Silver for gold -- and vice versa

Fri, Aug 16, 2013 - 4:33pm

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?

About the Author


Spartacus Rex
Aug 16, 2013 - 5:29pm

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
Aug 16, 2013 - 5:46pm

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. @

Aug 16, 2013 - 5:50pm
Spartacus Rex
Aug 16, 2013 - 5:51pm
Aug 16, 2013 - 5:57pm

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.

Aug 16, 2013 - 6:02pm

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.

Aug 16, 2013 - 6:04pm

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.

Spartacus Rex
Aug 16, 2013 - 6:09pm

@ "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.

Aug 16, 2013 - 6:17pm

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.

Aug 16, 2013 - 6:18pm

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...

Subscribe or login to read all comments.


Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 10/21

10/22 10:00 ET Existing home sales
10/24 8:30 ET Durable Goods
10/24 9:45 ET Markit flash PMIs
10/24 10:00 ET New home sales
10/25 10:00 ET Consumer Sentiment

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Recent Comments

Forum Discussion

by sierra skier, 40 min 16 sec ago
by NW VIEW, 43 min 5 sec ago
by Trail Trekker, 2 hours 2 min ago
by Scarecrow, 6 hours 5 min ago
by NW VIEW, Oct 22, 2019 - 7:41pm