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How High Could Silver Go?

By Chris Weber Printer Friendly Version

December 5 , 2006

When I recommended silver in 2004, I said that it could rise by 2,785% from the level then existing. This meant a price of $187.50. I got this by thinking about the gold/silver ratio.

My price target for gold was and still is $3,000 by 2020. And 3000 is 16 times 187.50.  Why did I pick 16? You can see why when you know about the history of the gold/silver ratio.

Gold/Silver Ratio: A Look at History and What it Tells us Now

Throughout the last several centuries, a ratio of silver's value to gold's has always seemed to come back to the 16:1 area, where about 16 ounces of silver equals one gold ounce.

There have been extremes in the market at certain times. At one extreme was the London market ratio of a mere 6:1 in the first quarter of 1551. Never again was silver valued so highly compared to gold. The reason was that newly discovered Spanish gold was pouring into Europe. While both gold and silver were discovered in the New World, the Spanish naturally focused on gold, it being more valuable. But so much gold came, relative to silver, that silver became relatively more valuable.  This extreme in the market, like all extremes, was not to last long. Later that same year the ratio doubled to 12:1.

The other recorded historical extremes came much more recently. It reached over 100 to 1 in the early 1940s, but the metals markets were not freely functioning with the world at war. On the afternoon of February 28, 1991, the ratio again reached 100.35:1.  At that rate, silver was amazingly low against gold. This extreme proved equally untenable, and silver began to gain on gold in the next few years. On February 28, 1998, exactly six years later, the ratio stood at 40.92:1. 

For centuries, governments had a bi-metallic standard, with both silver and gold as money at an official ratio between them...nearly always in the 14 to 16:1 area. One time or another, silver became overvalued in relation to gold, or vice versa.

How did people react to this? The money that was undervalued by the government went into hiding or left the country. We've seen this happen many, many times in the recent past. In 1965, for instance, the US removed all the silver from its dimes, quarter and half-dollars. For a brief while the pre-1965 silver coins circulated side by side with the new 1965 coins. But very soon the silver coins were held back by those who owned them. After all, if the government says that a quarter filled with silver is worth the same as a quarter filled with copper, the government is wrong.

Silver is worth more than copper and always has been. Who in their right minds would spend a silver quarter on something if they can spend a coin with the same face-value filled with base metals?  So in short order, the pre-1965 coins were withdrawn from circulation and held in private hands.

Gresham’s Law

Sir Thomas Gresham was a British Treasury agent in Holland in the 16th century, at a time when the British coinage had been badly debased. His job was to get new coins made of purer metal content. Queen Elizabeth wanted to end the inflationary policies of her family and directed Gresham to prepare new coinage with more silver in them. This he did, but in short order these newer silver shillings disappeared from circulation and the older shillings debased with base metals still circulated.  Gresham's Law is popularly defined as "Bad money drives out good ". It is often applied in areas outside of money. When a formerly chic resort starts to attract what the chic would call a "lower class" of clientele, the chic move on.

But there is a much better definition to Gresham's Law. It is that "Money overvalued by the state drives money undervalued by the state out of circulation".  In 1965 the US government undervalued the silver quarters....they left circulation.  Gresham's Law is a law of nature as immutable as the law of gravity and it’s still operating today. Any government can try to break it, but they are never able to.

When the time came to establish an independent American currency, the dollar, the founders were very careful to establish a gold/silver ratio that exactly dovetailed with the current market price.

Thus, the Coinage Act of 1792 established the US dollar and defined it officially as a weight of both silver and gold. Specifically, it was defined as 371.25 grains of pure silver and/or 24.75 grains of pure gold. This was a ratio of 15:1. Anyone could bring silver or gold to the new Philadelphia Mint to be coined, and silver and gold were both legal tender at this 15 to 1 ratio. The basic silver coin was the silver dollar and the basic gold coin was the $10 Eagle, which contained 247.5 grains of pure gold.

The following is a fascinating chart of the history of the gold/silver ratio in terms of the US dollar, since its 1792 founding to today. 

As you can see, from 1792 to the Civil War in 1861 the ratio looks roughly stable.  But there was a wealth of problems with it that the chart does not show. Because in fact, this ratio might have reflected the market prices of both metals in 1792, but market values, as we all know, change. And change they did. In fact, from the late 1780s through the next 30 years, Mexican mines began to pour out huge amounts of silver. The result was that the market ratio fell to 15.5:1 in 1797 and by 1805 it was 15.75:1.

It doesn't take a rocket scientist to see what happened, armed as we are with Gresham's Law. Silver was actually cheaper relative to gold than the US government "said" it was. Gold was undervalued and gold coins began to disappear from the United States as silver coins from all over the world began to flood in, since the US government was obliged to buy them at a price 5% over what the world market price was. It was a great way to make a quick little profit, so much more because the European monetary system was changing to reflect the market values of their own times.

For instance, in 1803 Napoleon established the Bank of France to stabilize a franc that had been ruined by the paper money inflation of the Revolution of the 1790s. He set the gold/silver ratio at 15.5:1.  Then, in 1816, when the British went back on the gold standard after the wars with France ended at Waterloo in 1815, they chose a 16:1 ratio. With America still on a 15:1 ratio, overvaluing silver relative to gold, by 1810 and for years after, the US was left with virtually no gold coins. These coins went instead to places which valued them more. Sharp speculators could buy gold officially in the US and sell it in London for a gross profit of 6.7%

To make matters worse for the Americans, even within the world of silver Gresham's Law was operating. This was because Spanish silver coinage was allowed to circulate alongside US coinage. (The phrase "pieces of eight" comes from this, since each Spanish dollar contained eight "bits", and "two bits" equaled a quarter. The US quarter is still today called "two bits".)

But the Spanish silver dollars contained from 2% to 5% more silver than the US ones did. So it paid to take the heavier Spanish dollars to the Mint, have them melted down, pocket the profit, and repeat the process. Very soon only American silver dollars were left in circulation. At the same time, bizarrely, the fractional Spanish silver coins --the half dollars, quarters and dimes--- contained less silver than their American counterparts.

This time Gresham's Law operated in reverse: American half dollars and other fractional coins left the country or disappeared into private American hands out of circulation. So all the US was left with was US silver coins and Spanish fractional coins.

That meant that after 1810 Gresham's Law had left America's monetary system in a mess. There were no US gold or silver coins and only the Spanish fractional silver coins circulated. This was to prove ruinous in the War of 1812. Not enough silver and no gold circulated, so individual banks printed paper money to finance the war.  This caused horrible inflation. Prices soared by an average of 50% during the war. Worse, after August, 1814 banks did not have to pay out gold or silver at all if people holding the paper money came to ask for it. This act exacerbated the inflation, which in turned caused mal-investments (as it always does). And this resulted in America's first Depression, the Panic of 1819.  The month of August, 1814 was terrible for America. This was the month where an invading British army entered Washington DC and burned the White House and Congress to the ground.

But our story is the gold/silver ratio here. Monetary chaos and inflation continued through the 1820s, until Andrew Jackson (1829 -1837) decided to do something about it. The Coinage Act of 1834 changed the 15:1 ratio to 16:1, better reflecting market realities. There was one problem with the way this was done. Instead of up-valuing silver they de-valued gold. The gold dollar was devalued by 6.26% while the silver dollar was left as it was. This was a populist move: the cry went around the land to "leave the dollar of our fathers" alone. It would have been better to re-value silver upwards rather than gold downwards. This 1834 devaluation of the gold dollar set a bad precedent that would come back to haunt America exactly 100 years later. But things eventually went well.  For the first time since the 1790s America had plenty of gold and silver coins circulating.

Then came 1848. Gold was discovered in California in huge amounts. A few years later, gold was discovered in Victoria, Australia and Russia. All this new gold coming in cheapened it in terms of silver. The silver-gold ratio declined from 15.97 in January 1849, when the first '49ers arrived in San Francisco, to an average of 15.37:1 from 1853 to 1860. The one percent difference became an average of over 4% and as high as 7%. Silver now became undervalued and it left the US fast. Gold coins were flowing into the US, since gold was now overvalued, but this caused a problem. With no small change and only larger value gold coins available, lots of new paper money was issued by banks in smaller denominations.

This near-constant headache was starting to tire Americans. Either gold had disappeared, or silver had, or some times both had. There had to be a better way. The days of the official bi-metallic standard in the US were numbered. A choice had to be made to either monetize one metal or the other. The wealthy and powerful wanted a pure gold standard, with the dollar defined in gold alone, with smaller silver coinage freely circulating by weight.

The Civil War intervened, giving America more to worry about than coin shortages. But a few years after the war, the "gold lobby" struck.

You see on the chart how after 1872 the ratio starts to soar out of the 14-16:1 range. In 1872 it became apparent to a few smart investors and  even some wise officials in the US Treasury that the silver to gold ratio, which had held steady at about 15.5 to 1 since 1861, was about to change drastically. Silver was about to lose much of its value.

One reason was the discovery of huge silver mines in Nevada, recently admitted to the Union with the motto, then as now, as The Silver State. New techniques were enabling miners to get more silver out than ever before.

But savvy globally minded men saw what was going on in Europe. Briefly, silver was being dethroned as money. First, starting in 1865 the world broke up into two factions. One wanted to continue bi-metallism as before, even with all the Gresham's Law problems. The leaders of this group were the US and France. France formed the Latin Union with Belgium, Switzerland, Italy and Greece to have a common ratio of 15.5:1 silver to gold. But the other faction, led by Britain, wanted to do away forever with official ratios and go straight to the gold standard, with the national currencies defined only in terms of gold. Germany joined them, as did Russia, Holland and Scandinavia. As 1873 opened, it was clear to smart people that the Latin Union was having Gresham Law style problems.

Silver is Dethroned: The Ratio Soars

Taking advantage of this, the gold lobby passed a law in February 1873. It discontinued the minting of any more silver dollars. A year later, another law revoked the legal tender status of any silver coin above $5. Silver was effectively demonetized in America.

The market timing was perfect, because it was in 1874 that silver's ratio to gold rose above 16:1 for the first time. Silver was pouring out of the mines, and Europe was increasingly moving away from silver as official money, so they needed less of it.

The ratio now began to soar and reached an amazing 42:1 by 1900.  By that time the only major countries that held to the silver standard were Mexico, which produced the most of it, and China, which had long historical ties to it. Mexican silver was particularly prized in Northern China, but it made up the bulk of circulating money throughout the country. Many attempts were made to get both countries off silver and onto gold, but they failed. One in particular was made in 1903, where the Americans tried to get the Europeans to join them in buying up massive amounts of Mexican silver in an attempt to make the Chinese currency rise too much in value. The Europeans were not happy at this attempt to subsidize US exports to China. Further, they coveted the Chinese markets for themselves and wanted to stay on good terms with the Chinese government. (It all sounds like what is going on a century later.)

This failing, the US went after Mexico. Knowing that Gresham's Law would work, they got the Mexicans to pass the Currency Reform Act of 1905, which effectively made gold coins cheaper than silver ones, and thus undervalued silver, which fled the country and stopped being produced as much. This left Mexico with a gold coin standard.

So China was then the only major power on the silver standard. And it almost caused a war. The Western powers invaded China to put down the Boxer Rebellion in 1900. They then foisted on the defeated Chinese a bill of $333 million. The Chinese started to pay this back in cheaper silver, and this enraged Britain, Japan and the US. Britain even threatened war if China did not pay gold. The Chinese saw that a switch from silver to gold would only harm their economy. They defied the West and had their own Currency Reform in 1905, which replaced the old Mexican silver no longer coming out with their own silver currency, the tael.   This is a measure of silver still in use in China. In Shanghai the new Silver Exchange will trade in taels, which is 50 grams of silver. And if China ever embraces silver money again, as it might, this could be the name of the currency.

So you see how seemingly far removed history has a real bearing on today's world. But back to the gold/silver ratio, look at the chart after 1900 and you see an odd thing. Each time the ratio rises it is always followed by a decline, however short, back to the traditional ratio area.

From 42:1 in 1920 it plunged to 16:1 a few years later.  It briefly soared to nearly 100:1 in 1942, as gold was overvalued at $35 per ounce during this time. Silver then began to gain in relative value again in a long wave. It is interesting that 1942 marks the start of a huge bear market in bonds, just as it does a bull market in the relative value of silver to gold.

More interestingly, both silver and bonds go to extremes again about the same time.

For silver, the fall in the ratio from near 100 ended when silver briefly touched nearly $50 an ounce, and gold was around $850. The actual low came on January 31, 1980, when the ratio was 14.82:1.  (Soon after, silver began a huge bear market relative to bonds as well as gold, which would take it up as high as 100:1 in 1991).

I want to point out that this 14.82:1 ratio came at the peak of the last silver bull market. It follows the pattern in having the ratio go back to the traditional area of 14 to 16:1.  The low in silver against the dollar was reached in 1993 and the low against gold was reached in 1991.

Certainly you can see by the chart that the ratio has been swinging back toward silver's favor since then. Silver has risen much faster than gold for years now. As I write this the ratio is 46.79. It thus matches the sharp rise in silver's value relative to gold that we saw in the few years after 1942. Then as now the ratio fell to about this current level and then started to fall more slowly over the next 30 years until the big blowout in 1980 when, again, we saw the ratio as low as 14.82:1.

I think we will see this area reached again. Whether it is 14.82, or 15 or 16, I think that silver will continue to rise faster than gold and the ratio will end up, even briefly, back in this traditional area.

So if we take a more conservative 16:1 ratio, and if gold reaches a high of $3,000 during this bull cycle, this means $187.50 silver.  Of course, this is just a guess at this point. Who knows where gold will end up by the time this bull market is over? It could be $4,000, in which case a 16:1 ratio would be $250 silver.

For now, I'm content to watch and wait and see where this bull market will take both metals.

Towards A New Monetary System

I think it is clear that the post-1971 experiment of global paper currencies completely untied from gold or silver is a failure. In the years to come, when these currencies lose value at startling rates, it will become apparent to all.

This could be the bull market in the metals that ends with a realization that unbacked paper money is just not stable. As time goes on, there will start to be debates about new currency reforms to replace them. I think silver and gold will once again play important roles in this system.

This would mean having governments give up their powers to destroy their currencies. And governments never give up their powers without a fight. Yet if we see national currencies all start collapsing in terms of gold and silver in the next generation, perhaps the time will be ripe.



Chris Weber is the highly respected Editor of The Weber Global Opportunities Report, published bi-weekly, which provides specific recommendations in the major markets.  For more information go to