 Historic Silver
- Headed for Higher Ground
David Morgan
Editor:
The
Silver Investor
February 24, 2005
With the rise in silver prices these past two years, silver is
becoming an ever-more attractive and exciting metal to investors.
This is not fluke. Many understand that although the price has
risen in U.S. dollar terms, the true gain has not been significant
yet! Since the U.S. dollar has almost constantly been losing
purchasing power these past several years, price alone does not
tell the full story. In fact recently a reader asked if they
were too late to enjoy any further appreciation in silver's value.
Silver is merely getting started in terms of how well it will
perform not only against the U.S. dollar but all currencies eventually.
Given where silver has been
and where I think it's headed, I thought I would take the opportunity,
below, to present some history about silver to explain why I
am so confident in silver's performance today, and even more
optimistic for tomorrow.
Sometimes, we get carried away
with our current investment situations and lose track of the
"bigger picture." We start to think that every tick
upward is a countdown to an immediate explosion in price, and
that every downward move presages a drop to low and disappointing
prices. Living in the moment, as we often are, we are all guilty
of this from time to time.
Of course there are plenty
who will encourage the latter view. The kind of price rise that
silver has been enjoying, and gold too, are "dead-cat bounces"
if you believe many on Wall Street.
This is where knowledge of
history is helpful. Wall Street won't ever explain to you that
silver has been a valuable metal for thousands of years, as much
as 10,000, 15,000 or even 20,000. It's malleable, useful, and
is satisfying to the touch and beautiful to look at. People almost
instinctually understand this.
Since most on Wall Street won't
explain it to you, even if they knew it themselves, you need
to understand silver's history for yourself. You need to read
up on it and bear in mind some basic, historical truths. Understand
silver's history and you can put the inevitable ups and downs
of the market into perspective and tolerate more price volatility.
Silver has been around a lot longer than you have. It will still
be sought after, and gaining value in a fiat-money system, long
after you are gone.
THREE POINTS FOR SILVER
When examining silver as a
valuable investment today, one should keep in mind the following
points.
Monetary function: Silver has
had a monetary function far longer than gold, being used as the
most common medium of exchange in everyday commerce since well
before the time of Christ. In fact, silver again lasted longer
than gold as a medium of exchange (real money), surviving until
1965, whereas gold ceased to circulate among the people in 1933,
being reserved for balance-of-trade payments until the gold window
was closed in 1971. Silver has enormous attractiveness and staying-power
when it comes to free-market monetary decisions - and no doubt
if people were free to circulate whatever kind of money they
chose, silver would again become the common man's first choice.
Store of value: It is also
worth noting that in a true gold standard, many financial planners
would be out of business. As absurd as this sounds, follow the
logic. If the monetary system were based on honest weights and
measures, you would know, when you first entered the work force
at, say, 20 years of age, exactly how much you would need to
save by age 65 for retirement. Why? Because your purchasing power
would remain constant. Under an honest monetary system, interest
rates are stable and long-range planning is simplified. In a
true gold standard, purchasing power actually increases slightly
over time so that an ounce of gold would buy slightly more after
35 years than it did when you originally entered the work force.
For thousands of years, silver has held its value, becoming steadily
more useful as an industrial metal while retaining its position
as a precious metal second only to gold.
Undervalued status today: In
consideration of silver's monetary role, we need to examine historic
ratios between the values of gold and silver. Historically, silver
was valued at approximately 1/12 the price of gold or what I
call the natural ratio. Once silver and gold were both used as
money, silver was 1/16th the price of gold. This is what I refer
to as the "classic" ratio or monetary ratio. This 1/16
ratio held from 1700 to 1860, one hundred and sixty years. Only
in recent history has the gold/silver ratio risen above the "classic"
16:1. If we use the classic ratio, then one troy ounce of silver
would be over $25 USD with gold at $450USD. This seems crazy,
but it actually is normal from a historic point of view. A menu
in the 1850s might offer a meal for 5 cents. If you worked as
a miner during the great silver rush in Virginia City (Comstock
Lode), you were paid two silver dollars per day as wages. The
five cents would be 1/40th of a day's wage. Taking that to the
present time, a person making $5.00 an hour ($40 a day) is able
to buy a 99-cent hamburger at several fast food outlets. This
is equivalent to the 1/40th comparison. Looked at historically,
silver has a long way to travel up once a breakout begins.
THE TRIGGER?
Silver's value is pent up and
steady market pressure will unlock it over time. Whether the
value is realized all at once - highly doubtful - or over a period
of months and years, no one can say with any accuracy. But as
my little historical overview above shows, the reality of silver's
value and its erratic upward moves in the last few years are
no flukes. Silver is volatile but the major trend is up and we
are very early in the major trend.
Where might the trigger lie
this time? Probably what will trigger a substantial move in the
market is industrial silver demand from China - a vast country
in the throes of a compressed industrial revolution.
In a recent article, I referred
to the industrial pressure from China plus inflationary pressures
around the world as the "Silver Trap" - and concluded
that: "Silver is going through the roof, in my opinion,
because of the twin pressures of inflation and industrial demand
and increasing industrial demand from China. More than gold,
silver is going to come under pressure because it is an industrial
as well as precious metal."
I also wrote, "We are
on the cusp of breaking out of the Silver Trap - and the force
of the explosion may be mighty indeed. The twin drivers of inflation
and high demand are providing the fuel, and the takeoff is underway.
The market is a mighty force and cannot be denied - not now,
not as it affects the silver market, indeed the precious metals
markets in general."
No one can predict how long
it will take for silver to reach its true value, but almost everyone,
when confronted with the facts will admit that silver is a long
way from that point yet. Usually it takes protracted bear markets
- commodity markets - several years to reattach silver (or gold)
to a realistic market price.
Are we in such a market? Yes,
we are. The pressure on silver supplies is strong and growing
more powerful every day - and the demand from Asia and from China
in particular for industrial silver will only continue to strengthen.
The recent price rise in silver was encouraging, but even were
silver to dip again, those who understand silver's history would
merely look on those dips as buying opportunities.
I believe we are on the brink
of a historical re-evaluation in silver prices. Those with a
basic knowledge of the history of the "white metal"
and its ability to retain value over time, will be the ones who
will find it easiest to tolerate the entire wild ride (and it
will likely last throughout this decade and maybe beyond) as
silver finds newer and much - very much higher - ground.
I will close by reminding readers
that in numerous other articles and white papers I have stressed
that physical silver is not the only kind of way that investors
position themselves for the ongoing upward movement over the
next half decade. It is important for investors to invest in
real silver and gold. However, the leverage in stocks, especially
small mining stocks is quite extensive, if one is positioned
correctly. My newsletter, the Silver Investor, contains such
choices - and recently we have been focused on one opportunity
in particular, in northern China.
Interested in finding
out more? You should subscribe to my newsletter at www.silver-investor.com.
If, like me, you believe that history repeats itself when it
comes to silver, and that an ancient silver/gold will reestablish
itself eventually and perhaps even reach the 10 to one ratio
I forecast several years ago, then you will surely come to consider
the Silver Investor monthly reports.
February 23, 2005
David Morgan
email to : silverguru22@hotmail.com
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321gold Inc
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