Gold or Silver?

June 9, 2002

Every day, Monday-Friday anyway, I get the question asked of me, "Which should I buy now, gold or silver?" I am aware of the silver advocates' continual urging of silver over gold, and I can't disagree with their information and predictions. We must consider several things when we decide which inflation hedge to buy and hold. We should also consider when to unload.

We all know that gold and silver are going up in currency prices for several reasons. First of all, silver cannot be mined for its current price, but gold can be produced for its current $328, in some places anyway. Cost of production, makes silver a runaway good buy, if only cost of production is considered. However, even though gold can be produced at its current level in some places; demand far outstrips production. It is estimated that 2500 tons of gold are produced each year, and demand is twice that. This indicates more gold will have to be produced, and indeed it will be, as the price goes higher, allowing less efficient mines to re-open. Mines that are closed because they cannot produce gold for less than $350, will reopen, if they can, when gold reaches that point. Many mines, once shut, can never re-open, as all equipment has been removed, they are flooded, or the bureaucrats won't allow it. The same goes for silver. As the dollar price per ounce escalates, it is like an elevator going up in a building. As it reaches each additional higher priced floor, the doors open, and more mines get on the car for its trip to the top. More production of both gold and silver will occur as prices go up.

At the same time, as prices go up, the demand will increase, and already has. My volume increased sharply as gold went past the $300 mark, and when it went past $325, it went up even more. It's like the NASDAQ. The higher it went, the more demand there was for those absurd stocks. The higher gold and silver go, the more people want to get in. Higher consumption feeds on itself, driving prices ever higher, allowing more mines to re-open. Is there a top for gold and silver? There was with NASDAQ. In 1980, when gold and silver reached their heights of $850 and $54, that was the top then. Why? Because the prices had gone up far in excess of the dollar's going down. It became a 1980's preview of 2000's NASDAQ, only metals went down slower after their peak. My friend Adam Hamilton, in his latest offering to his subscribers, says that a sudden radical increase in metals prices would not be good, and he is right. We would want gold and silver to go up steadily, but not suddenly. Gold and silver are in for a nice run over a period of at least a few of years, and maybe permanently, if the world and US governments continue on their unbridled expansion of paper currencies, which they are likely to do. Currencies have no value, and no one can tell me what any currency is "worth." You can compare one with another, but that is a comparison between worthless pieces of paper, and in no way gives value. It's all Monopoly money. Selling our metals might be wise if the dollar goes down at say 10% a year, and metals go up at 1000% a year. Eventually, a point will be reached, when it is time to sell…assuming we still have an economy and haven't been treated to what history has always served up to governments that pay their bills via the printing press…total worthless currency.

As an aside, the stock market went to hell, because it was way overpriced, and lacked profits. Will housing do the same? A lot of people think so. It is way over priced, and increasingly is unobtainable by the average guy. Will housing follow the NASDAQ? It's possible. I think buying overpriced housing now is similar to buying the NASDAQ at about 4,000.

Getting back to gold vs. silver. When worried people "flee to safety," be it a bomb shelter, or precious metals, most immediately think of gold. It's just a simple fact: Worried people firstly think of gold, not silver. If the war between Pakistan and India turns nuclear, gold may go up faster than silver, because of huge demand. Japan's economy is in the dumps, and Japs are buying gold, gold, gold…not silver. Gold is far more compact than silver, and is most people's first thought of a "flight to safety." Gold is what most people turn to in times of trouble.

Silver, on the other hand, is older than gold as true money, and is in far shorter supply than gold. There are over 80 million ounces of non-existent silver committed on futures contracts alone. Silver cannot be mined at its current price, and one must look at historic ratios between gold and silver. Before 1893, the ratio was fixed at 16 to 1. 16 ounces of silver equaled one ounce of gold. In 1980, when both metals went through the roof, the ratio was almost exactly 16 to 1. In practical terms, during my 25 years experience as a precious metals broker, I have always found that 35 to 1 was a more accurate, normal ratio, with an unfixed, government dictated market. If the ratio was under 35 to 1, buy gold, and if it is more than 35 to 1, buy silver, has always been my feeling. Today's ratio is close to 65 to 1, a strong indication in favor of silver. Silver is not only beautiful, a virtually perfect conductor of electricity, and heat, but is used in many places industrially, and it seems to be getting scarce. I have no idea where it has been coming from, but from whatever source silver has been emanating, it can't last forever. It defies the laws of basic economics, that there be a continual supply of something at below its cost of production. Silver requires a vastly larger storage space than does gold.

If one goes up, the other is likely to follow, as happened in 1980.

Richard Russell, in his latest Dow Theory Letter, has a unique method of comparing the price of gold to the Dow, and according to these ratios, gold is headed for a much higher price. Russell doesn't chart or mention silver. I have no crystal ball. I am not able to foretell the future, other than in great generalities. The world's situation looks pretty grim to me, and the buck is sliding. If the Palestine-Israel, or Pakistan-India enmities erupt violently, gold may outpace silver. If a new, low resistance wire is produced, it requires a tremendous amount of silver. Silver Eagles and 100 ounce, Johnson-Mathey bars are being gobbled up with amazing rapidity by my clients, and I assume others as well. Gold is doing the same.

There are advisors by the dozens, newsletters and "experts" beyond all tally. I write no newsletter, but it just seems to me that if you have the space, by all means get silver in addition to gold. I think ratios, supply and demand, and history favor silver. Gold will follow it I suppose. However a huge global conflict, nuclear war, or any unsettling conditions both militarily as well as economically might favor gold. Silver will follow it, I also suppose! Does your crystal ball work? If yours does, please tell me what will happen next week, as I will become an instant billionaire by going long or short on whatever is going up or down. If I only knew what was going to happen…but I don't. So by all means protect yourself with both silver and gold. Whatever you do, get out of dollars.

I talked to a guy from New York who has 90 silver contracts, and he is at a profit. Suppose he orders delivery of the 450,000 ounces of silver, and a couple of hundred others do the same? There goes the silver futures business. No one will get it, and they will be sorry they didn't get a lot of physical. It would be mandatory for the futures issuers to say, "sorry, we are bankrupt." What else could they do? Pay out in dollars? Where would they get either the dollars or the silver? Back up your gambling with physical, by all means. Play games with futures if that turns you on, and take a chance. I'd rather go to Las Vegas. I lost far too much in the futures game to ever play it again. I am the voice of experience. Guess what happened Wednesday? Someone dumped 5,000 gold futures contracts, and drove the price down suddenly. Those who had gold futures may have lost their shirts, even though it recovered the next day. It is said that 95% of futures players loose. I don't doubt it. My safe's contents have gone up wonderfully, and if prices go down a bit, it is still there, and I don't owe anyone. Owning something physically, is far better, to me, than playing gambling games with futures. Protect yourself by owning physical, tangible things like a home, car, guns, ammo, food, gold, and silver. You'll never go wrong!

The Fourth Coinage Act of 1873 embraced the gold standard and demonetized silver, known as the “Crime of 73”