Silver for gold -- and vice versa

The warden said:
"The exit is sold.
If you want a way out,
Silver and gold."

There's been a lot of talk, maybe too much talk... :-) about which precious metal is best to own, why, when, in what ratio (if any, for some). Not a trivial question to ask if one is just beginning to stack -- and not one to ignore if one had at one point tragically lost a sizeable stack in choppy waters on a midnight fishing expedition.

There are economic, monetary, industrial, geopolitical, social and in ALL cases personal considerations -- I cannot hope to cover them all: but I would like to try to start a conversation about them, and eventually dig up more details in future posts. We are all our own 'financial advisers', to a greater or lesser extent we are trying to act as such for our family and friends. It's important to have a solid, well-founded understanding of at least the pillars influencing the decision which metal to choose and in what ratio. And whether and when this decision should be revisited.

Being the Luddite that I am, I do NOT feel comfortable investing my savings in paper representations of legal claims on property I do not physically control – as I see a non-trivial risk in being subordinated if not outright dispossessed of said ‘ownership’ as and when the current monetary paradigm hits a convenient milestone on its lurching path towards its eventual demise (and subsequent transformation). While I do not (as yet) foresee the end of the world as we know it in ALL areas of life, I DO remember, and therefore anticipate the possibility of ‘bail-ins’ on a much more breathtaking scale than we have seen thus far -- at least recently. Perhaps direct registration of shares or physical certificates will help. The fact that I see this as a ‘perhaps’ is enough for me to stick to physical, tangible, directly held assets. But as Ernest Hemingway said, you go broke gradually, then all at once. I don’t think we’ll get a red-striped letter in the mail saying ‘WARNING’ beforehand (any more than we already have, of course) – the entire point of making an (admittedly pretty final) move like this is to have as many people still holding the bag as possible. While general warning signs abound (and will multiply), there will be no text message telling me it’s no longer safe. Year early, minute late and all that. Hence my focus on physical accumulation.

My very first investment in precious metals did not bode well for my future in being a PM bug -- a spouse who vehemently enough disagrees with a particular allocation decision is a powerful impetus for liquidation. It was, to others, a trivial sum -- 50 oz of silver -- but it was powerful enough that it forced me to start over, re-examine all my premises, information and informed predictions about the future. In doing so, I realized that my conclusions and planned course of action were correct. I ultimately convinced my spouse that my efforts to keep a portion of our nest egg in PMs was not founded in specious, get-rich-quick arguments, nor stemmed from a gambling addiction.

Going through the process of checking the premises helps think through a cogent, convincing argument for others as well. In my mind THAT is why TFMR is invaluable - the persistent reader can find ALL kinds of opinions to challenge one's premises. Main Street is called thus for a reason -- it represents a numeric majority of like-minded individuals, who will have a number of shared assumptions and experiences. But in the Forums you will find views to challenge ANY assumption, if you choose to look.

The element of metal allocation that I wanted to focus on (and ask YOU about) is the GSR -- the number of ounces of silver required to get an ounce of gold. My own perspective is that I am currently overweight in silver, and want to increase wealth preservation and decrease risk, and for the moment have no current intent to sink further savings -- unless there are extraordinary circumstances (e.g. silver drops to 14-15 and can ACTUALLY be bought anywhere near those prices). My thinking has been voiced earlier by DPH and others several times -- trade silver for gold as their relative valuation in fiat shifts (and thus, for the time being, their tradable ratio) and gold becomes less expensive in terms of silver. Simple enough, on the surface.

There are some who expect this ratio to drop to (or even below) 1 [you know who you are] -- and some who suggest a ratio around 15:1. There are those who think 15:1 is bollocks.

There are those who think they can identify turning points in the GSR --  Silver: The GSR Bottom Finder

There is a good bit of detailed (if dated) material in this old article from The Moneychanger. It's a REALLY long piece with lots of detail, but I have not had a chance to vet its sources, so DYODD. Despite the title, the 'meat' (swapping metals to increase net ounces held) of the article is at the end.

The GSR is regularly discussed in The setup for the big trade and lots of other threads here. Casey Research seems to dismiss the GSR as an unreliable indicator for investment: Guest Post: The Gold-Silver Ratio – Another Look

And of course there is the MOPE in the media -- I was not going to get into this, but this report was too good to resist:
This August 15th Gold Council report was referenced by Business Insider, and headlined thus --CHART OF THE DAY: Gold Demand Is Evaporating. Very amusing.

 "Total demand has fallen to its lowest level in 4 years, owing to a decline in demand for gold for investment related purposes (demand for jewelry and coins continues to grow).

Here's the chart showing total demand going back to the beginning of 2010, wherein you can see that the last two quarters are the weakest we've seen in recent years."

But onto more serious matters. Is it enough to look at a chart like this:

Or does it make sense to consider a chart more like these:


In both cases, do the more recent (20th century) values now represent the 'new normal' -- or are they extreme swings which will revert to the mean?

This one is for people braver/smarter than I (of which I'm told there are many):

Well, at least it does not seem like the demand for gold for investment purposes HERE is likely to evaporate soon...

So, dear Reader -- what, if any direction is YOUR preference? Buy more silver now, expecting the GSR to fall further? Or just the opposite – when S truly HTF, will GSR shoot to eve-of-WWII levels (and beyond -- according to some)? Buy both in some ratio? Swap one for the other NOW? Is the goal larger net value of assets in current fiat, or a higher number of ounces, and are the two the same thing? Does portability figure into anyone else's calculations? How does this calculus change as prices march onward (dare I say HEH?), or conversely if they should fall further?

 

159 Comments

ReachWest's picture

Numero Uno.

Numero Uno. Now to read what JY posted - I think there's a dolphin in that chart, above.

EDIT to ADD: (10 minutes on and I have now read the post) Thanks JY. I still think that looks like a dolphin on the last chart - and that's all the sense I can make out of that particular graphic.

I purchased all Gold when I first started stacking. At that time I really didn't know much of anything, just had a feeling that I wanted a portion of my assets in something non-paper. The only site I read in those days was JSMineset - so Gold was it. Since that point everything I have stacked is in the Ag category. I like them both and think that each has certain advantages over the other. 

Au can hold a whole lot of value in a small space. Ag less - but it may just be more easily traded/utilized in tough times. I've never bothered with the GSR ratio exchange thing. Could 'ave - maybe should 'ave. But didn't and probably won't. 

I know that Mike Maloney did a podcast over at SGTReport the other day and he talked at length about the GSR. He says it should historically be in the order of 12:1. I believe he made that case based on access to mineable quantities of each element over history. It's a good podcast - here's the link for anyone interested.

Disclaimer: Like many other Turdites, my stack vanished at sea during a whale watching outing. Just sayin'.

erewenguy's picture

what the heck

Does the G/S ratio looks like a multi-decades bull flag in that 3rd chart? Maybe JPM is going to play with silver prices and offload their huge silver inventory onto people who see it as poor man's gold.

Thanks for pointing to the GSR Bottom Finder

Oh - and by the way.... Second

lnardozi's picture

Thurd

Seems to me, whichever way one ultimately decides to go the transaction could be done at essentially zero cost by finding someone on here who believes the opposite and exchanging. Then, the only trick is to find a safe way of doing so.

DayStar's picture

Furth

Well, silver is on the mend.  Let's hope it holds.

I have heard it said, and from experience it seems to be true, that possession is 9/10ths of the law. Perhaps CA Law has some thoughts on that.

DayStar

¤'s picture

I plead...

...the fifth.

TGIF! Thanks JY!

ag1969's picture

David Morgan on the Gold/Silver Ratio

RaulP's picture

Silver rehypothecation for gold??

RaulP's picture

(No subject)

California Lawyer's picture

@Daystar

In the common law, derived from olden times, there were two types of property: personal property and real property.  With respect to personal property, such as the computer you are using to read this, that actual, physical piece of personal property was owned by someone, the proof of ownership being possession thereof.  

Said differently, if you hold it you own it, and mere proof of possession suffices to establish your rights as the true owner of the personal property despite someone's oral claim to the contrary.

Real property is of course, much different.  

Then there came to be the concept of intellectual property, such as copyright, patent, trademark, etc.

In sum, for personal property, the rule is that the owner of the property is the one that is in actual physical possession.   

Monedas's picture

What .... no Friday "Slam Sandwich" ?

Not that we need .... any more bullish .... signals .... but, you know they wanted to "Slam Our Canned Ham and Bacon" .... big time .... and couldn't ?  Truck on fire on Queensboro bridge .... lower level .... (heat rises) .... mid span .... kerosene downed the trade center .... can diesel soften bridge steel .... Friday afternoon rush hour .... maybe some "terrist" gave us a "Slam Sandwich" of their own .... Jamie "Banksta" Dimon and Ben "Yankee Dolla" Bernanke .... eat your heart out ?      Monedas       1929       Comedy Jihad On Patrol For Petrol Bombers World Tour     devil

Spartacus Rex's picture

Oh Really C.L.? Generalities can only go so far.

Re: "In sum, for personal property, the rule is that the owner of the property is the one that is in actual physical possession." So in that case, Lost or Stolen Property would never get returned, would it? BTW, automobiles are considered personal property, and yet when financed, should the holder in "physical possession" of the auto fail to make the scheduled payments, the true owner repossesses quite easily. Ergo, Possession is only 9/10ths (Prima Facie ie presumed correct) of the Law, and thus not 100%.

Spartacus Rex's picture

It Appears That "Investors" Are Getting Duped Again Into GLD

GLD Exodus Is Reversing

Zeal Research | August 16, 2013 The flagship GLD gold ETF has suffered a radically unprecedented mass exodus this year. The capital fleeing this single vehicle was the primary reason gold plunged so dramatically in 2013’s first half. But just this week, money started flowing back into GLD for the first time in months. This likely marks the dawn of the GLD exodus’s reversal, which is wildly bullish for gold. Falling stock markets will play a critical role.

The GLD gold ETF is now formally called SPDR Gold Shares. Rising from modest beginnings nearly 9 years ago, it has grown into a dominant force in the global gold markets. This is because GLD acts as a conduit for the vast pools of US stock-market capital to easily and quickly flow into and out of gold bullion. These capital flows can greatly affect overall gold demand over short periods of time, buffeting gold’s price.

If GLD operated like a closed-end mutual fund, issuing a fixed number of shares one time at its IPO, this wouldn’t be the case. GLD would have zero impact on the gold price after its initial bullion purchase. But GLD isn’t structured this way, its primary mission is to track the gold price. And there is only one way to accomplish this. Both excess supply and demand of GLD shares have to be directly shunted into gold.

When stock traders get excited about gold, they buy GLD shares at a faster rate than gold itself is being bought. Thus GLD’s price rises faster than gold’s, and it threatens to decouple to the upside and fail its mission. In order to prevent this and bring GLD’s price back in line with gold’s, this ETF’s custodians have no choice but to meet this excess share demand. So they sell new GLD shares into the market.

Selling new GLD shares naturally raises cash. And the GLD custodians immediately plow these new funds into physical gold bullion held in trust for its shareholders in its London vaults. This process effectively shunts excess GLD share demand into gold itself, amplifying the underlying gold rally. So when stock traders are exerting differential buying pressure on GLD shares, it is very bullish for gold. Cont. @ http://goldsilverworlds.com/investing/gld-exodus-is-reversing/

Spartacus Rex's picture

Ranting Andy: Gold and Silver Demand to Overwhelm Manipulation

Occasnltrvlr's picture

Okay, First Of All...

...Every time I see "GSR", "Welcome To The Jungle" starts running through my head, but I suppose that's my own cross to bear.

Second, about the "GSR":  I am of the opinion that it is completely meaningless.  It exists, because it can be defined, but means absolutely nothing at all.

Some people contend that any consistently- and well-defined statistic has some predictive power.  I am not of that opinion.

The ratio of chickens to cows exists too, but I don't consult it when evaluating the choice of wings or tacos for lunch, and one who did study it would not have sufficient information to make an educated guess about my choice.

thisismynewname's picture

Buy Silver

My out of the money Jan 18 calls are almost in the money, and that's almost at the point where I might have the seed money to turn a small pile of fiat into a big pile of fiat.  All I need is for the AG bull market to resume and to not see 6 weeks of price declines in a row.  Just give me fall 2010/spring 2011 again - that's all I ask.  (I missed the fall 2010 run, and was up 15x during the spring run when I thought Ag was going to punch through 50 and get me to 7 figures.  But I was greedy and ended up with a nice watch).

I've been able to do 2x or 3x fall/spring 2011/2012.  But then it all turned to fairy dust.  And don't tell me I have a gambling problem - I already know.

¤'s picture

MY GSR preference...

At this point I'm going to be buying a bit more silver (200-500 ozs. more would satisfy me) but my emphasis (hopefully) will be geared mostly towards gold at this point.

I need to catch up on my own personal GSR. My plan and hopes are that I start divesting some of my silver if we're to get back down to 30 or lower and then I'd swap it for more gold.

I'll never totally get rid of all my silver unless a very unique/volatile situation happens that I can't anticipate or expect at this point. It remains to be seen, but my emphasis going forward will be more golden then silvery.  It's a win-win situation either way.

1221-goldprices_full_600.jpg

Spartacus Rex's picture

@ "Okay"

So can One safely assume that you do not follow the GSR, notice the Cycle, and thus employ the cycle to greatly improve your physical stack? Regarding "The ratio of chickens to cows", such does however affect the​ consumer prices of same, thus not only choices made by consumers, but the bottom line profitability of restaurant chains, ergo investors who follow such, usually make wise decisions on which stocks to invest in. 

bucktooth's picture

JY - hat tip for the post

From my perspective, it all boils down to what is a good GSR for a specific individual. 

One could argue: Portability - favoring Au;     Fiat Currency backing - favoring Au;    Upside Potential/Price volatility - favoring Ag;    Geologic Availability - favoring Ag;    Above ground supply - favoring Ag;    Industrial usage - favoring Ag;    An Individuals wealth -- favoring Au as silver becomes unpractical for high net worth folks.

These are just a few topics that a person might take into account when trying to decide what GSR is right for them.   

thisismynewname's picture

Reading other people's comments

For me, reading other people's strategies as far as GSR/BTFD/Boating accidents, etc., I'm always asking myself "how many ounces of AU/AG for this person is 'a lot'?"  If you're making buy/sell/swap decisions, but your stack is 1/10th the size of mine, should I care?  Likewise, if your stack is 100x mine, should I care then either?

Using DPH as an example - if he already has 200 ounces of AU, my response would be along the lines of "If I were in your shoes, you have enough AU and I would be putting my fiat into AG because there's more upside".  But if he had zero AU and 100,000 ounces of AG, my response would be "What are you waiting for - get some of that into AU asap!"

If he had 2000AG, and wanted 500 more, but had no AU, my response might be, "If I were in your shoes, I would put extra money into AU, unless you wanted to take more risk.  AG has more upside, but it's tougher to move in size than AU.  And capital controls can come to either AU or AG, and not at the same time, so there's that risk..."

Anyway - that's about 6 cents worth.  Adding more than my 2 cents on this side of the paywall to try to get some discussion going...
 

alan2102's picture

Motley

Motley Fool is on record as saying that the GSR is going to 20,000:1.  And if Motley says it, that's good enough for me.

.

.

.

.

.

cheeky

Spartacus Rex's picture

@ag1969

LOL! Shouldn't that read as: 'Tittybomber'

wouldyoubelieve...'s picture

ag1969

well, now they have the perfect recruitment poster for teenage boys and geeks of all ages, "Join the TSA and finally get to feel some tatas"

Spartacus Rex's picture

Coming Soon...

Free Breast Exams, courtesy of the TSA!

Occasnltrvlr's picture

Monedas, "Yankee Dolla"

One of my favorites.  (It's a fact, man, it's a fact...)

Spartacus Rex's picture

West Sleeps On... MOPE & Manipulation Benefits the East

Physical Gold Demand Surges 53% In Q2, Total Supply Down 6% - Price Falls 35% By Mark O’Byrne Gold bullion gained as data showed that global physical demand remains very robust. 

The latest World Gold Council Gold Demand Trends report, which covers the period April-June 2013, confirms again how recent falls in the gold price were due to speculators selling paper gold rather than a decline in actual demand for physical gold.

It highlights, once again, that the price falls have generated significant increases in demand, most notably from store of wealth, jewelry, bullion coin and bar buyers  in Turkey, Dubai and the Middle East, Vietnam, India, China and the rest of Asia.

Meanwhile speculators, primarily banks and hedge funds, exited their positions in the gold ETFs and futures markets. This led to liquidations of just 402 tonnes of ETF gold worth only $18.3 billion.



Support & Resistance Chart - (GoldCore)

To put this number into perspective, demand from India and China alone in Q2 was 310 tonnes and 276 tonnes or 586 tonnes combined. This demand alone vastly outnumbers the ETF outflows. Yet prices fell from $1,598.75/oz (closing price on March 29) to a low of $1,180.50/oz (closing price on June 28) - a very significant fall of 35%.

Monday, April 15 alone saw massive $20 billion paper gold sell orders on the COMEX trigger stop loss selling and unfounded panic in the gold market.

Reports suggest that a futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting. The futures market then saw a further wave of selling of contracts worth some $15 billion, equivalent to 10 million ounces of selling or 300 tonnes, in just 35 minutes.

According to the report:... Cont. @ http://www.goldcore.com/goldcore_blog/gold-jewelry-coin-bar-demand-53-and-total-supply-down-6-q2-2013-price-falls-35

Occasnltrvlr's picture

Yes, Spartacus,

That does help to predict consumer prices, but doesn't help in determining my appetite at the point that I choose to purchase.

Yes, you can safely assume that I do not "employ the cycle to greatly improve [my] physical stack" but you are presuming that your contention is possible in the first place, which I contend is not.  If you are able to use GSR to your advantage, great, keep doing it.  But I will never be convinced that that single data point can be interpreted to be a meaningful directive.

Spartacus Rex's picture

Demand For Gold Bars/Coins Make Up For ETF Outflows In Q2 2013

Gold Silver Worlds |   The World Gold Council released the global gold demand trends for the second quarter of this year. In this article, we highlight the most important figures. In fact, the accompanying charts tell the story.

During the second quarter, gold demand accounte for 856.3 tonnes. That’s 12% less than the same quarter a year ago. A wave of outflows from ETFs was the principal cause of the decline, although this was mitigated by record demand for gold bars and coins. Continuing the theme of the previous quarter, demand for jewellery grew significantly to reach multi-year highs. Supply declined by 6%, the primary reason being a marked contraction in recycling.

The 12% decline in tonnage demand translated into a 23% drop in value to US$39bn – its lowest level for more than three years (see table). Q2 saw an absolute drop in the gold price of more than US$400/oz – a double-digit decline in the average quarterly price compared with both Q1 2013 and Q2 2012. In the context of this price move, the decline in value terms is unsurprising. That total bar and coin demand was able to reach a record value of US$23.1bn in spite of such a sizeable price move is testament to the strength of demand in that sector. The price action also had an impact on the supply side of the gold market resulting in a sharp contraction in recycling. In what is a normal reaction to sharply weaker prices, recycling activity shrank – primarily due to consumers in developing markets holding onto their stocks of old gold as the profit motive waned along with the gold price.

gold demand Q2 overview physical market

The second quarter saw:

  1. a continuation of the strong recovery in consumer demand for jewellery;
  2. the prominent role of India and China on the global stage;
  3. a divergence between different elements of investment; and
  4. a shift in focus from West to East – all of which were amplified compared to last quarter.

The following three charts show the details for the investment demand per category, total bar and coin demand over the last years, and central bank demand in the last quarters.

gold demand Q2 2013 investment demand physical market

gold demand Q2 bars coins physical market

gold demand Q2 central banks physical market

 Source: World Gold Council and Thomson Reuters. http://goldsilverworlds.com/physical-market/demand-for-gold-barscoins-make-up-for-etf-outflows-in-q2-2013/

John Galt's picture

Gold vs. Silver?

Thanks for this post JY.

FWIW, when I started stacking I went 100% silver primarily because everything I was hearing and reading suggested silver had the biggest upside potential. (I also sheepishly admit to getting caught up in some of Max Keiser's early hype about silver as the best investment ever).  At the time the GSR was about 80:1. 

As I read more about PMs, including some of the old posts by Another via FOA (and subsequently FOFOA) I began to question the certainty of going all in with silver. Yes, I am familiar with all the arguments why silver is supposed to be the investment opportunity of the century, but seeing that I am looking more for insurance than investment it seemed prudent to shift into gold as well.

As for timing it was luck more than anything else that had me shifting from silver into gold when the GSR dipped into the 40s a couple years ago. I actually ended up with more bang for my fiat buck than if I had gone into gold right away.

At this point I am positioned roughly 2:1 in $$$ terms in gold vs. silver. For me personally I think it is wise to hold both, and my unit of choice is 1 oz coins, esp MLS or Eagles. At one time I did have some banker bars (1000 oz) of silver, not thinking about how difficult it would be to liquidate these should the price go to the moon. Smaller denominations, IMO, are more practical.

As for the GSR there are arguments to be made that the proper balance should be about 15:1. The historical record in the chart posted above, however, shows a very broad spectrum of ratios over a very long time frame so I don't know if it is wise to invest on the assumption that the historical ratio "should be" 15:1. Only on a few brief occasions has the actual ratio dipped that low.

All things considered, if I was starting a stack today I would likely lean more to silver when the GSR was higher than 50 and, alternatively, buy more gold when the GSR got 40 or lower. With roughly an even weighting in both one could shift from one metal to the other as the GSR went back and forth, and actually grow one's stack without having to sink further fiat in as investment.

One final point I'd like to make is that when I first started stacking my strategy was to go all in. Some readers here may have already done that, and some might be considering it. My own view on this has moderated over time, and while I once thought it best to be 100% invested in PMs I have since scaled back to broaden my preparedness for TEOTGKE with things like food storage, seed, gardening supplies, generators, solar panels, water purification, hand tools and other forms of PM such as lead and lead delivery systems.

I also hold some fiat in paper form outside the system, because when the bank holidays take place I'd rather be in a position to buy needed goods rather than wait helpless in line at locked banks or empty ATMs.

My stack is now modest compared to what it once was, but hopefully I am better prepared. 

And one final comment: we can talk about PMs and other forms of preparedness, but don't forget about your community. While we have an excellent community here helping each other and sharing information don't forget that this community of folks at TFMR is mostly a virtual one, and TPTB can shut it down at any time and will probably do so when they get desperate enough.

Therefore, think local too, and build your networks with those around you.

Syndicate contentComments for "Silver for gold -- and vice versa"