of information available to those wealthy enough to be able to own gold, and the history of gold and silver as money to be used for purchasing consumables; one wonders why companies, banks, and persons of wealth, along with their financial advisors, are so poorly informed about the impracticality of owning gold as a potential emergency money for individuals and businesses; especially considering the current very distorted relative value of gold to silver.

Since I am more than sixty years of age I can reminisce that I grew up with silver money in my pocket, though I do not ever recall even seeing any gold money; and my parents, grandparents, and great grandparents all had silver money in their pockets, nor did they ever speak of having or using gold as money.

While silver was domestic money for more than 100-years here in the U.S., both as coin and currency backed by silver; and was used by consumers to purchase their food, clothes, and shelter. Gold, on the other hand, has been used by governments, banks, and international businesses during the past century to settle international trade accounts, and not as domestic money. Both gold and silver ceased to be used as money by banks and government by 1971. So buying gold to hold for an eventual use as domestic money to purchase consumables is incredibly silly, if not outright stupid.

Gold and silver have been mined, in the most recent century, at a ratio of about 10-ounces of silver for each 1-ounce of gold. In a hard currency economy where both metals would only be used as money and all production would be sold to governments to coin stable money, the relative price would be 10-to-1; that is, each ounce of gold would exchange for 10-ounces of silver. Yet the commodity markets have at this time (Nov. 2011) continually traded these metals in a range that is approximately 1-ounce of gold for 50-ounces of silver. In the past 20 years it has been as high as 1-ounce of gold for 100-ounces of silver; and as low as 1-to-30.

It is important for people purchasing gold and silver to question why this market is so skewed. First off, gold and silver are not used as money in the U.S. economy; nor does our government purchase or sell any significant amount of these metals annually, except in the production of non-monetary bullion coins. Consider that more than 50% of all gold mined annually is stored in bars or stamped into investment coins by several countries; while another large portion goes into jewelry and is relatively easily recoverable back to bullion. The world has accumulated more than 4.3 billion ounces of gold and the stock pile is growing around 75-million ounces per year. Silver is a very different story; for the past generation, more silver is consumed annually by industry than is mined.

Even though mining has increased the annual production of silver more than 50% in thirty years, worldwide industrial demand has increased even more; such that the above ground stocks of silver in the 1970's was around 24 billion ounces and has declined to between 18 and 19 billion ounces today; a large portion of which is not easily recoverable to bullion. Even if all the silver tied up in film, electronics, plumbing, military hardware, silverware, medical bandages, industrial catalysts, jewelry, anti-microbial clothes, etc., was available to serve as doomsday money there is still less than 5-ounces of silver available to each ounce of gold to serve as money. So 5-to-1 in quantity supports and affirms the current 50-to-1 price difference, right?

Actually, there is a lot of missing information about gold and silver. Because the market is always right, the 50-to-1 ratio has to be correct at this time, in this economy; the law of supply and demand can be manipulated, but it cannot be broken. Gold production is constrained such that a great deal of the above ground gold is mined and stored in a cave to cave sequestration by governments, banks, precious metal investment companies, and ETFs; all hoarding a lot of gold and some silver. In essence little new gold, relative to hoarded stockpiles, is available to be owned by individuals as bullion, while essentially all silver, both mine production and stockpiles is for sale to the highest bidder for industrial consumption. Gold is artificially high in price relative to its quantity above ground because of hoarding; which is done to promote a high price and facilitate price control. The markets in gold and silver are not free markets; supply and price are manipulated to benefit governments, banks, and industries. A great deal of newly mined silver is sold by miners at very low prices to benefit industry, presumably to gain help from the financial markets in having the gold market managed in such a way that prices are kept very high to benefit miners; and to give a false wealth effect to governments and banks that sequester gold. Considering that most of these large mining companies are publicly owned; the dumping of silver at prices as low as 10% of the spot price seems to disparage their stockholders unless there is a price benefit to their gold production side of the precious metal market.

The cave-to-cave aspect of gold comes from the vast system of caves made by miners to remove gold ore; refine a fraction of that ore into gold bars; which are to a large extent bought by governments, banks, and ETFs and immediately put back into concrete caves with thick steel doors, to keep it locked away as a hoard, and not likely to ever be used as money by citizens to purchase consumables. So if the 50-to-1 price ratio reflects the available amount of silver to gold, and if there are 18-billion ounces of silver that could be made available for exchange and consumption by markets, then there are only 360-million ounces of gold available for exchange and consumption by the markets. At least that is the quantity relationship supported by the lack of information to the users, holders, and investors of gold and silver. But this quantity relationship is false, since banks and governments have sequestered a little over 2-billion ounces of gold (about half of the mined gold), leaving 2-billion ounces or so to be held by individuals, businesses, and ETFs; and since several billion ounces of silver are sequestered in film, electronics, etc.; the amount of silver available to individuals as bullion is about 4-billion ounces; giving us a ratio of tradable bullion of 2-ounces of silver to 1-ounce of gold in the possession of private citizens, (this includes jewelry and bullion that could act as money). If silver is correctly priced at about $35.00 per ounce then gold should only command a price of two times greater or $70.00 per ounce; based simply on a supply foundation for price. Since the current price ratio is 50-to-1 this should lead us to suspect that the market is skewed by ignorance, misinformation, and probably disinformation through market management; which has created a speculative market in gold, in place of an investment market, which can only correct itself downward as individuals become more knowledgeable about the bullion supply and the more effective monetary use of silver versus gold.

There are some aspects of investing in gold that make it undesirable to own, should there be an economic meltdown. The first is that governments have the power to force those who possess gold to sell it to government at a price set by government. This was done in the U.S. by President Roosevelt in 1933, when private ownership of most gold became illegal; until President Nixon overturned this law in 1971. The price paid to those turning over their gold was $20.67 per ounce; while the following year, in 1934, President Roosevelt devalued the dollar 41% by declaring that the U.S. would exchange gold internationally at $35.00 per ounce. Why would anyone want to own gold when government can confiscate it and cheat the owner while doing so? Granted silver could also be confiscated by government, but because it is highly effective as domestic money and has many industrial uses, government would cause economic harm to itself by interfering in the use of silver as money in our economy.

An even worse problem for those who speculate in gold ETFs, ETCs, or purchase gold that is stored and managed by investment companies, is that they will never gain possession of the gold they have invested in; and therefore will not have any of the economic protection they were seeking when they bought into these investment scams. A full meltdown of the world economies could occur in a matter of days or at most a few weeks; and along with such a meltdown all forms of secure distribution of goods will fail; making it impossible to ship items such as gold and silver from any form of investment depository to individuals and businesses. Not to mention that in an economic meltdown all depositories of precious metals (which include all forms of precious metals investment companies) will be raided; and their gold and silver will be confiscated by governments in the political interests of those in power at the time.

There is a relatively new way to speculate in commodities like gold and silver called Exchange Traded Funds (ETFs). A precious metal ETF is run be a trustee organization that buys and sells a commodity like gold and also sells paper certificates that act like stock in that ETF. The trustee hires a bank to be the custodian of its gold; to store it and to receive additional gold when the trustee buys, or deliver gold to a buyer when the trustee sells. You as an investor (actually you are a speculator in paper, not an investor in gold) can trade your paper ETF stock with other speculators, who as a group must pay all of the overhead and profit of the trustee organization, such as wages, rent, shipping, storage, insurance and brokers fees. It is impossible to find a chair in this game when the music stops, because the custodian banker is the only one with a chair and he is not playing the game; the banker already has the gold; you hope!

I recently had a good laugh at the expense of a popular television business program when one of their reporters was doing a series on gold, wherein he was in London and was allowed to view gold that he reported was owned by a very large Exchange Traded Fund (ETF). He viewed this gold only after surrendering all electronic devices that could pinpoint his location and after being driven around London in a blacked-out van to ensure he had no idea of his location. For some reason he felt privileged to take part is this charade, without his understanding that an ETF is an investing charade by design. If you do not know where your investment is, or its condition without an audit for quantity and quality, it might as well still be disbursed in the crust of the earth.

What proof can this reporter provide that the gold he saw belonged to that ETF? How often is that gold randomly assayed to prove that it is gold? What assurance can the ETF provide that any gold they possess will not be confiscated by the British government, or any government of any country that allows ETFs to store precious metals in their banks? What prevents the custodian of gold or silver from selling the metals to cover short positions or raise cash by selling metals to profit from price spikes, when they, as banks, speculate in the precious metal markets, without informing the trustee of the ETF?

If ETF funds are good investments, with their hidden gold and only ownership of paper stocks in the ETF, why not create an ETF on gold that is hidden in the earth and cannot be mined. It is estimated that we have mined roughly 5% of the gold in the earth and that future mining will extract a further 5%, leaving 90% of the gold in the earth to form the basis for our ETF. All sales and purchases of our stock will be through our broker at current spot prices. Since 5% represents over 4-billion ounces of gold, our earth ETF would be roughly 90-billion ounces of gold; and we know exactly where all of it is; we also know that it is secure and cannot be stolen or confiscated by government. If our fund needs to sell gold we can sell ownership of gold in cubic kilometers of the earth's crust and buy those ownership rights back, when our fund has better cash flow from higher gold prices that will bring in more investors. We will sell stock in our ETF for a premium (broker's fee) over and above our gold's value and live off that premium while speculators try to out speculate each other trading our ETF stock through our broker. Since cows need to be milked and investors need to be bilked; not only can we form one ETF in this manner, we can form hundreds using the same gold; the gold is irrelevant, because ETFs are all about paper. Outside of ETFs concentrating commodities that make it easier for governments to confiscate those commodities, there is nothing special about them; they are just a newer game in the gambling casino known as Wall Street; and in every ETF you are speculating in paper and only paper.

Then there are companies that will sell you gold and silver and offer to store it and insure you against its being lost or stolen for an annual storage fee and insurance fee. So when the economy goes into inflationary meltdown and you want to take possession, you will first need to have some sort of distribution network that is still operating and is trustworthy to bring your gold to you; then you will need to be sure that the company storing your gold has not repeatedly sold and resold your gold and stored it for many other investors that may also want delivery of "their gold", causing that company to simply send everyone a cash refund, if that. If you do not have it in your land you cannot sell it or spend it to support life and limb.

Consider the possible scenario occurring about mid-September 2013, the limited wheat and corn harvest is coming in, controlled by government after social declension brought on by political corruption and greed, and the self-fulfilling prophecies of December 21, 2012, cause an economic meltdown in the winter of 2012-2013. Anyway, by September 2013 there are long lines in the cities to purchase the meager amount of goods available. Government is by Marshal Law and standing in bread lines is the priority activity for most people. On one side of the street there is a very long line of people waiting to receive two slices of bread every other day from a government storehouse, provided they have the proper government identification; while on the other side of that street a line forms outside a bakery that is allowed to bake and sell their own surplus bread over and above what they bake for the government dole. The bakery sells on a black market that the government tolerates to avoid social unrest, but which the banks will be jealous about, because it shuts them out of these transactions.

The bakery sets a limit of two loaves per person per week at a profiteering price of one ounce silver per loaf; and a sign that says we do not make change; of course the baker will barter for other items of value, but he will not accept Federal Reserve Notes, because their value will be declining daily and they cannot be trusted to replenish the baker's flour, sugar, and shortening. In the line outside the bakery are a number of people with questionable assets that they hope they can trade for bread. Obviously the person with two 1-ounce silver pieces will get two loaves of bread and the person with six half-dollar coins (minted pre-1965) containing 2.16-ounces of silver will get two loaves of bread. What about the person that presents the baker a 1-ounce American gold eagle coin; what will they get? They will receive two loaves of bread for their 1-ounce of gold, provided that gold is exchanging for two or more ounces of silver; and they will receive no change. While the person with the nice ETF certificates, showing a picture of gold on each certificate, will presumably be able to exchange them for a piece of paper with a picture of a loaf of bread on it. Similarly for the person that owns gold stored by an investment company; the baker informs them that when they have gold or silver in their possession he will do business with them.

How will gold and silver compare in an economic meltdown? Well if gold is not confiscated by governments worldwide; and hoarded gold is not sold to businesses and individuals by governments and big banks, there would be about 1-billion ounces of gold in tradable bullion coins and bars and about 1-billion ounces of gold in the form of jewelry, that to some extent would serve as money if the gold content of any piece of jewelry can be estimated. Similarly for silver, there are about 4-billion ounces of silver in the form of coins and bullion worldwide and perhaps a billion ounces of sterling silver in the form of jewelry and silverware that could serve as tradable money. Leaving us a ratio of 2-ounces of gold to 5-ounces of silver, held by individuals, to serve as stable money worldwide.

These figures are actually declining right now in Europe and the U.S., because several companies are canvassing owners of gold and silver coins, bullion, and jewelry to sell it for cash; and as this recession continues, more and more gold and silver is disappearing into increasing industrial consumption and large depositories such as governments, banks, and ETF funds. Here in Eugene Oregon we have had more than 100 full page ads in the local newspaper in the past year, offering to purchase gold and silver in any form; not to mention the almost continuous television ads that have occurred over several months in the past year, soliciting viewers to sell unwanted gold jewelry for cash. This is causing a significant decline in the amount of gold and silver still available to individuals to be used as money in future economic duress; while this recycled gold is mostly sequestered to maintain the high price of gold, this recycled silver is sold mostly to industry, and resulting in depressed silver prices until it is consumed.

It is important to note that the ratio of gold to silver that is held by individuals is somewhere between 1-to 1 and 1-to-2.5 ounces of gold to ounces of silver. So the barter value (money value) of these metals in a failed economy will be parity or near parity; making an investment in gold for the purpose of personal economic preservation a very unwise act. It is silly to stockpile a shelter with champagne, caviar, and frozen pastries, against a threat of war or natural disaster, when apple juice, peanut butter, and crackers will sustain you just as well, for a fraction of the cost. It is therefore silly to buy gold to insure your economic future when purchasing silver would give you between 20 and 50 times the value at today's prices (gold around $1750 and silver around $35 per ounce each). Even for people playing the metals markets as investors or speculators, without concern or consideration of using gold as future money, the price of gold relative to silver will continue to change in favor of silver and the cost of investing in gold will require more capital for less profit relative to silver as time goes on.