Gold versus Silver
Most commentators that I read are more bullish on silver than gold. Not me, I am in the minority camp being far more bullish on gold than I am on silver. Now, let me tell you why I feel this way.
In 1717, Sir Isaac Newton, who was then master of the Royal Mint in London, established a new mint ratio between silver and gold, which effectively put Britain on a gold standard. During the Napoleonic Wars Britain curtailed convertibility. This was reestablished in 1821 with the new £1 sovereign becoming the standard gold monetary coin of the realm, replacing the guinea.
1820 gold sovereign struck the year before return to specie (Approx. 7 times larger than actual coin).
When Britain returned to the gold standard in 1821, most European countries' currencies were either tied to silver or to a bi-metallic standard linked to both silver and gold. The currencies of Germany, Austria-Hungary, The Netherlands, Sweden, Denmark and Norway were silver based, whereas the currencies of France, Italy, Belgium and Switzerland were bi-metallic. By 1873, all these countries, except Switzerland had abandoned their respective currency metal affiliation in favour of gold. The United States also tied the dollar to gold in that year. The Swiss franc was made convertible into gold in the following year. Thus, 1873 marks the emergence of the Classical Gold Standard. Each of these national currencies was fixed to the value of an ounce of gold. For example, the dollar was set at $20.67 (U.S.) and the £ was set at £4 and 5 shillings per gold ounce. Since silver was no longer a part of the currency mix it's price fluctuated, strictly based upon supply and demand.
It is only since August 1971, when President Nixon cancelled the dollar’s link to gold, that the prices of both gold and silver have been set by the market. Thus, the true respective values of gold and silver can only be assessed from that time. The best method of measuring how the market perceives the relative value of gold versus silver is to review the price ratio chart of the two metals, which we will do now.
Like most charts there is a huge amount of history contained in the relative price values of gold versus silver. It is important to remember that the gold price from the beginning of this chart in 1900 was fixed at $20.67 (U.S.) per ounce until January 1934, when President Roosevelt was instrumental in raising the price to $35.00 (U.S.) per ounce at which level it remained until President Nixon "temporarily" took the dollar off gold in August 1971.
The price charts for silver and gold from 1890 are shown below, so that you can see the price relationship between the two metals and how these prices are reflected in the gold/silver price ratio.
The Gold/Silver Price Ratio
The spike low of 15.29 recorded at the end of January 1920 occurred at the commodity price peak following the First World War inflation and it heralded the end of the long wave summer and the onset of autumn, which is the massive speculative season (the roaring 20s). A similar price spike low at 16.15 was recorded in January 1980. That low in conjunction with the commodity price peak on account of the Viet Nam war inflation signaled the end of the fourth long wave summer and the onset of the speculative autumn. The ratio low was not only attributable to the peak in commodity prices but it was further enabled by the Hunt Brothers desire to corner the silver market.
The low in March 1968 should be addressed. Why was silver in such demand? On November 19, 1967 British Prime Minister Harold Wilson, following several assurances to the contrary, announced a 14% devaluation of the British pound. "This relatively small devaluation of one single, non-reserve currency in November of 1967 turned out to be quite a spark in the monetary powder keg of the Bretton Woods gold exchange system and the London Gold Pool. Within weeks of the devaluation, the group of central bankers known as the London Gold Pool had to sell 1,000 tonnes of their own gold into the public market, 20-times the normal amount." Silver Bear Cafe.
The demand for gold became so intense following this devaluation that European commercial banks attempted to restrict private gold purchases. "Of greater concern, however was the fact the drain on the pool (London Gold Pool) was accelerating again....the measures taken by the Swiss commercial banks and by some other continental banks to impede private demand for gold worked quite well; although it was clear from the start that such measures could only serve as a stop-gap until some fundamental change was agreed upon." William Martin, Federal Reserve chairman December 12, 1967; quoted in R. I. P-The London Gold Pool, 1961-1968, Jake Towne, June 14, 2009; published in the Silver Bear Cafe.
1967: Wilson Defends ‘Pound in Your Pocket’
With gold being relatively difficult to obtain, investors purchased silver as the next best hedge against further competitive monetary devaluations.
Let's now move forward to examine this gold/silver price ratio chart from the time that President Nixon took the dollar off gold in August 1971 to the present. Incidentally, the huge gold drain from the London Gold Pool, of which the U.S. was a 50% partner was the prime reason for the U.S. to abandon gold backing for the dollar. Gold's monetary role, which had lasted just short of 100 years (1873-1971) and much longer than that if we trace the peg of the £ to gold, was eliminated. From this point on, the prices of both metals should have been based upon the law of supply and demand. Unfortunately, gold and perhaps silver, have since been subjected to frequent official and unpublicized sales in an effort to control the price.
Once the gold price peg had been lifted, as one should expect, it began to rise from the artificial price base at which it had been held for so long. By January 1980, it had reached $850.00 (U.S.) per ounce, which amounted to a gain of better than 2,400% in a little less than eight and a half years. Of course, this price increase was also attributable to the most virulent period of the summer long wave inflation. Over the same period, the price of silver performed better than gold. As I have suggested some of that silver price increase was almost certainly attributable to the Hunt Brothers attempt to corner silver.
Since that ratio low of 16.15 in January 1980, the ratio has moved strongly in favour of the price of gold. The best that silver has achieved since then is a low of 1 /31.63 in April 2011. It was then that silver reached its price peak of $49.51 (U.S.) versus a gold price of $1,570 (U.S.) per ounce. Gold was to reach its price peak of $1,920 (U.S.) five months later in September at which time the ratio had risen to 1/45.4.
Overall, the ratio median since August 1971 has been 1/ 56.01. (the price of 56.01 ounces of silver equal to the price of 1 ounce of gold).
Now let us examine the gold/silver price ratio during a period, which I consider to be the most relevant to where we are currently positioned within the long wave cycle. In my opinion, the stock market is close to replicating the 1929 autumn stock bull market price peak, followed by the stock market crash. I am sure that many of you presume that we have gone beyond that period as evidenced by the 2000-2002 stock bear market or the 2007-2009 stock bear market, which was the result of a worldwide credit collapse. This threatened most major western banks, many of which were bailed out by concerted central bank interventions. However, the huge credit/debt problem has not gone away, indeed it has continued to multiply, and sits over all of our heads like a sword of Damocles. It is only a matter of time before the international debt bubble bursts and when it does, the central banks, this time, will be powerless to stop the utter destruction of the international financial system and the world economy.
When the great roaring 20's autumn stock bull market peaked in early September 1929, there was no indication of a brewing credit collapse that would almost bring down the entire U.S. banking system. Indeed, there was no sign of a stock bull market price peak (no one rings a bell at the top of the stock market), and what was to follow would be a bear market that would reduce the value of the Dow Jones Industrials by 90%.
The stock market crash in October 1929 was viewed by many as detached from the real economy. E. H. Simmons, President of the NY stock exchange, on January 26, 1930 put it this way, "The psychological effect of the stock market on business is, I think, usually overemphasized.... I do not think that the fall in security prices will cause any great curtailment in consumption, and the trade figures thus far available seem to bear out this view." In like manner, Charles M. Schwab, Chairman, Bethlehem Steel Corporation on December 10, 1929 said this, "Never before has American business been as firmly entrenched for prosperity as it is today. Steel's three biggest customers, the automobiles, railroad and building industries, seem to me to justify a healthy outlook....stocks have crashed but that means nothing to the welfare of business...wealth is founded on the industries of the nation, and while they are sound, stocks may go up and stocks may go down, but the nation will prosper."
Regardless of this misplaced official optimism, the evidence was accumulating that things were getting a lot worse. By the spring of 1930, six months after the crash, over four million Americans were out of work. "Despite pledges to the government, the nation's business leaders saw no way to save themselves but to cut production. Some tried by cutting the work week to spread out available work among more laborers; others tried to keep their employees on by reducing wages. But the truth was that consumption had slumped tremendously. No one was buying, and more and more factories and businesses were closing their doors. During the spring of 1930 breadlines began to appear in New York, Chicago, and other American cities: long lines of patient, hopeless, humiliated men shuffling forward slowly to receive a bowl of watery soup and a crust of bread from charity kitchens, Salvation Army halls, and local relief agencies. In New York, the number of families on relief was 200 per cent greater in March, 1930, than it had been in October 1929." The Great Depression, The United States in the Thirties, Goldston, Robert. The Bobbs-Merrill Company, Inc, Indianapolis, 1986. P. 47.
The depression worsened bringing more and more Americans into the ranks of the unemployed, as business failures continued to multiply, adding to an increasing number of banking failures. However, waiting in the wings was a massive bombshell that would make everything that had occurred since 1929 seem trivial by comparison.
The year 1931 has been aptly termed the 'tragic year'. The crisis had its beginnings in the overextended Boden-Kredit Anstalt bank, which was the largest and most important bank in Austria and for that matter Eastern Europe. The bank had encountered serious financial trouble in 1929, "But various governmental and other sources had leaped to its aid driven by the blind expediency of the moment telling them that such a large bank must not be permitted to fail (sound familiar?). In October, 1929, therefore, the crumbling Boden-Kredit-Anstalt merged with the older Oesterreichische-Kredit-Anstalt, with new capital provided by an international banking syndicate including J. P. Morgan and Co., and Schroeder of England, and led by Rothschild of Vienna. The Austrian Government also guaranteed some of the Boden bank's investment." America's Great Depression, Rothbard Murray, Richardson and Snyder, New York, 1983. P. 227.
In March 1931, Austria and Germany formed a customs union, in a world of increasing trade barriers (Smoot-Hawley) and restrictions. The French government hated and feared this treaty, which caused the Bank of France and lesser French banks to call in their short term debts from Austria and Germany. As a result, the Kredit-Anstalt suffered a run in mid-May. Once again there was a determined effort to prop it up; the Bank of England, the Austrian Government, Rothschild, the Bank of International Settlements and the Federal Reserve Bank of New York banded together millions of dollars in an effort to save the bank. Finally, at the end of May the Austrian Government pledged another $150 million (U.S.) to the bank, but the Government's credit was now worthless, and Austria soon declared national bankruptcy by quitting the gold exchange standard. This was the beginning of the end of the international monetary system based on gold. In September of that year Britain followed in Austria's wake declaring bankruptcy by taking the pound off gold. From that point, it was only a matter of time before the international monetary system collapsed. This was realized when the United States abandoned the monetary system in March 1933.
This was an international credit crisis, made principally in America. Not only had American banks lent copiously to American consumers and corporations during the roaring 20's, but they had also lent considerable sums abroad. For example, when the crisis hit, American banks held almost $2 billion (U.S.) worth of German acceptances, and the Federal Reserve Bank of New York was on the hook for its share of the unsuccessful bail-out of the Kredit-Anstalt bank. When that bank failed, It was the start of the sovereign debt collapse, but in the U.S., corporate and consumer debt, principally mortgage debt, had already started to fail, leading to a rising tide of banking failures. Between 1929 and 1933, 10,000 U.S. banks were put out of business. The ongoing credit crisis of today is similar in many ways to the 1930s debt debacle. The principal exception to this comparison being that the debt bubble today is significantly greater than its 1930s counterpart and virtually the entire capitalist banking system is now at risk.
"When the world credit crisis began in October 1929, there was first a flight from questionable securities into strong securities. The second phase saw an intense liquidation of inventories and commodities. The third phase involved the liquidation of commercial real estate, houses and farms, both through foreclosures and sacrifice sales at a fraction of prior values. The fourth stage was a flight from the banks into cash and gold (which ultimately caused the whole U. S. banking system to collapse) and the fifth and final phase was the flight from the dollar to gold." The Donald J. Hoppe Analysis. This had nothing to do with inflation of the currency or inflation fears; the crisis was one of deflation and debt liquidation. It was simply the recognition that gold is the only financial asset that is not someone else's liability and therefore, the only asset that cannot be defaulted and become worthless.
Many years before, Donald Hoppe wrote the sequence of liquidity events following the onset of the world credit crisis in 1929, John Exter, who had been a vice president of the New York Federal Reserve Bank produced his famous inverted liquidity pyramid in which he outlined what happens during a debt deflationary collapse. Investors flee from increasingly illiquid assets to stronger and more liquid assets and down into treasury bills and thence into Federal Reserve notes and finally to the ultimately most liquid and most secure asset of gold. Essentially, this followed the path that Hoppe had described, following the 1929 stock market crash.
Note: Everything above gold is a paper asset. Certainly gold equities are paper assets but are a direct claim on gold.
Following the 1929 stock market crash and the ensuing credit collapse, Donald Hoppe described the massive flight to gold in this way, "Foreigners cashed in not only their American stocks and bonds, but also their dollars and hauled American gold away by the boatload. Americans converted their paper dollars into bank deposits into gold coins and stashed them in mattresses, hid them in basements or attics or took them on one way trips to Bermuda or the Bahamas. By July of 1932, Treasury Secretary Mellon secretly informed President Hoover that the Treasury, the Fed and the banking system were being drained of gold at such an accelerating rate that a collapse of the gold standard was imminent, and if the U. S. went off gold the dollar itself could suffer a severe decline in the foreign exchange markets". The Kondratieff Wave Analyst, Hoppe, Donald, January 1986. P.9.
It was not only gold itself that frightened investors turned to as their ultimate safe haven asset, but it was also to invest in the companies that mined gold and even those that explored for the precious metal. In fact, following the stock market crash in 1929, what remained of capital flowed almost exclusively to gold and shares in gold companies both miners and explorers.
According to the U.S. Bureau of Mines, there were 9,000 operating gold mines in the U.S. by 1940. Of course, some of these were small Mom and Pop operations, especially some of the Placer operations located mainly in Alaska, but there were also several very large producing mines. I doubt that there are one tenth of that number operating in the United States today.
In Canada, there was a huge exploration boom, particularly along the Abitibi greenstone belt stretching from north/central Ontario into Quebec. Many of the mines discovered and placed into operation along that belt in the 1930s are currently being explored and in some cases are being mined at this time. Here are a few of the many examples that I have been able to research. 1935, in North Western Quebec, the Arnfield, Canadian Malartic and Lamaque gold mines came into production; Canadian Malartic has been rejuvenated by Osisko Mining (OSK/T) into a multi-million ounce deposit. Lamaque is being successfully explored by Integra Gold Corp (ICG/V) . 1935, milling commenced at Pickle Crow mine in Patricia district, NW Ontario now owned by PC Gold (PKL/T). 1938, Hallnor Mine, Porcupine district, Ontario brought into production; now being successfully explored by Temex Resources (TME/V). 1938, Lapa Cadillac mine, Western Quebec commenced milling; currently being mined by Agnico Eagle Mines (AEM/T.)
I have a copy of The Chronological Record of Canadian Mining Events from 1604 to 1943 and Historical Tables of the Mineral Production of Canada, submitted by the Dominion Bureau of Statistics to Canada’s Department of Trade and Commerce. From this copy I have been able to deduce that between 1929 and 1940 over 100 gold mines throughout Canada were placed into operation. These properties had to be explored successfully, which in itself cost a large amount of capital, before they could be placed into operation by milling the ore and that required further significant capital. This influx of so many new gold mines naturally added to Canada's gold production between 1929 and 1940.The following table shows that between these dates gold production in Canada rose from 1,928,308 fine oz. in 1929 to 5,311,145 fine oz. in 1940, which amounted to a 175% increase.
As the world credit crisis unfolded following the 1929 stock market crash in New York, the desire to own gold and invest in gold mining companies was not only a North American pheneomen but an international one, since almost all countries were mired in an economic depression. The following chart shows that between 1929 and 1940 gold production worldwide more than doubled. As I have already written, but I think it is a point that needs to be emphasised, that could not happen without a major influx of capital into the gold mining industry. Following the destructive stock bear market of 1929 to 1932, capital was very scarce and what remained flowed almost exclusively to the gold mining industry.
Below, I show the share prices from 1929-1936 of two gold mining companies . These spectacular gains were not unique to just these two companies. I was told by a South African gold fund manager that that the junior gold mining shares in South Africa experienced record gains in the 1930s.
Note that the share prices of both Homestake Mining and Dome Mines increased by 6 times from their 1929 price lows to their 1933 price highs. These price increases occurred without any increase in the price of gold which was fixed at $20.67 (U.S.) per ounce until January 1934 when the price was officially raised to $35.00 (U.S.) per ounce.
They say "a picture speaks a thousand words", and the followng chart does just that. Following the 1929 stock market crash, the U.S. economy collapsed, falling by more than 45% into 1933. This in turn fostered a deflationary spiral leading to a collapse in commodity prices, including the price of silver, which fell by 50% into December 1932. In the face of this deflation the price of gold stocks, here depicted by the price of Homestake Mining (See prices in table above) increased by several hundred percent. During that time, the price of gold itself was fixed, initially at $20.67 (U.S.)and after January 1934 at $35.00 (U.S.) per ounce.
By 1933, twenty-five percent of Americans were unemployed and the governmentwas desparate to get people back to work. Silver mining was an important activity in the U.S. and one of the most important in several western states. The senators in these states wielded considerable power and they induced President Roosevelt to introduce the Silver Purchase Act of 1934, which in effect nationalized the silver market, much as the earlier Gold Reserve Act had nationalized gold. All newly mined silver was sold to the Treasury; thus, the U.S. government set the price of silver within the United States. The initial purchase price was $0.50 (U.S.) per ounce. In April 1935, the price was raised to $0.7757 (U.S.). Later it was increased to $0.90 (U.S.) and finally to $1.29 (U.S.) per ounce, where it remained until silver was denationalized in 1963. Elsewhere in the world, including Canada, there was no official backing for silver; the price, outside the U.S. languished. (See silver chart, which is based upon London silver price, P. 3)
Silver has not been a monetary metal since 1873 and in the case of Great Britain since 1717. Gold, on the other hand, despite the fact that all world currencies are fiat, still retains a monetary presence in as much as most central banks hold gold as a part of their reserves. At this time, some countries, principally China and Russia are substantially building their gold reserves.
Silver Coin Investor.com
The predominant use for silver is industrial (53%); if photo usage is added to industrial, it increases the industrial demand for silver to 66%. In the coming economic deflationary depression industrial demand for silver will be considerably reduced.
Economic depressions are by nature, deflationary, because debt is wrung out of the economy. Usually that process is chaotic as a result of an inordinate number of bankruptcies caused by the failure of both debtors and creditors alike. This process leads to a significant reduction in the money supply. Between 1929 and 1933 debt liquidation in the U.S. led to a 30% collapse in the money supply.
In this, the fourth Long Wave winter, debt is significantly greater and more international in scope than it was at the onset of the third Long Wave winter after the 1929 stock market price peak. This is because the currencies of all countries are fiat paper. Paper money is debt money. When the debt bubble bursts the deflationary shock will be much larger than it was in the 1930s and far more pervasive.
Ludwig von Mises, the Austrian school economist wrote, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." There has been "no voluntary abandonment of further credit expansion." Indeed, since 2008 there has been a massive worldwide expansion of credit expansion, most of it assumed by governments.
In 1933, Robert L. Smitley wrote, "It is a delusion to think that a depression caused by an overexpansion of credit can be resisted. All the panaceas, nostrums and quack remedies invented by all the politicians in the world cannot hold off the eventual day of reckoning." The panaceas, nostrums and quack remedies" are evident by programs like 'Quantitative Easing and Tarp', which are merely pseudonyms for money printing.
Governments and central banks have been printing even more money in an effort to stop the debt collapse. It won't work. The day of reckoning is close at hand. When the bubble bursts it is likely to be sudden and catastrophic.
The worldwide debt bubble is about to burst into a deflationary depression. We know that once deflation begins in earnest that there begins a sequence of events as investors bailout of illiquid assets like small business real estate and commodities. After this, the bail out continues via corporate bonds, stocks, government bonds and even treasury bills, as investors seek the safe haven of cash. Since cash is paper investors turn to the ultimate safe haven asset, which is gold. (See John Exter's Inverse Pyramid on Page 8). As we have documented at some length in this writing, it is not only physical gold, but also the companies that explore for and mine gold that are sought as the safest investments during such frightening times. "Gold money does better against paper money in deflation than in inflation, because in deflation the market runs from paper assets, including the dollar itself, that are falling in price or actually defaulting. Gold never defaults and compared with paper is unbelievably scarce." John Exter.
There is no historical evidence that during times of deflation silver assumes a monetary role. Indeed, as we have demonstrated the price of silver dropped by 50% during the last deflationary winter. Silver prices, at least in the United States were set by the government after 1934, but elsewhere in the world silver prices languished throughout the depression. The median value of the gold/silver ratio from 1929 to 1940 was 76.92, even though the gold price was fixed.
In these times silver has assumed an even greater role as an industrial metal than was the case in 1929. Thus, the price of silver is predominately governed by industrial demand. In the forthcoming long wave winter deflationary depression that demand is going to be seriously curtailed and the price of silver will reflect this.
The gold/silver price ratio should widen dramatically in gold's favour when debt deflation hits. The demand for gold will reach unprecedented levels. John Exter put it this way, "It will be far the biggest run out of paper money into gold in history, and ... gold mining shares will soar to unheard of prices in the coming deflationary collapse." The demand for silver on the other hand will, if history is our guide, fall appreciably and hence its price will do likewise.
The bursting debt bubble will likely bring about a major currency crisis, which without doubt will add even greater demand for gold. This makes it likely that physical gold will be unobtainable at any price. In this case, investors will turn to silver as an alternative, as they did during the days of the British pound devaluation. Hence, it makes sense to retain some silver as a store of value, but given all the evidence gold should be considered the primary safe haven asset, particularly, as there may come a day not that far into the future when you will be unable to purchase it.
Written By: Ian Gordon
Ian A. Gordon, The Long Wave Analyst, www.longwavegroup.com
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