A number of otherwise smart gold commentators believe that only gold is money and that silver will not work. I find myself puzzled and feel that I have to highlight the flaws in their viewpoint. At the same time, they gloss over a critical point (without even knowing it) that makes me reconsider my silver bias. To be clear, I own significantly more physical silver (100%) vs. gold (0%). In fact, I think the arguments that "pure goldbugs" make against silver are totally ridiculous. Before we get there, let's outline the most common "pure goldbug" points and debunk them.
1. Point: Gold has a better stock/flow ratio, which makes it a better “store of value” and therefore better value overall. Counterpoint: It’s a better “store” of the value it already has, but that doesn’t make it a better “value.” The overall value is determined by 1) how well it maintains the value it has and 2) how much value others will place on it for its uses. By goldbug logic, if hypothetically people needed to eat a tiny amount of gold each year to live (let’s call this an “industrial use” of gold), it would be less valuable than it would have been as a pure store of value. This fails the common sense test – nothing has to be a “pure” store of value to HAVE value.
2. Point: The rich and the governments/central banks only own gold, and they set the price, so gold must be that much more valuable. Counterpoint: Depends on how you see it – sort of. For example: two shoe salesmen visit a distant land in ancient times. One returns and says, “It’s horrible…nobody there wears shoes!” The other says “What an opportunity…nobody there wears shoes!” Pure goldbugs assume that demand for silver from central banks is nonexistent and will always stay that way.
Over the course of human history there has always been some ratio of gold to silver – I believe the 20th century decision of governments to get rid of their silver is just another stupid decision like “Brown’s Bottom” and is an aberration that will correct. In fact, China’s already buying – proving my point. Eventually, governments will buy it again to maintain strategic stockpiles for usage in: military applications, currency, and reserves. Does that sound like silver shouldn’t have much value compared to gold? Or is the opportunity that much greater?
3. Point: Silver’s not as rare as gold, and even if it is more scarce, scarcity doesn’t mean much – many things are more scarce. Gold's monetary value means that the gold/silver ratio (GSR) should be over 1000 to 1. Counterpoint: Yes, technically scarcity doesn’t matter. What matters is how scarcity is relative to importance. For example, I’ve got a unique rock, the Galt’s Gulch Special rock. Would you like to buy it for 100 gold coins? No? So there’s a tight supply (1 rock), but NO demand.
On the other hand, if we’re 1 mile underwater, and I’ve got the only 2 oxygen tanks – I’d like 100 gold coins for a tank of something that usually is free. Scarcity does mean value if the item is undersupplied. Furthermore, on a GSR of over 1000, with a few tons of gold, one rich person could control global silver supplies (which many different groups actually NEED), compared to gold (which just stores value). How likely is it that the world would just let 1 person control the global silver supply? If you think that's not possible, then a GSR ratio of 1000 is also not possible.
4. Final Point: The gold/silver ratio reached over 1:100 during past crises. Clearly, gold is always a better investment. Counterpoint: Exactly, during crises (non-normal periods) some people sold silver to hold a “more portable” savings (silver’s volume is much greater than that of gold) in case they needed to run. Viewed another way, people went crazy and provided a fire sale on silver. Using this time to determine the proper GSR is like measuring food inflation during a hurricane – prices are not rational at that time. If that was really what silver was worth, it would have STAYED at 1:100. If pure goldbugs were right, this would mean that the GSR of 1:16 in the earth’s crust is too low. This point also fails the common sense test.
HOWEVER – if people go crazy for gold and sell silver – why, then, you’d better have gold to sell to them. It probably makes sense to buy gold so that you can sell to the “gold-crazy” at a GSR of 100, wait for the GSR to return to 16 or lower, and then swap for 5X your original amount of gold. The risk here is that silver has been so suppressed that a GSR of 50 is never reached again, never mind 100 – and the GSR will eventually decline to the single digits in my opinion, just to clear the market.
Additional disclosure: I have both ZSL and GLD puts as well as a physical position in silver, with a physical gold position coming at some point.