Gold vs. Silver: Let the (Polite) Debate Begin...

[Recyclersteve]

I want to talk about the current (roughly 84 to 1) price ratio difference between silver and gold. In other words, it currently takes roughly 84 ounces of silver to equal the price of 1 ounce of gold.

So what? Well, let's think about this a bit differently.

Think about gold which is typically thought of as used for rings, coins and bars. Yes, I realize that there is gold inside computers, but it is such a small amount that for most recyclers it is virtually impossible to make the effort worthwhile unless you buy some expensive equipment.

Now think about silver. Yes, silver is used for coins, bars and computers just like gold, but it is used for so much more.

For instance, there is an entire Wikipedia page titled "Medical Uses of Silver." This includes:
1) Anti-bacterial cream;
2) Wound dressing;
3) Endotracheal breathing tubes;
4) Catheters;
5) Conjugations with existing drugs;
6) X-ray film;
7) Eye drops (to prevent conjunctivitis in newborn babies);
8) Treatment of skin conditions such as corns and warts; and
9) Staining of cells to isolate irregularities.

And on and on. Get the point? Silver is super important to the medical community!

Outside of the medical community here are but a few of the uses:
1) Cloud seeding to enhance rainfall totals (some say this was done in Dubai where they just had unbelievable flooding), but I'm not here to debate the merits of cloud seeding;
2) Camera equipment;
3) Mirrors;
4) Solar equipment;
5) Engines;
6) Brazing equipment; and
7) Batteries.

Another thing about silver is that much of the silver used is not recoverable. An example is the silver used for cloud seeding.

Now, let's look at the relationship between two other metals- platinum and palladium. Traditionally, platinum was more expensive and often much more expensive than palladium. In just the past few years that dynamic has changed and now palladium is actually more expensive than platinum. I'm not about to suggest that silver is worth more than gold. That would be a dream, but not likely anytime soon. I am suggesting that a ratio of 84 to 1 simply appears to be beyond ridiculous.

Another way to think about silver is this. Back in 1980 silver surpassed the $50 threshold as the Hunt Brothers of Texas were trying to corner the silver market. It got close to the $50 level again in 2011, but not quite as high as it was in 1980. I read just recently that something worth 25 cents in 1980 is now worth $1, four times as much. So, that can be interpreted as meaning that $50 silver in 1980 is equal to $200 silver now. $200 silver and $2,300-2,400 gold sounds much more like a realistic scenario than what we have now.

Yes, anyone with a net worth of, say, $10 million or more who has a lot of money in gold might get a bit testy when reading something like this, but to say that silver isn't vastly underpriced right now just doesn't seem right when you think of all the critical uses it has along with the fact that when it is used it is often gone and not recoverable.

One more thing, and I don't claim to have the answer on this one. It seems that gold is much more likely to be counterfeited (because of the much higher price). I seem to remember reading that there are even counterfeit gold slabs out there that look really good. I haven't seen one first hand that I can remember, so I'll leave that commentary to others. My point is that silver might be a safer investment to own because you can always drop a 1964 Kennedy half to listen for that familiar ring tone.

I don't want this to become a heated political type debate with name calling, etc. But it is worth seriously considering that silver right now is vastly undervalued compared to gold. And, no, I'm not currently selling my silver!

[pmbug]

Demand driver right now for gold = monetary

Demand driver right now for silver = industrial use

Silver is not currently seeing huge demand flows as a monetary metal. That could change if some nations were to remonetize it, but that doesn't seem to be on anyone's radar at the moment.

Silver has a structural issue with supply vs demand. There is currently a significant deficit in new (mined) supply vs. demand that is draining vaulted stock. It appears that there is anywhere from 1 to 4 years (wide variance because accuracy of available numbers is questionable) of vaulted stock available at the current flow rate. Barring a global economic depression (which is still very possible IMO), the demand for silver is likely to continue growing faster than new mining capacity. If we do hit the no more vaulted supply event horizon, it's going to cause a huge dislocation in the pricing. Where that ends up, who knows. As costs skyrocket, industry will try to limit their input costs by avoiding silver use where possible. Jewelry demand will likely plummet as it gets expensive.

Demand for gold on the other hand is likely to continue or even get stronger as the dollar remains in the BRICS crosshairs.

Bottom line, IMO - silver has the potential to have a huge upside dislocation in a few years if the world doesn't completely [shucks] the bed. It's not by any means guaranteed though - there are many variables that factor into the silver demand/supply equation and they are in flux. Gold is likely to continue seeing steady demand growth. It's the safe bet, but potentially not the most rewarding (ie. I agree that silver has more upside potential if all the ducks align).

It's wise, IMO, to own some of both.

[MaxGravy]

You didn't mention military use so crossposting this from another thread.

Why Was the U.S. Silver Stockpile Raided by DOD?

Silver has been used for thousands of years as ornaments and utensils, for trade, and as the basis for many monetary systems. Of all the metals, pure silver has the whitest color, the highest optical reflectivity, and the highest thermal and electrical conductivity.

Backstory.

Whenever you read some precious metals expert discussing the industrial uses of silver, here is the typical spiel that goes: "Silver is essential in jewelry, electronics, medical, solar, electric vehicles, and Green Energy storage systems (i.e., batteries)."

Very good, Captain Obvious, but it's my fervent belief that military and aerospace usages of silver gobbles as much as a third of all silver used by industry.

https://www.moneymetals.com/news/2023/1 ... dod-002877

[Lemon Thrower]

I view it a little different.

First you have the dollar.

Gold is an alternative to the dollar that the PTB have largely phased out of of the monetary system. Its prices is a derivative of the dollar although manipulated.

Silver is an alternative to gold and a much smaller market. Its prices is a derivative of the gold price and also manipulated.

Ultimately its hard to get excited about either because the price of all 3 is manipulated.

If you are worried about counterfeits, buy large quantities of low value denominations, like junk silver dimes especially mercs which are easily identifiable as 90% (vs Roos where some are silver and some are clad). Another good alternative is old date, circulated gold sovereign which carry low premiums; this is the gold equivalent of junk silver.

[68Camaro]

Silver has greater upside potential but is a longer term play, and will lead to disappointment by anyone trying to time the market and flip. And because its market is so much smaller of a market than gold it is currently far easier to manipulate. Yes, it has greater industrial use, but it is also not monetized.

Contrary to what LT has said above, gold was been remonetized for use by central banks several years ago and it has achieved a lot of recent attention from purchases by many central banks. Previously for several decades it was not considered a tier 1 asset and couldn't be counted at full value in their reserves. That changed a couple years ago (many posts on this).

They are both useful for wealth preservation to the other side of a crisis, but gold is far more useful due to its compactness vs value. Copper takes a semi-truck to move, silver a pickup truck, gold can be moved in your luggage.

Buy all three. There needn't be a single answer. But you will have copper by the hundreds, silver by the thousands, and gold by the tens or hundreds of thousands - (or more, but in those proportions).

[Lemon Thrower]

68 you are correct, gold but not silver counts as a Tier 1 asset. I am a lawyer and used to be in banking and actually submitted a formal comment letter to the Fed when it proposed those Basel III regs. My comment was that they should also include silver lol!

Tier 1 asset means when held by a bank its as good as cash and they don't need to hold reserves against it. It has a zero risk weight if you understand what risk-weighted assets are (very important concept in bank regulation!).

I just meant that since Nixon in 71 gold is not used as money except by governments and central banks. Take some gold to your local commercial bank and they wouldn't know what to do with it. They made it obsolete on purpose.

[Cu Penny Hoarder]

No debate from me.

Own BOTH!

[pmbug]

68 you are correct, gold but not silver counts as a Tier 1 asset....

Tier 1 asset means when held by a bank its as good as cash and they don't need to hold reserves against it. It has a zero risk weight ...

I have read many conflicting analysis of the Basel III rules for gold over the years. Last I knew, it actually required bullion banks to maintain more cash capital to hold their gold - to the point that Scotiabank closed their gold trading division (post #55 in the link below). I participated in a discussion on the subject spanning over a decade here:

https://www.pmbug.com/threads/basel-iii ... atus.1056/

Initial reports circa 2012 were generally as you described. Scroll down to post #40 (October 2015) and you will start finding references where that perception was wrong and/or that the Basel committee changed the orginal proposal. The NSFR did not go to zero, it actually increased from 50% to 85%. It is later corroborated in post #44 (from March 2019). Also in 2019, the LBMA lobbied European finance ministers to ease the NSFR requirements on the bullion banks (see post #52). The LBMA was still fighting it in 2021 (post #56) - they lost AFAIK.

[dakota1955]

For me I go with the ones that has a better premium and I look at the gold / silver ratio at the time.

[Lemon Thrower]

68 you are correct, gold but not silver counts as a Tier 1 asset....

Tier 1 asset means when held by a bank its as good as cash and they don't need to hold reserves against it. It has a zero risk weight ...

I have read many conflicting analysis of the Basel III rules for gold over the years. Last I knew, it actually required bullion banks to maintain more cash capital to hold their gold - to the point that Scotiabank closed their gold trading division (post #55 in the link below). I participated in a discussion on the subject spanning over a decade here:

https://www.pmbug.com/threads/basel-iii ... atus.1056/

Initial reports circa 2012 were generally as you described. Scroll down to post #40 (October 2015) and you will start finding references where that perception was wrong and/or that the Basel committee changed the orginal proposal. The NSFR did not go to zero, it actually increased from 50% to 85%. It is later corroborated in post #44 (from March 2019). Also in 2019, the LBMA lobbied European finance ministers to ease the NSFR requirements on the bullion banks (see post #52). The LBMA was still fighting it in 2021 (post #56) - they lost AFAIK.

I think you are generally correct but you are mixing a few concepts.

Tier 1 does not actually refer to an asset. Its a test of equity on the bottom right hand side of the balance sheet. The first most strict test it Tier 1 and the second is Tier 2.

NSFR is a test of the liability portion of the balance sheet, upper right.

Basel III was a set of more stringent, world-wide rules. The Basel Committee on Banking Supervision drafted these. The US investment banks pushed for these because in the 90s they were getting beat by the European banks who had different rules.

You learn in school that if someone deposits $100 in a bank then the bank has to hold 10% as reserves and can make loans of 10* $90. That's roughly correct but not how it works anymore.

There is a fixed percentage test, but it works different. They require capital of at least X% of risk weighted assets. Different things count as capital and something like hybrid debt/equity might count as Tier 2 but not Tier 1.

I say X% because the requirement depends on the size of the bank, they keep changing the requirements, and they keep requiring new "buffers." Basically whenever the regulators get spooked they require additional capital (euphamistically called a buffer) which restricts the profitablity of banks and their ability to pay dividends, repurchase shares, or do acquisitions.

The really interesting thing is when it comes to risk weighted assets. Cash is weighted zero. That means if a bank holds cash, there is no reserve requirement related to it. Gold is weighted zero, which makes sense. U.S. government bonds are weighted zero, which sort of makes sense. But actually all government bonds are weighted zero, which makes sense for the Swiss National Bank and maybe the German National Bank but is quite a strained concept when applied to the Italian, Greek, or Cypriot national banks. Residential mortgages can we be weighted as low as 35%. Muni bonds are less than 100%. Most loans are 100%. Certain loans that are more speculative or risky may have a >100% risk weighting which makes it cost prohibitive for a bank to make.

I think by default silver would be 100% risk weight but I really don't know because most banks don't have silver on their balance sheet and I worked for a large super regional bank in a region with little mining. A bank isn't going to own silver because they have to hold capital against it and it doesn't offer a return.

As to debate on gold vs silver, well I've long been a silver bull but silver as a market is a fraction of gold. So its basically a derivative of gold. The GSR is way out of whack but that tells you more about silver's greater irrelevance to the monetary system than it does about the true value of silver. There is no catalyst on the horizon that will cause the GSR to move to 16, and if there were they would change the rules again like they did to the Hunt Brothers.

[Silver4face]

Yes it's good to own both, but for me the choice is silver because I buy it for face! (Half dollars and war nickels).

[pennypicker]

If you are worried about counterfeits, buy large quantities of low value denominations, like junk silver dimes especially mercs which are easily identifiable as 90% (vs Roos where some are silver and some are clad). Another good alternative is old date, circulated gold sovereign which carry low premiums; this is the gold equivalent of junk silver.

When it comes to 90% the owner of my local coin shop told me mercs are his best seller followed by Franklin halves.