By Craig Hanks
It is fall 2008; our economy is shrinking; our personal and business assets are loosing market value across the board; the banking system is going catatonic; and commodities like gold and silver are bouncing around like my truck on a road full of potholes. Earlier in the year the US dollar was declining in value against virtually every other currency and all commodities. While this fall the dollar has strengthened relative to foreign currencies because the problems in our economy are also global problems that are affecting the economies of all industrialized countries. Along with the worldwide banking collapse and strangulation of our economies by high energy prices, we are entering into a significant global recession. Price speculators have been very active all year long in all of the commodity markets, such that prices on all raw materials, including gold and silver, shot up dramatically in the first six months of 2008, while in the past few months speculation is now driving most commodity prices way down. Since gold and silver have been de-monetized for a long time their values only rise and fall with industrial demand, because social demand for them as safe-haven money is still very limited. If our economy goes into a deep recession, the uncertainty of job security, retirement security, and the near certainty of rising inflation, caused by government deficits and Federal Reserve intervention into shoring up failing banks and other private businesses, will cause more people, as well as many businesses, to exchange dollars for gold and silver. Right now there is a preference for gold rather than silver as a security hedge; but for the individual, gold is the wrong metal to own.
Consider that with more than six billion people on earth there simply is not enough gold and silver available to have these precious metals fulfill the role of money for everyone. It is estimated that about 4.4 billion ounces of gold have been mined in historical times and at least 4 billion ounces are still with us as pure bullion, or easily recovered and smelted into pure bullion; this amounts to only two-thirds ounce per person. It is also estimated that about 44 billion ounces of silver have been mined in historical times and about 20 billion ounces of this silver has been consumed in the past and disposed in ways that are not profitable to recover. Approximately 24 billion ounces of silver could be recovered and converted to coins or bullion; this amounts to about four ounces per person. Central banks and governments hold about 800 million ounces of gold and negligible amounts of silver, leaving just over 3 billion ounces of gold and 24 billion ounces of silver in the hands if businesses and individuals; or an approximate ratio of 8 to 1.
If our paper currency fails, causing people to barter with gold and silver for their daily needs and wages, then gold can at most command a value of eight times that of silver. Since the current ratio of value is $750 to $10, or 75 to 1(in the fall of 2008), gold is nearly 10 times higher that it should be relative to silver. This means that silver will appreciate many times over when gold and silver become barter money again. It is less than 50 years since silver was taken out of our US coinage; yet prior to 1964 silver has been in coins going back over 1000 years. While gold has not been barter money since 1934 in the United States, its history as coined money goes back more that 2000 years.
It makes no sense to ask whether gold will go to $10,000 per ounce or $10 per ounce, because it is the US dollar that is changing value. Gold and silver change their value very little with respect to goods and services for which they may be bartered. One hundred and two hundred years ago an ounce of gold would buy a good suit of clothes and an ounce of silver would buy a good meal at a restaurant, and so they will today. Over the years these metals have not strayed very far from this valuation except under severe economic tensions, at which time they typically rise in value rapidly.
Even though gold and silver are in relative short supply and little used as money, the U.S. paper dollar is the wrong barometer of economic stability. Assets and commodities should not be valued in terms of US dollars, but in terms of fixed quantity commodities like gold and silver. The unstable item (dollar) fluctuates in terms of the stable (gold), not vice versa. Reporting it backwards does not make it valid. Worldwide currencies should be exchanged by valuing them to gold and silver, not to the U.S. dollar, or any other currency for that matter.
In the past there have been many government attempts to peg a monetary ratio between gold and silver. It has been ten-to-one, twenty-to-one and even thirty-four-to-one during the depression. Teddy Roosevelt ran for President promising to fix the ratio at sixteen ounces of silver to one ounce of gold. These ratios not only show a historical variance, they also are all showing ratios of silver to gold that are greater than the real amounts of these metals mined and refined. The reason that these metals are not valued in direct relationship with the amounts mined is principally the hoarding of gold by governments, central banks, international banks, and some international corporations. This hoarding of gold is the same as it having never been mined, as far as the markets are concerned. This hoarding of gold tends to skew the ratio of gold available to consumers and investors as compared to the silver available. And it is a valid factor in arriving at a proper price for gold with respect to silver, provided that this hoarded gold remains unavailable for investment or payment in trade. If this hoarded gold came back into the markets as a monetary unit it would un-skew a gold-silver relationship that goes back to the late 1800's. However, if governments decide by law to remove even more gold from private ownership to government ownership, they will do so at their price, similar to the US government action in 1934; and whatever is left in private hands will be too small of a quantity to serve as money. In either case silver would increase in value as compared to gold.
I am not asserting that gold and silver are improperly valued today. But I am asserting that investors who own gold to protect themselves from the calamity of a failed economy and inflating paper currency are investing in the wrong metal, by a factor of at least eight. Our current industrial and jewelry use of these metals would have no relationship to the value they would become as barter-money in a failing US economy. So one cannot compare these metals today and make an investment in holding either of them, based on their current uses and values in our social economy. When gold and silver are re-monetized to act as money in our economies it will not be by government decree, but by the actions of citizens acting to create opportunity and build a new economy.
If a well-to-do person were going to set aside food and other necessities for future consumption in case of economic depression, should they be advised to purchase champagne, caviar, and frozen pastries (gold); or should they perhaps purchase apple juice, sardines, and crackers (silver)? Quantity is more important than show when one is trying to survive. People who invest in gold as insurance against economic depression are not acting in their own best interest; they are simply following their investment counselor's bad advice.
If investors and their counselors really understood gold and silver they would never purchase or recommend the purchase of gold at its current inflated price. If silver is mined at ten ounces for each ounce of gold and is priced correctly at $10.00 per ounce then gold should only be $100.00 per ounce, when we consider their monetary barter value. But if gold is priced correctly at $750.00 per ounce then silver should be $75.00 per ounce. Whichever way the market moves in a panic, silver will appreciate by a larger factor in relationship to gold. Actually, both metals would appreciate with respect to the US dollar, but silver would outpace gold in percentage growth at the point where producers and consumers started preferring gold and silver in exchange for goods and services. Giving investment in silver today considerable value over investment in gold, because of this growth potential.
Besides the ratio of gold to silver issue there is another important aspect of gold usage in tough economic times that must be considered; and that is the usage of gold to purchase food, toiletries, medicines, clothes; etc. If we were to do the Zimbabwe thing and have the US dollar inflating 100 % per week while very few goods are available to purchase; anyone going to a store with a shiny 1-oz gold coin would find that their purchases may only use up 10 to 20 percent of the value of their gold coin and that the store cashier would not give them change in gold or silver (even if the store had gold and silver to make change); the cashier would give them change in paper dollars that would rapidly inflate to nothing if they could not be quickly spent.
This problem would not occur with silver to any great extent because silver is still available from 100 oz bars down to 1 oz coins, and also available as old US coins, right down to silver dimes, permitting shoppers to pay with exact change for the goods they require. In the late 1970's an elderly Dutch gentleman told me how he experienced this very problem when he was sent to Germany in the early 1920's to go to university. The gold coins he received from home, for living expenses, was greatly sought by the shopkeepers, but they had little to sell and he always received change in German Marks (paper) that lost more than half their value in a week. He seldom got full value for his money, because of daily inflation. The same situation could occur here; it certainly has hit many nations in the last few decades, and for some it lasted many years. Silver is by far a superior investment to gold when it is being held as insurance against inflationary times and economic panics.
The companies that mine gold and silver for our industrial and personal consumption should be aware of the potential re-monitization of these metals by consumers and retailers; and what this could mean for their businesses in tough economic times. Recovery from a bout of depression caused by hyperinflation will depend a great deal on having a good supply of gold and silver and a vibrant mining industry to supply the money necessary to grow and expand a new economy and support international trade.
Craig D. Hanks Eugene, Oregon
This article is taken from a chapter of my book SOCIAL BENCHMARKS. Other excerpts can be viewed at http://beyondfarenough.blogspot.com/
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