Gold has been a great investment for the last twelve years. It has gone from $300 an ounce to $1,900 an ounce with few stops.
At the moment, the price of gold is a bit off its all-time highs and sits at $1,725.
It’s not as cheap as it was — but it is far from a mania…
I’ve yet to hear a taxi driver or waitress tell me to buy gold. The guys running the stores at the strip malls are buyers, not sellers. And it never leads the news.
Greek Fire
Furthermore, it’s much easier to envision gold going up versus down as the global currency warlords are fighting each other for the right to surrender…
It’s not hard to imagine a scenario where a Greece- or Argentina-style default in France or the U.S. would spark a speculative frenzy and a blow-off high around $10,000 an ounce.
In fact, this is quite easy to picture. What’s more difficult to figure out is how gold will drop back below $1,000.
I like gold, and I’ll continue to own it and recommend you buy on the dips.
The most immediate catalyst is the new Basel III rules, which will double the value banks place on gold.
(This could be why Goldman Sachs downgraded it today. They need to stock up.)
One More Silver Dollar
That said, today we are talking about silver.
My dear, sweet grandmother was born in 1898 and died in 2000, thus acquiring the unique honor of living in three centuries.
She was born before the Fed was created in 1913; raised a young family during the Great Depression; and hoarded her bridge winnings in the credenza. She had a big drawer full of pre-1963 silver half dollars, quarters, and other loose change.
I remember in the late 1970s, the old biddy would call up silver buyers and have them appraised…
They would come scurrying over to her apartment, hoping for a quick score from a little retired lady. But she never sold. She just liked talking to people sometimes. They would get tea and cookies.
I don’t know what happened to all those silver coins, but I do know they have gone up in value over the last fifty years.
A 1948-1963 silver half dollar is 90% silver, 10% copper, and weighs 12.5 grams. Using $32.80 as our silver price and $3.63 for copper, this will give you a melt price of $11.87.
That’s a 2,477% return over 49 years. Not too shabby.
Silver as Industrial Metal
Unlike gold, which has few industrial uses, silver — in addition to being used in coinage and as a storehouse of wealth — is used in all sorts of products.
It is also cheap.
Take a look at the gold/silver ratio:
Though the ratio isn’t at a bottom, like we saw in 2011 when silver popped to $48.44, we are still below the average and well off the highs.
Today silver is trading at $32.22.
At silver’s high point, the ratio dropped to around 30:1. During the metal’s worst days, when it traded for $3.73 in 1992, the ratio swelled to 90:1.
For silver to revisit its highs versus the price of gold, silver would need to almost double in price while gold remained the same.
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There are two arguments for why silver will go up.
The first is debasement of currencies, which has been covered in this space many times.
The second is industrial supply and demand.
In the year 2000, global industrial demand stood at 383.3 moz. This reflected rising demand from a growing range of consumer products, most notable photography and electronics.
There was a post dot-com bubble drop, but silver demand quickly bounced back and went on a seven-year run to a record amount of 492.7 moz in 2008. In 2009 demand took a hit, but bounced back in 2010 with 499.6 moz.
Many people thought digital photos would end demand for silver after that sector went from using 33% of industrial silver in 2000 to 13% of silver in 2011. The supply has been taken up by TVs, computers, cellphones, and solar panels. Some 40 moz a year are now used in thick solar cells.
The Silver Institute has recently put out numbers that say industrial demand for silver fell 6% in 2012, but will bounce back in 2013.
They expect it to hit an all-time high of 511 moz in 2014 based on demand growth from India and China, with photovoltaic cells being the fastest growth unit.
The upshot of this is the price of silver trades below its average with a number of upside catalysts — including industrial demand and currency debasement.
Next week, I’ll tell you about the looming supply disruptions.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
