The 600 Year Silver Bear Market

The book "The Ascent of Money" actually talks in depth about the discovery of the New World Potosi mines by the Spaniards. Apparently, a great metal shortage was solved by this discovery. The Spanish ‘pieces of eight’ became the global reserve currency.

But obviously this did not make the Spaniards wealthy in the long term. The increase in money supply merely increased the prices of all goods and services. The period from 1540 to 1640 was the only period where annual inflation of about 2% per annum actually existed before the era of fiat currencies. Check out my earlier post on interesting quotes from the book.

Coming back to the topic of this article, here is a 600 year graph of silver prices and silver/gold ratio from 1344 to 1998 as shown in 1998 dollars (click to enlarge).

Also included in the chart is the silver/gold ratio. Note that gold is more counter cyclical then silver. So for insurance purposes, gold is obviously the preferred asset.

Looking at the chart, one might be tempted to conclude that silver looks undervalued when compared to gold based on the silver/gold ratio. But when the primary trend in prices has been down over the course of the last 600 years, what does it mean to be in a bull market?

Looking at this chart, even the great 1970s bull market in silver was essentially a bull market in a longer term downtrend. (While this data series is till 1998, the general trend would not change by extending it to 2008.)

The story of silver over the past 600 years has been one of declining inflation-adjusted prices. Just something to keep in mind.

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Comments

[sdavid0419:]

Very interesting chart. It seems like each level of decline was sparked by a major new find of the precious metal. With current technologies it is unlikely any major new discovery will be found on this planet. This doesn't rule out the moon or mars as the new frontier but with the current technology leaking liquid hydrogen it is unlikely the new finds will be reported in my life time. Based on a 600 year span my current forrey into silver will be relatively short term but without new supply I believe the industries that NEED silver will drive the price up once the supply runs low.

Jun 18 08:43 AM

[MikeW:]

Silver is also used in photographic film. We know the trend for that product.

Jun 18 09:49 AM

[Mad Hedge F...:]

The big thing for me this month was the long awaited (well, maybe not so long) upside breakout in silver to a new six months high of $16.00, up 95% from the October lows. Please see my warning of the impending move at (www.madhedgefundtrader... ). The metal is at the low end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1 and is currently 62:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon’s mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit during the nineties when the world shifted from silver based films to digital photography. Now, rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $50/ounce in the next economic cycle. Since silver can trade with double the volatility of gold, this forecast could prove conservative.

Jun 18 11:12 AM

[GMiki1:]

Silver has many, many new uses and is in shortage. Silver is erratic--mercurial--but it will explode sometime soon...

Jun 18 11:34 AM

[User 168640:]

Hi ho silver

Jun 18 02:24 PM

[Gtarras:]

Please share with us what uses silver has?


On Jun 18 11:34 AM GMiki1 wrote:

> Silver has many, many new uses and is in shortage. Silver is erratic--mercurial--but
> it will explode sometime soon...

Jun 18 03:05 PM

[ATM:]

Silver is used in batteries. Demand is rising in this area as silver oxide batteries are beginning to replace lithium ion because of enviromental concerns.
Silver is also used in high stress ball bearings, silver/tin soldering compounds (lead free), as a catalyst, printed circuit boards, membrane and conventional switches, plasma TVs, inks, antennas. prepaid toll cards, in CDs, DVDs, anti-bacterial dressings and clothing, mirrors, paints, eye glasses, photovoltaic cells, and water purification.

Jun 18 05:22 PM

[dieuwer:]

I don't live 600 years, so what's the point of showing a 600 year bear market graph?
I prefer to invest over a 5 - 10 year period. For now, it seems that silver is indeed in a 10+ bull market (almost) so I ride it. If silver is going down again from 2020 (or whatever) I already have exited.

Jun 18 05:53 PM

[Plebian:]

This article shows a complete lack of understanding of real history. The 'price' of silver has been suppressed for so long because silver represents the people's money, and those in power would rather see it worth less (or worthless), so that bad money can replace good money! Those who have the wealth make all the rules.

The article is also deceitful because it completely leaves out the supply and demand fundamentals of silver. If one were to explain the current silver situation to a grade-school child, no doubt even they would be 'bullish' about the future of silver 'prices'. Nevertheless, they would be hard-pressed to understand the 'unseen hands' that try their best to suppress silver.

In a recent article, it was pointed out that the silver 'commercial' traders in the commodities exchange have been net short silver contracts for every CFTC reporting period since 1986? It is now 2009. Has any other major commodity on Earth been shorted by the establishment as persistently and continuously as silver? Something's been going on. Maybe silver is their Achilles' heel. We will find out soon enough.

(If it's anything like the video version of 'The Ascent of Money', it's clear that that story was sanctioned by the bankers.)

Jun 18 11:50 PM

[goldrealmny:]

Sajal, silver wil make other investments look like infected dog doodoo covered with flies in the next decade. In the past 600 years there were tens of billions of ounces of aboveground silver. Today that amount is about 90% less. And a whole lot more fake paper money too. Try studying fundamentals. Silver demand is 900 million ozs per annum. Mine supply is a bit more than 600 mil ozs. Basically, all the once massive silver stockpiles have been depleted over the past 50 years or so b/c silver is used in SO many industrial applications - NEVER to return to market.

People who are buying 1000 oz COMEX silver bars today for these ridiculously low prices will make out like people who bought Berkshire Hathaway 20-30 years ago.

Let's see who is richer in 2030 Sanjay.

Jun 20 03:01 AM

[Johan Axelsson:]

Having actually been in Potosi and walked inside the mountain this is quite fascinating. The town that for several hundreds of years was quite a big thing because of the precious metal is more or less stricken by poverty today. But still they mine that mountain, not so much for silver anymore thou. Like so many other silver mines it is mostly gone.

I am bullish for silver in the next years. I don't think we will find silver in the quantities needed to suppress the price for long.

Jun 20 03:22 AM

[Wilky:]

I certainly hope you guys are right. I own as much silver as I do gold. No-one is talking about platinum. I have about half as much platinum (dollar value) as silver. Do you pundits think that is a reasonable holding?

Jun 24 10:17 AM

[cariolio:]

Should I hold my Silver coins for a better rate? I have inherited an entire bag of silver coins. Thanks for your opinion.

Jul 21 09:49 AM