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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