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


Mr. Fix
Aug 16, 2013 - 7:00pm

I have not had a dull moment in months.

I've been feeling one of my classic rants coming on for weeks now, but I just haven't been able to find the motivation to sit down and write it. First off, I've learned some important lessons over the past month, and I thought I'd share them with the gang here.

I know it might be a stretch to tie this into being relevant to a precious metals log, but believe me it is, and you'll know why he for your done. If you've always been annoyed with my longer posts, you will most definitely want to skip this one.

As some of you know, I took on multiple jobs in order to pay for a new kitchen for my wife. Here's how that went:

I took on a new customer who wanted a new bathroom built were there was no previous bathroom on the second floor.

They went on vacation for two weeks, and left me in their house with expectations it would be done upon their return. After dozens of trips to the Home Depot, and many sleepless nights working around the clock, mission accomplished, and my customers were beyond satisfied, in fact I've gotten quite a few referrals because their friends and neighbors thought that the amount of work was extraordinary for the price that they paid.

During the times while I was not at work, I poured footings in my own backyard, after digging the trench that the concrete went in, and mixed the stuff myself, and build a a new wall outside of the old one against the back of my house.

I then took down a barn, and hauled away another 25 foot long 2 x 12s to extend past a loadbearing pre-existing wall on my house's interior, and then build a new roof over the entire structure.

I enclosed a previously outdoor patio, with siding donated from another contractor, (leftovers,) and used Windows and a door scavenged from a previous demolition.

Then I took on another customer's kitchen, it was a simple revamp, with the exception of building headers inside the attic so that I could remove the loadbearing walls that enclose the kitchen, and opened it up to the dining room/living room.

Most of the attic work was done during a heatwave, where the outside temperature covert around 100°. In the process, I lost nearly 30 pounds.

In the evenings, I started tearing out my old roof, which was underneath the new roof previously installed. I also removed the back wall of my house which was now enclosed with the new one, and then removed more walls that had previously been holding up the old roof.

I live in a 1929 log cabin, which is a series of additions, and once upon a time my small galley kitchen was obviously a back porch.

The floor was still pitched, and the old steel plumbing was just laying in the dirt between the floor joists, which were also running in the wrong direction.

The floor in the new section that I built was perfectly level, but when I removed the wall into the old section, I found that one side was a half-inch too high, and the other side was 2 inches too low, and the middle was shaped like a bowl. So I spent a few days in my crawlspace reinforcing the old floor to take out the discrepancies, and using the jack from my car, I jacked up all of the sagging structure, until all the floors were at the same height everywhere.

I spent days doing plumbing, cutting out all the of the rusty steel pipes, replacing them with new copper, and moving the plumbing into the new section, to spread the room out across the back of the house.

I also ran multiple new electrical circuits for the countertops, and all the new stainless steel appliances on order at the Home Depot.

The customers kitchen was another major hit, they loved it, and I was paid well for my efforts.

The work at my own house however was not particularly rewarding if I was expecting brownie points from my wife and daughter.

They constantly complained of the inconvenience, constantly complained about the noise, constantly complained about the dust, and constantly complain having to walk around me while I worked.

Last night we had our first meal in our new kitchen/dining room, and what I got for my efforts was a burnt hamburger, and some of the worst mashed potatoes I've ever eaten. Then I was told by both my wife and daughter who had originally demanded a new kitchen, that it had taken up most of their summer, and that somehow their lives were in disarray, despite the fact that they had spent most of the shopping, and visiting friends.

I must say, even if I'm the only one, mission accomplished, the renovation is complete, and even though nobody knows how to use the new appliances, which use an extraordinary amount of computer power to do things one simple knob would use to do, I'm sure at some point will get the hang of it.

So how does this relate precious metals?

I've been a stacker for the past five years, initially putting my entire life savings into gold and silver, and then adding to my stack on a fairly regular basis, most recently while the price continued to plunge.

My wife was disgusted with my investments, and said that that money could have easily bought the new kitchen that she always wanted.

I told her that I could build that new kitchen, but I would not sell my stack to do it, I would earn it as I went.

She will never know how much work that was to actually accomplish,

I underestimated it myself.

I've lost track of current trends in gold and silver, although I had long said that they would not be any significant movement until the entire system imploded.

It's starting to look like we may be getting close to that point.

I do not multitask very well, and for me to accomplish anything of value, I try not to focus on things that are still relevant to the task at hand.

Taking time to write this post has just been interrupted,

my wife is stuck on the side of the Jersey Turnpike and it sounds like one of her pulleys has seized, and the fan belts have melted.

Being in New York, I have quite a evening in store for me, as I must now drive to New Jersey and fix her car for her,

(which broke well on a completely unnecessary trip to IKEA).

I guess that's just how my summer is going.

Maybe I'll have time to post later this evening,

but I doubt it.

Thanks for being here.

Spartacus Rex
Aug 16, 2013 - 7:06pm

@ Mr. Fix

Hang in there King Stud! I know exactly how you feel!

Spartacus Rex
Aug 16, 2013 - 7:12pm

@ Occasnltrvlr

Perhaps not in your situation, however price is a determining factor concerning "appetite" for a majority of consumers. eg Taco @ .99 versus Chicken Wings @ 5.99 or switch those menu prices and what, presume that those that perceive a different bargain will not change their taste preferences accordingly? BTW, regarding "contentions", I have simply utilized the cycle for over 4 decades and thus am speaking from experience, however you are free to think, contend, and do whatever you want, and seriously, good luck with that.

Aug 16, 2013 - 7:15pm


Man, oh man...I wish I had that much gold.

Not braggin' at all but as way of an example for others based on your comments which I liked.

I have approx 30 lbs. of silver and only 1 lb. of gold. Sooo....30-1 isn't exactly a bad GSR when your talking pounds of metal. I like thinking in lbs.

I would like to acquire another 1 lb. or so of AU if possible (and get myself up to a kilo) and another 15-20 lbs. of silver and then I'll take a pause and see how it goes. I'm definitely not (ok, maybe not definitely) going to plow more fiat into the PM's until I see some signs where this heads for sure and with little doubt about it.

Like I said earlier, stacking is a win-win situation no matter what. My hoped for outcome in my case is that I never have to sell it or swap it out and I can leave it for my kids so that in the coming decades they'll have something that probably won't be affordable at that time.

$50,000 gold/ $1,000 silver anyone?

I'd feel good about leaving it to them. I'd also feel good about trading most of it in at some point for land or lots of fiat. Yep, that's right , I said fiat.

Unless we go to a golden implied debit type card (I wrote about this extensively long ago) and we have the option of redeeming our PM's into a regional bullion bank system in the future I'll hang onto it for as long as possible.

I see the possibility in the future of TPTB wanting our gold/silver and paying folks a premium to get it OR I can see a point in time where they'd like you to deposit it so they can then lease it out. Most people won't know about leasing like we do and making a royalty or premium for depositing their gold or silver might not be as nerve wracking to consider to them as it is to us now.

I believe something very unique will happen at some point regarding how they'll try to appeal to the masses about our gold and silver and try to pander to our fiat based needs.

Let me put it this there anyone here today who doesn't want or wouldn't like a lot more cash right now? I'm one of you in that regard and at some point all (ok, some or most) of my PM's that I spent a lot of cash on (to me at least) will need to be cashed out unless some radical new system is in place like an all electronic banking system where fiat is no longer or mostly not the preferred method for purchases by most people.

I think the transition could be almost seamless at this point. Everyone is using a card of some sort more and more frequently and people are very comfortable with them it seems.

John Galt
Aug 16, 2013 - 7:18pm

@ Mr. Fix

A Hat Tip + Hi5 to you Sir.

I. Am. Impressed.

Spartacus Rex
Aug 16, 2013 - 7:21pm


So, then if I read you correctly, you are thinking that instead of TEOTGKE, such will simply morph into merely another variation of same, and thus party on as usual? Have you considered the possibility that perhaps when all trust in bankers finally goes up in smoke, there will not be another variation of the pea under the nutshell / three card monty, and thus actual Lawful Money Gold & Silver Coin will actually reign supreme?

Aug 16, 2013 - 7:22pm

Good to see you Fix!

Good Luck on your repair mission to NJ. Don't forget the Duct Tape!

Spartacus Rex
Aug 16, 2013 - 7:25pm
Aug 16, 2013 - 7:35pm


Yep...but has anyone considered that this drags on for quite awhile and we get a variation of the same old thing like we have for decades upon decades?

I won't spend much time on this but if we were to have lived in the 1930's and we lived through a depression, U.S. bank holiday/Gold Act and a world war etc. I'm sure the future wasn't looking real good back then but look what we are 70 years later.

Can anyone imagine what the ZH headlines and stories would've said in the 1930's about those situations I just brought up? The sky would've been falling and TEOTWAWKI would be just around the corner...yet here we are 70 years later.

Has anyone ever considered how much inflation adjusted QE stimulus equivalent was spent during the 1930's and during WWII to prop up the economy and war effort? Not to mention the marshall Plan that spent billions oversea's? That money was printed out of thin air back then also. Yet here we are....70 years later.

Like the saying goes...never put all your eggs (emotional one's also) into one basket just in case. I believe this goes on for quite awhile and that a grand compromise or necessary monetary system adjustments between CB's (or simply BIS mandated) are made and that they don't sit around and watch everything melt down around them.

That's my belief at this time but I'm open to multiple scenario's and I'll adjust my thinking or holdings accordingly.

None of this means that I don't think it possible or likely that some type of major monetary deal or situation pops up and it causes PM's to rise significantly. However, I don't see panic stricken chaos.

I could be very wrong.

That's why I stack for myself...and for my kids...for decades down the road. Not tomorrow, but hey, you never know.

Cranky Old Bat
Aug 16, 2013 - 7:45pm

Mr Fix

You, sir, are a rare and wonderful treasure. I hope your wife and daughter come to appreciate what you've done.

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