Revisiting the Weimar Gold and Silver Ratio 18 comments
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I wrote an article some years back pointing out an interesting fact about gold and silver during the great Weimar hyperinflation. That article lay dormant for some time until last October when I suddenly received dozens of emails about it from gold investors. As it turned out, the article had been mentioned on the website of one of gold’s well known commentators and hence the rush of emails.
The point of that article is summarized in the chart below which displays the gold-silver ratio for German Marks between 1919 and 1923. As expected, the ratio moved near the historic level of 16 despite both prices rocketing as hyperinflation took a hold. The mystery was why the ratio leapt from 16 to 160 from October 1923.
click to enlarge image
The answer was soon discovered on a perusal of German events around that time. As I wrote in that prior article:
On October 23rd, the communists began an uprising in Hamburg. With memories of the Bolshevik Revolution of 1917 still fresh in the memories of Germans, this must have set alarms bells furiously ringing. Was Weimar Germany about to go the way of Tsarist Russia? The message racing through the minds of many a panicked German must have been “Get out of here!” and spare no expense in doing so!
Tales of mass executions and the often violent expropriation of wealth by Lenin and his cohorts surely would have focused the minds of wealthy Germans on getting their wealth changed into a form that was easily transportable and that could only mean gold. With an equivalent amount of silver weighing about sixteen times as much, it seems quite apparent that demand for gold skyrocketed whilst other forms of tangible but more cumbersome wealth were traded in for gold to the extent that people were prepared to give up 90% of their assets to accommodate this decoupling of the gold price. It must have been a desperate frame of mind that bid gold up to such feverish prices.”
So the story goes and I see no reason to change my conclusions. The question is how relevant is that scenario for today? People who are more gold oriented than silver will use this as an argument to hold gold rather silver in times of crisis. After all, portability of wealth is an important consideration if one is forced to move at short notice.
Well, the first question to ask is whether we are in a time of crisis that is comparable to Weimar Germany in 1923? The answer is clearly “No” and is easily demonstrated. Let me ask you a few questions.
Are Americans burning dollars to fuel their stoves as the paper costs more than the face value?
Is inflation running at a rate where prices double every week, day or even worse?
Has any American city succumbed to a takeover by radical groups anywhere?
The answer to all these questions is a resounding “No” – not even close. You may wish to argue that these things are going to happen soon but what are the facts? Gold has failed to take out its March 2008 highs despite things appearing to be even worse than March 2008. This is in the face of gold bullion disappearing off the counters worldwide.
You have two choices here, you either deduce the markets have already discounted the panic in the price of gold or the price of gold is not truly reflecting the panic. Those who take the latter view believe the gold price is therefore being suppressed. That of course begs the question why gold ever managed to get from $255 to $1032 in the first place. Either a gold suppression scheme does not exist or it is impotent and therefore not worthy of serious consideration.
In my opinion, the financial panic is near its conclusion. Do not expect the Dow and gold simultaneously at $3000 - that is not for this present time. The equity markets are rapidly approaching a bottom that may never be seen again. If you are sidelined in cash waiting for Dow 3000, you may end up sitting on cash for the rest of your life.
But what about the argument regarding portability of hard wealth? Today gold and silver have been digitized. You can open a storage account with a number of companies and have your metal stored in various vaults around the world (though when you can hold $100,000 worth of gold in one hand I was never convinced of the absolute need for a gold storage scheme). If you don’t think one country will be safe in a crisis then you can move it to another country for storage.
In other words, unlike our rich Germans, we can store it quickly beyond the immediate area of crisis. I bet those Germans would have loved the idea of opening a storage account via the Internet in Britain or the USA and buying up the desired amount of gold and silver ready to be reclaimed if they had to flee the country.
We have that option and if you feel insecure in your precious metal holdings then by all means open an account in Britain, Switzerland or some other perceived safe haven. The main point I see for such accounts is liquidity. When you buy or sell precious metals, it may be quicker to sell into a price spike by this method as other methods may incur more delay and miss the spike. Alternatively, it also has the advantage of buying in at a major bottom without having to fight the high premiums we see for retail bullion products just now.
I am personally thankful that technology has advanced to the stage that we have these great and varied advantages over our Weimar investors. So let us use them to our benefit whether we are gold investors or otherwise.
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This article has 18 comments:
On Mar 04 09:57 AM fubar02 wrote:
> I wonder what happened to the gold/silver ratio when Roosevelt made
> it illegal to own gold and refused to buy back American's dollars
> at 1/20th of an once of gold? Would think that would have made silver
> very attractive to the average investor.
Or, (and I favor this one,) the manipulators WANTED gold at the range it's at.
Endless speculation as to WHY they did what they did is possible.
Occam's Razor, there are simpler explanations as to why gold may be in a certain price range. Try those first.
On Mar 04 12:40 PM Onemonzas wrote:
> 'Either a gold suppression scheme does not exist or it is impotent
> and therefore not worthy of serious consideration.'
>
> Or, (and I favor this one,) the manipulators WANTED gold at the range
> it's at.
>
> Endless speculation as to WHY they did what they did is possible.
But while our situation is no where near 1919 Germany, we could also be early in the this thing.
Government agencies always look after the people.
Never mind the evidence of the CFTC's bank participation report showing greater than 60% of all gold and silver short sales come from a few banks, it's all false or an error in CFTC reports. I believe in the honesty of government agencies because they would get into a lot of trouble if agencies didn't uphold the law. Congress would yell at them, shake their fingers and god for bid ask them to prevent it in the future, I am sure they don't want that.
So go buy some electronic gold or silver from JP Morgan or where ever you can be sure that it's in good hands thanks to good governments around the world.
Perhaps a clue to silver's price behaviour is more to be gleaned by its high correlation to other metals. You know ... they all go up and down together. Now don't start claiming copper or lead are manipulated as well!
Remember, gold and silver are traded internationally, not just in Weimar Germany. There is NO evidence that gold/silver ratio reached any unusually high numbers. It stays at 16:1 in USA, for example. If gold/silver ratio indeed reached 160:1 in Germany during the time, some one would have made tons of money doing the gold/silver carry trade. Bring gold to Germany and exchange for cheap silver, and bring silver to USA and exchange for cheap gold. No such thing ever happened.
Read my take on the coming hyperinflation:
tinyurl.com/d25abb
I believe the chart you show must came from some historic data recording glitch.
Further, you can never be sure if the "paper gold" really exists. The whole banking industry began on false assurances that the gold belonging to depositors was being kept safe and not being loaned out to others. Of course that turned out to be false then, and I have no reason to believe it today.
Yes, one could argue 160 should be 16 but the politics of that very month makes the ratio leap understandable.
On Mar 04 06:05 PM Mark Anthony wrote:
> I am always skeptical about the claim of an extreme gold:silver ratio
> during the Weimar Republic. Has there any independent verification
> that such extreme gold:silver ratio did indeed happen?
>
> Remember, gold and silver are traded internationally, not just in
> Weimar Germany. There is NO evidence that gold/silver ratio reached
> any unusually high numbers. It stays at 16:1 in USA, for example.
> If gold/silver ratio indeed reached 160:1 in Germany during the time,
> some one would have made tons of money doing the gold/silver carry
> trade. Bring gold to Germany and exchange for cheap silver, and bring
> silver to USA and exchange for cheap gold. No such thing ever happened.
>
>
> Read my take on the coming hyperinflation:
> tinyurl.com/d25abb
>
> I believe the chart you show must came from some historic data recording
> glitch.
Actually they had a way of preserving their wealth back then...
From the book "The Bubble That Broke the World"
Written in 1932, during the Depression and looking slightly back towards the economic troubles of the Wiemar Republic...
Page 78 "The Germans themselves were in flight from the Mark. They had been stealing away from it quietly for a year or more; now they began to run.
They took German marks to the Reichsbank and bought dollars in New York, pounds sterling in London, French francs in Paris. This could be done through the mechanism of foreign exchange; and when they had exchanged their marks at the Reichsbank for dollars payable in New York, pounds sterling payable in London and French francs payable in Paris, they had then only to wire to New York, to London and to Paris to keep their dollars, their pounds sterling and their francs on deposit.
Germans who knew not not how to convert German marcs into foreign bank deposits through the mechanism of foreign exchange found simple ways to get rid of them. For example, they would go to the nearest border and tender the largest possible German mark bill for a small railroad ticket, wanting not the little journey but the change in Dutch guilders or Swiss francs,for hoarding."
So it seems that foreign exchange of currencies and wiring of money form one nation to another Was available to anyone who had the brains and willingness to do so.
The book again is
The Bubble That Broke The World
by Garet Garrett
Read it and find out how what led to the Great depression and ALL of the monetary madness that went on back then looks eerily familiar to what is going on today.
(Not a pleasant thought, but you should at least consider if history is repeating itself.)