How Does Silver Perform in a Deflation?

How does silver perform during a deflation? A question many of our readers have asked.

Today, most investors are fairly convinced that gold does well during a deflationary environment. Since gold has held better than all asset classes these past several months, many mistakenly believe that gold does best during inflations, but they are not sure about gold during deflations. The fact is, from times past, gold actually does best during deflations, rather than inflations.

The seminal work on this topic was produced by Professor Roy W. Jastram of the University of California at Berkeley when he penned the book called, The Golden Constant. Jastram stated that during the preparation of his book, he found that, throughout the centuries, the history of silver was intertwined with gold. The two metals were found together in nature, were combined in the artifacts of man, and were held precious throughout the world when used as coinage. Both became the means by which wealth was measured and commerce carried out. However, where gold maintained its value over long periods of time, even centuries, silver’s movement in the monetary history was erratic and volatile. So, Professor Jastram asked the fundamental question you are asking, “Just how does silver perform during inflations or deflations?”

Precious metals have a long-standing reputation as hedges against inflation. Jastram writes, “This is not valid based on evidence of a century and a half in the United States and more than three centuries in England. The truth is, in most cases, the two metals, yes, both silver and gold, gained operational wealth in deflations.” From a long-term perspective, gold has held its purchasing power very well in the United States.

His report went on to say just how silver fared in relation to gold, and the findings are quite significant to those in the silver community. As stated previously, silver has a history of being much more volatile than gold and remains so to this day. There were periods where silver actually outperformed gold and periods when it underperformed. This is historic fact and yet might give a serious student pause to reflect upon the presumptions and beliefs held about silver.

If only one metal had to be chosen to protect your wealth, the answer from history would be the gold market. However, the most recent timeframe studied by Jastram, which was inflationary, revealed a significant out-performance of silver over any other commodity, including gold. But I must emphasize that the timeframe covered a long period when the price of gold was still fixed by government edict.

Regardless, the facts from the past cannot be refuted. The average price for silver in 1978 was $5.40 and the average price in 1979 was $11.09. But between 1978 and January 21, 1980, silver increased nearly tenfold.

As I have stated many times, the easy money has been made in the precious metals but the BIG money lies ahead, because if you think like I think, once this “disinflation” turns into a dollar collapse people will be looking for anything that will hold value, and that certainly includes both the precious metals.

Remember there is no fever like gold fever, and that will ignite the silver market, as those looking to gold might be priced out of the market and, thus, willing to buy silver!

Comments

[yellowhoard:]

It's always darkest before the tornado. Long gold, silver, recently palladium.

Feb 27 09:02 AM

[odessa88:]

I was looking at palladium, but I couldn't work out how they justify such a ridiculous spread ?

Feb 27 09:43 AM

[Bartlesby:]

When looking at this price history, keep in mind that 60 years ago there was 10 times as much silver as gold globally. As of 2008 there was roughly 5 times as much gold as silver. This is quite the reversal and certainly favors silver's outperformance.

Feb 27 01:05 PM

[Mad Hedge F...:]

ab#c With gold bugs, survivalists, and garden variety hedge funds running victory laps over the yellow metal’s recent breach of $1,000, it is easy to miss the move in silver that has been twice as impressive. Silver has run 30% this year to $14.60 an ounce, despite the steady deterioration in industrial demand. Silver ETF buying has exploded by 1,676 tonnes to bring their total to 9,929 tonnes. Sales of silver American eagle coins have doubled to four million ounces so far this year. The metal may have more to run. Hedge fund longs, which peaked last year at 50,000 futures contracts, have so far reached only 23,100 contracts in this round. But risk managers are going to have to keep an extra sharp eye on silver positions. A turnaround by the Dow or the yen against the dollar could suddenly take the air out of this bubble.

Feb 27 02:09 PM

[5142152-337:]

Turn around by the Dow? Kidding, right? The Dow is heading to 5000, maybe lower. There won't be a turn around in the Dow in this decade! If ANY of us are still walking this Eearth after 2010, maybe then the Dow could head north, but not before!

Feb 27 03:28 PM

[Conan the B...:]

Considering that the Dow is holding 7,000, even though AIG could go belly up on Monday, I wouldn't be surprised if the DOW makes a run north to 9,000 any day now.

Buffet has a tendency to move Markets, His annual letter comes out tommorow, a move to the upside would freak out the Shorts.

Feb 27 03:53 PM