Should I Buy Gold or Silver?

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Prior to 1873, European countries’ currencies were backed by a combination of gold and silver. By 1873, all European countries , except Switzerland- had abandoned their respective currency metal affiliation in favor of gold. The United States also tied the dollar to gold in that year. The Swiss franc was made convertible into gold in the following year.

Thus, 1873 marks the emergence of the Classical Gold Standard. Each of these national currencies was fixed to the value of an ounce of gold. Since silver was no longer a part of the currency mix it’s price fluctuated, strictly based upon supply and demand.

In 1971, President Nixon cancelled the dollar’s link to gold.

It is important to remember that the gold price from the beginning of this chart in 1900 was fixed at $20.67 (U.S.) per ounce until January 1934, when President Roosevelt was instrumental in raising the price to $35.00 (U.S.) per ounce at which level it remained until President Nixon “temporarily” took the dollar off gold in August 1971. 
 

The spike low of 15.29 recorded at the end of January 1920 occurred at the commodity price peak following the First World War inflation.

A similar price spike low at 16.15 was recorded in January 1980. That low in conjunction with the commodity price peak on account of the Viet Nam war inflation signaled the end of the fourth long wave summer and the onset of the speculative autumn. The ratio low was not only attributable to the peak in commodity prices but it was further enabled by the Hunt Brothers desire to corner the silver market.

The low in March 1968 should be addressed. Why was silver in such demand? On November 19, 1967 British Prime Minister Harold Wilson, following several assurances to the contrary, announced a 14% devaluation of the British pound. “This relatively small devaluation of one single, non-reserve currency in November of 1967 turned out to be quite a spark in the monetary powder keg of the Bretton Woods gold exchange system and the London Gold Pool. Within weeks of the devaluation, the group of central bankers known as the London Gold Pool had to sell 1,000 tonnes of their own gold into the public market, 20-times the normal amount.” Silver Bear Cafe.

The demand for gold became so intense following this devaluation that European commercial banks attempted to restrict private gold purchases. “Of greater concern, however was the fact the drain on the pool (London Gold Pool) was accelerating again…the measures taken by the Swiss commercial banks and by some other continental banks to impede private demand for gold worked quite well; although it was clear from the start that such measures could only serve as a stop-gap until some fundamental change was agreed upon.” William Martin, Federal Reserve chairman December 12, 1967; quoted in R. I. P-The London Gold Pool, 1961-1968,Jake Towne, June 14, 2009; published in the Silver Bear Cafe.

With gold being relatively difficult to obtain, investors purchased silver as the next best hedge against further competitive monetary devaluations. This is happening today, as many can not afford $1,300 per ounce of gold. 

Let’s now move forward to examine this gold/silver price ratio chart from the time that President Nixon took the dollar off gold in August 1971 to the present.

Gold’s monetary role, which had lasted just short of 100 years (1873-1971) and much longer than that if we trace the peg of the £ to gold, was eliminated. From this point on, the prices of both metals should have been based upon the law of supply and demand. Unfortunately, gold and perhaps silver, have since been subjected to frequent official and unpublicized sales in an effort to control the price.

Once the gold price peg had been lifted, as one should expect, it began to rise from the artificial price base at which it had been held for so long. By January 1980, it had reached $850.00 (U.S.) per ounce, which amounted to a gain of better than 2,400% in a little less than eight and a half years. 

Of course, this price increase was also attributable to the most virulent period of the summer long wave inflation. Over the same period, the price of silver performed better than gold. As I have suggested some of that silver price increase was almost certainly attributable to the Hunt Brothers attempt to corner silver.

Since that ratio low of 16.15 in January 1980, the ratio has moved strongly in favour of the price of gold. The best that silver has achieved since then is a low of 1 /31.63 in April 2011. It was then that silver reached its price peak of $49.51 (U.S.) versus a gold price of $1,570 (U.S.) per ounce. Gold was to reach its price peak of $1,920 (U.S.) five months later in September at which time the ratio had risen to 1/45.4.

Overall, the ratio median since August 1971 has been 1/ 56.01. (the price of 56.01 ounces of silver equal to the price of 1 ounce of gold).

In my opinion, the stock market is close to replicating the 1929 autumn stock bull market price peak, followed by the stock market crash. It is only a matter of time before the international debt bubble bursts and when it does, the central banks, this time, will be powerless to stop the utter destruction of the international financial system and the world economy.

When the great roaring 20′s autumn stock bull market peaked in early September 1929, there was no indication of a brewing credit collapse that would almost bring down the entire U.S. banking system. Indeed, there was no sign of a stock bull market price peak (no one rings a bell at the top of the stock market), and what was to follow would be a bear market that would reduce the value of the Dow Jones Industrials by 90%.

The stock market crash in October 1929 was viewed by many as detached from the real economy. E. H. Simmons, President of the NY stock exchange, on January 26, 1930 put it this way, “The psychological effect of the stock market on business is, I think, usually overemphasized…. I do not think that the fall in security prices will cause any great curtailment in consumption, and the trade figures thus far available seem to bear out this view.” 

In like manner, Charles M. Schwab, Chairman, Bethlehem Steel Corporation on December 10, 1929 said this, “Never before has American business been as firmly entrenched for prosperity as it is today. Steel’s three biggest customers, the automobiles, railroad and building industries, seem to me to justify a healthy outlook….stocks have crashed but that means nothing to the welfare of business…wealth is founded on the industries of the nation, and while they are sound, stocks may go up and stocks may go down, but the nation will prosper.”

 

Regardless of this misplaced official optimism, the evidence was accumulating that things were getting a lot worse. By the spring of 1930, six months after the crash, over four million Americans were out of work. 

“Despite pledges to the government, the nation’s business leaders saw no way to save themselves but to cut production. Some tried by cutting the work week to spread out available work among more laborers; others tried to keep their employees on by reducing wages. 

But the truth was that consumption had slumped tremendously. Lines of patient, hopeless, humiliated men shuffling forward slowly to receive a bowl of watery soup and a crust of bread from charity kitchens, Salvation Army halls, and local relief agencies.

In New York, the number of families on relief was 200 per cent greater in March, 1930, than it had been in October 1929.” The Great Depression, The United States in the Thirties, Goldston, Robert. The Bobbs-Merrill Company, Inc, Indianapolis, 1986. P. 47.

“The depression worsened bringing more and more Americans into the ranks of the unemployed, as business failures continued to multiply, adding to an increasing number of banking failures. However, waiting in the wings was a massive bombshell that would make everything that had occurred since 1929 seem trivial by comparison.

In March 1931, Austria and Germany formed a customs union, in a world of increasing trade barriers (Smoot-Hawley) and restrictions. The French government hated and feared this treaty, which caused the Bank of France and lesser French banks to call in their short term debts from Austria and Germany. 

As a result, the Kredit-Anstalt suffered a run in mid-May. Once again there was a determined effort to prop it up; the Bank of England, the Austrian Government, Rothschild, the Bank of International Settlements and the Federal Reserve Bank of New York banded together millions of dollars in an effort to save the bank. 

Finally, at the end of May the Austrian Government pledged another $150 million (U.S.) to the bank, but the Government’s credit was now worthless, and Austria soon declared national bankruptcy by quitting the gold exchange standard.

This was the beginning of the end of the international monetary system based on gold. In September of that year Britain followed in Austria’s wake declaring bankruptcy by taking the pound off gold. From that point, it was only a matter of time before the international monetary system collapsed. This was realized when the United States abandoned the monetary system in March 1933.

This was an international credit crisis, made principally in America. Not only had American banks lent copiously to American consumers and corporations during the roaring 20′s, but they had also lent considerable sums abroad. For example, when the crisis hit, American banks held almost $2 billion (U.S.) worth of German acceptances, and the Federal Reserve Bank of New York was on the hook for its share of the unsuccessful bail-out of the Kredit-Anstalt bank.

When that bank failed, it was the start of the sovereign debt collapse, but in the U.S., corporate and consumer debt, principally mortgage debt, had already started to fail, leading to a rising tide of banking failures.

Between 1929 and 1933, 10,000 U.S. banks were put out of business. The ongoing credit crisis of today is similar in many ways to the 1930s debt debacle. The principal exception to this comparison being that the debt bubble today is significantly greater than its 1930s counterpart and virtually the entire capitalist banking system is now at risk.

When the world credit crisis began in October 1929, there was first a flight from questionable securities into strong securities. The final phase was the flight from the dollar to gold.

This had nothing to do with inflation of the currency or inflation fears; the crisis was one of deflation and debt liquidation. It was simply the recognition that gold is the only financial asset that is not someone else’s liability and therefore, the only asset that cannot be defaulted and become worthless.

Following the 1929 stock market crash and the ensuing credit collapse, Donald Hoppe described the massive flight to gold in this way, “Foreigners cashed in not only their American stocks and bonds, but also their dollars and hauled American gold away by the boatload.

Americans converted their paper dollars into bank deposits into gold coins and stashed them in mattresses, hid them in basements or attics or took them on one way trips to Bermuda or the Bahamas. By July of 1932, Treasury Secretary Mellon secretly informed President Hoover that the Treasury, the Fed and the banking system were being drained of gold at such an accelerating rate that a collapse of the gold standard was imminent, and if the U. S. went off gold the dollar itself could suffer a severe decline in the foreign exchange markets”. The Kondratieff Wave Analyst, Hoppe, Donald, January 1986. P.9.

As the world credit crisis unfolded following the 1929 stock market crash in New York, the desire to own gold and invest in gold mining companies was not only a North American phenomenom but an international one, since almost all countries were mired in an economic depression. 

By 1933, twenty-five percent of Americans were unemployed and the government was desperate to get people back to work. Silver mining was an important activity in the U.S. and one of the most important in several western states.

The senators in these states wielded considerable power and they induced President Roosevelt to introduce the Silver Purchase Act of 1934, which in effect nationalized the silver market, much as the earlier Gold Reserve Act had nationalized gold. 

All newly mined silver was sold to the Treasury; thus, the U.S. government set the price of silver within the United States. The initial purchase price was $0.50 (U.S.) per ounce. In April 1935, the price was raised to $0.7757 (U.S.). Later it was increased to $0.90 (U.S.) and finally to $1.29 (U.S.) per ounce, where it remained until silver was denationalized in 1963. 

Silver has not been a monetary metal since 1873 and in the case of Great Britain since 1717. Gold, on the other hand, despite the fact that all world currencies are fiat, still retains a monetary presence in as much as most central banks hold gold as a part of their reserves. At this time, some countries, principally China and Russia are substantially building their gold reserves.”

 

There is much more to the story. To read the rest of the story, go to GramsGold.com