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The Real Monetary Gold/Silver Ratio

|Includes: iShares Silver Trust ETF (SLV)

In my previous post, I laid down the law that, as the world veers sharply to a view of both gold and silver as money, the gold/silver ratio must go to 16 to 1 as it has at every other time in history when metal was money.  To add to the bullishness of this argument, I want to mention a contingent of silver bugs out there who believe 16 to one is too high.  Ted Butler and David Zurbuchen are two such bugs.

Zurbuchen did a monstrous research project in 2006 where he gathered data, crunched numbers, made intelligent guesses where there was no hard data, used different sources to get independent estimates that agreed pretty closely, then averaged these estimates - in short went to painstaking extremes to arrive at reasonably accurate numbers for two things that we investors should care about a lot - the total amount of gold above ground and the total amount of silver above ground.  The man even made estimates for silver lost to coin abrasion. You can read his fascinating study by just googling "The Real Silver Deficit".  The bottom line is a gold/silver ratio for above ground metal of 5.88 to 1 instead of the 16 to 1 of the past.

The world has changed dramatically for silver since we stopped making coins out of it in the 60s.  In 1954, Zurbuchen points out that, of all the silver mined to that point, one third of it was coins, one third of it was bullion, and the other third was "dissipated" or lost.  In other words, most of it was still around in the form of money.  Then came the triple whammy of the end of silver coinage, the end of monetary currency backing, and the electronics revolution. Now 90% of our silver winds up at the dump.

So does our current journey away from government bungled money to real money go beyond the traditional 16 to 1 to the gold and silver that is actually above the ground and investable, that is to 6 to 1 ?  At $2000 gold, that would be $333 silver.  To curb your bullishness, consider that Bunker Hunt felt the ratio should be 5 to 1 when he refused to sell in 1980 at 16 to 1, and, well, it didn't work out well for him.  But things have changed since the 70s and since 1954.

Whatever silver arrives at in the ratio with gold, it seems to be making a bee line toward a GSR in the teens.  It's doing some strange technical things.

I'm a fan of the megaphone formation because it tends to presage explosive moves.  A widening channel alludes to a destabilizing trend.  So when it breaks, it typically moves forcefully away from the megaphone either up or down.  The formation began with the price action immediately pegging the RSI at 70 (the overbought sell indicator), where it has been epoxied ever since.  I began buying at $19, so it's a good thing I pay no attention to the RSI. The scary thing is silver will probably break this megaphone to the upside.