Precious Metals Vs Government Currency

Throughout history, silver and gold were the international currencies of trade. The historic ratio between the two metals was 16 to 1. Governments rose and fell, but either of these two metals buried in the back yard, preserved your wealth.

The odd thing about government currencies is that they start out strong and then end up being debased by the government. What happens is that a different metal is substituted for silver and gold with the implied value. If you were around in the 1970’s silver coinage disappeared in our country. There is a saying that “Bad money chases out good money.” In 1964 the US mint took silver out of our coins. It cost more to buy the silver than the coin was worth to produce. Then in 1982, if you collect pennies, you’ll notice that there are two different types of pennies, copper and copper clad. The price of copper had risen to where it was too expensive to mint copper pennies. The thing to observe here is that metals act like a barometer for the currency in circulation.

The present government can print all of the dollars they want to print, and the price of gold and silver will tend to reflect it, in their “rise in value.” It’s like being in a row boat and someone chops a hole in the bottom of it. The water is not rising, the boat is sinking. The apparent rise in the value of precious metals can be attributed to two things; the number of people wanting to buy it, and the supply available. That seems so obvious, but it really isn’t. The world population has doubled in the last 50 years. (Double click for a larger view)

There are twice as many people desiring precious metals. So the actual supply has been cut in half. Second, people have a lack of faith in paper money. Usually when a currency falters badly, owning gold is curbed or restricted. No government wants their currency dumped for precious metals. They will halt it immediately.

The world’s currencies are a mess. They kind of convert using gold and silver. If you do a bit of googling, you’ll find out that the world has about 40 billion ounces of silver and about 5.1 billion ounces of gold. So if we have 7 billion people in the world, there is enough silver for everyone, but not enough gold. Then if we bring in the precious metal Platinum, there are only 186 million ounces of it.

Let’s look at some historical ratios:
Silver trading to gold 16:1
Silver at $32 implies gold at $512
Gold at $1700 implies silver at $106

Silver trading to Platinum 50:1
Silver at $32 implies Platinum at $1600 and vice versa

Examine the total supply of precious metals:
Supply of silver to gold 8:1
If gold is fairly valued at $1700 then silver should be $212
If silver is fairly valued at $32 then gold should be $256

Supply of gold to Platinum 27:1
If gold is fairly valued at $1700 then platinum should be $45,900
If platinum is fairly valued at 1600 then that implies gold is only worth $59

Mull it over in your mind and about the only thing you can really agree on is that Platinum is way under priced. There is enough silver and gold in the world, where those buying and selling will determine the price and no one can really corner those markets. Probably three quarters of the world population doesn’t have $500 in savings so a one ounce gold purchase is out of the question–silver maybe. But we do have to realize that the doubling of the world population has probably doubled the demand for precious metals

At some point in time world governments are going to have to consider platinum as a medium of exchange in world markets. That’s not saying that they couldn’t miss the bus. The private sector will pick up on this even if they don’t. You can’t print dollars forever and not expect inflation. (Double click for a larger view)(Don’t click if you are already depressed by what you see)

Look at the increase in the number of 100 dollar bills in just the last 10 years. I have to laugh when the reason given for doing so is to stave off deflation. It reminds me of the drunk clapping his hands in Central Park to keep away the elephants. When told there were no elephants in Central Park, he replied “See it works!” Any way you look at it, too much money is being printed worldwide to solve present financial problems and it just isn’t going to work. Some form of precious metals conversion will have to be in effect to facilitate world trade.

Another thing to realize is that silver has “become more valuable.” 100 oz. bars of silver are now worth $3,000. I was OK with a $300 dollar doorstop, now I feel like taking it to the bank for safe keeping. Its the same damn doorstop, but it’s worth stealing now. I didn’t do anything to it to make it worth more.

Platinum appears to be the biggest bang for the dollar. I bought gold when it was $300 and considered worthless as an investment. It’s still worthless as an investment, because it pays no interest. I can truthfully say the same thing for my savings account right now. Converting a portion of your gold holdings to platinum is not a bad deal right now, you get money back on the exchange. Platinum is cheaper than gold. It’s not an investment; it’s a bet that the government won’t stop printing dollars. And of course, there are only 186 million ounces of that precious shiny metal left (subtract what I finished buying yesterday).

Here is what the Platinum bars look like:

Expect to pay a $24 premium on the bars and a $48 premium on the coins.

Or you can play the game the Congressional way.

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