Gold is at $800: Why Isn't Silver at $40?

Last week I mentioned how silver was underperforming gold at this present time but demonstrated that this was something to be expected. Silver lags gold at the beginning of a bull leg up but as if to compensate this seeming conundrum, silver will assuredly be outperforming gold at the end of the same bull leg!

But what of a further question that may be asked? The question is simple yet potentially vexing to silver investors. Gold has now closed above $800 for the first time since January 17^th 1980. One may naturally ask what the price of silver was at that time and the answer would be $40.

But of course, silver is not at $40, it is just under $15 so what gives? If silver is going to emulate 1980 then it has some serious shifting to do in the next 10 months or so before this particular bull wave ends. Can silver go from $15 to $40 in a matter of months? Well it is possible since the same feat was achieved during the “Hunt Spike” in a mere matter of four months. So nothing can be excluded but neither is it assured. There can be nothing worse than expecting $40 silver only to see it hit $39 and then drop back to $15.

But again why is silver not at $40? The answer is because we are not at the same point in the commodity super cycle that we were back in 1980. Truth be told, this is more like 1960 than 1980. This commodity super cycle or the Kondratyev inflationary upwave as others call it has a long way to go yet. Silver will reach $40 and assuredly go much higher in the years ahead but for now we take each bull leg at a time.

So with that in mind, we briefly look at something we need to see if we believe this is a real silver bull market. That is silver rising in various international currencies. The charts below show the silver bull market in six major world currencies. Despite their fiat vagaries and rising values against the US Dollar, silver is in a bull market in each and every one of them. All we await now is the final push onto new highs.

Silver in US Dollars

Silver in Australian Dollars

Silver in Canadian Dollars

Silver in Euros

Silver in Pound Sterling

Silver in Yen

Why is it that silver will rise in a currency that is itself rising in value against the US Dollar? The answer is relative supply and demand. When investors shift their dollars into euros, the European banks just turn on the electronic spigots to create these nebulous euros.

Not so with silver or gold for that matter. When investors demand silver as a dollar hedge, you can’t just press a key on your computer and a 1000 oz bar of silver appears out of the ether. No sir, it first has to be discovered, dug out deep from the ground, refined to 99.9% purity and then poured into investment grade bars which are shipped to warehouses. This is obviously not a trivial matter and hence firmly puts a supply bottleneck on silver availability compared to a bond denominated in euros. The result is a faster rising price of silver.

The only curiosity about two of these silver graphs is silver in Yens and Canadian dollars. While the other currencies made their last major highs back in April-May 2006, silver went onto make new highs in the Yen and the Loonie 10 months later in February this year. That is an interesting one for Elliott Wave analysts I suggest but for now we need only point out that the new highs were not confirmed by the other currencies and hence were false flags.

So we await the international bull market in silver to resume very soon as old highs are taken out across the globe. On our charts the Australian and Canadian dollars seem furthest behind in catching up. If you are ultra-cautious you may wait for these laggards to catch up. As for me, I’m not waiting, gold is making new highs and silver will surely follow!

Comments

[kjnahoom:]

Roland,

Silver does not move in a 20 to 1 ratio with Gold. It moves in a 50 to 1 ratio. With Gold at $800, Silver is fairly priced at $16. With Gold at $1000, Silver will be at $20.

You either do not know about, have forgotten about or have never heard of the Hunt brothers. The Hunt brothers were the sole reason for the inflated Silver price in the 80s.

Review your history.

KJN

2007 Nov 04 10:28 AM

[cohrt:]

I remember the Hunter brothers and their impact on the silvermarket prices 1980

2007 Nov 05 12:22 AM

[namius:]

Silver is far more rare (between 3-5 times) above ground than gold. Silver is far more useful in the modern world. Silver has more uses than any commodity except oil. The only 2 things considered money by all people through out history are silver and gold and there rate of exchange has always been based on rarity. In 5 thousand years of recorded history no item more rare and more useful has been considered less valuable. There is only one argument that says silver should be valued less than gold, it comes out of the ground 7 times more but by that logic could only be considered at worst 1/7 the price of gold. The true free market value of silver is at very least in the 3 digit range.

2007 Nov 05 04:45 AM

[Greg Pinelli:]

Silver moves in whatever ratio and price the current investors say it should move in..the idea that it's fixed at 50 to 1...or ought to be 15 to 1 is the kind of thinking that loses money in the real world.
Silver is ALWAYS a late mover...that is, it will dramatically rise when gold is closer to what investors believe is a must have position..something we are not even close to. It explodes up..and down. The idea that silver will move in lock step to $20 when gold moves to $1000 is a very low probability play..cloer to $60 is much closer to what I'd come back to own up to.

2007 Nov 05 09:39 AM

[User 99198:]

which is the best way to buy gold, stocks,futures or acyual silver bars...

2007 Nov 05 10:08 AM

[namius:]

Always take physical possesion of the metal first and then store in a safe or with a reputable storage company.

2007 Nov 05 09:31 PM

[Quagaar:]

DID almost everyone forget the Hunt Bros manipulation of the silver market.
For many traders the collapse in silver was the final straw for a stock market already under siege from worries as diverse as the Iranian hostage crisis, the Russian invasion of Afghanistan and soaring interest rates. [The consumer price index climbed at a 13% rate for 1979. The prime lending rate hit 22% in early 1980]. But by the year's end, the whole decline was almost forgotten. The Dow ended the year at 963.99, thanks in large part to the euphoria over the election of Ronald Reagan.
www.buyandhold.com/bh/...

2007 Nov 06 07:35 PM

[Greg Pinelli:]

So...Quaagar..which sounds like some kind of mutant fungii...your point is what?? And what could it possibly have to do with 2007??
The Hunt bros. were taken down by government intervention and pure market envy....Also..
Taking physical possession of silver is like attaching a 50lb carbuncle to your butt...Buy an ETF...it's easier..safer..faster.... much cheaper. Where did these people come from..the 1980's????

2007 Nov 06 10:09 PM

[Bucksnet:]

Expert geologists have calculated that there is 17.5 times more silver in the earth's crust than gold. Therefore, with all other things being equal, gold should be 17.5 times the price of silver.

However, most gold that has come out of the ground is still in physical form like bullion, but most of the silver that has been mined has been used up in industrial production and is very expensive or even impossible to recover again. The current ratio of available silver to available gold is less than 10, so with gold at US$820, silver should be at least US$82.

Also, the price of silver is being artificially held down by the massive short selling postions on the Comex by the 4 largest commercial traders. A simple read thru the Commitment of Traders (COT) report will show short position of over 6 months new mined supply - a much larger position than any other commodity.

There are other factors that will drive the price up and silver should be at least US$100....

2007 Nov 07 06:09 AM