Precious Metals Rally
Research for Online Investors

by John Dalt

7/15/11

Gold is setting highs as it marches against the fallacy of fiat currencies.  Silver set its new high on April 28th in a parabolic run-up.  It is now being drug back to life.  The Comex raised the margin requirements on Silver to take some of the steam out of the market.  It seems they had more open contracts than could be delivered!  That did the trick, knocking the iShares Silver Trust etf (SLV) down from $48.35 to $31.97 in two weeks.  The Spdr Gold Trust etf (GLD) lost 4.3% at the same time.

Silver was leading the precious metals market, and dragging gold with it.  During the spike in Silver prices the Gold/Silver ratio reached a low of approximately 31.  That means it took 31 ounces of silver to buy one ounce of gold.

Gold and silver have always been considered money.  As such they had to be valued against each other.  The U.S. Coinage Act of 1792 established the U.S. Mint, preserving the right of all persons to have coinage struck with their gold or silver at ‘established ratios.’ Alexander Hamilton, as the Treasury Secretary, established the ratio at 15 to 1.

This ratio was roughly the same that had been used in Europe since the late 1500’s This ratio was the perceived value of each metal in relation to the other. Large amounts of silver were discovered in Spain, Mexico and Peru. The ratio established the exchange rate for miners to change their silver in currency or gold.

Some parts of the world valued silver at a much higher rate. In Asia, Africa and India silver was valued at a higher rate with a ratio that generally stayed below 10 to 1. By the late 1800’s silver had lost much of its attraction for currency. Governments preferred to keep reserves in gold. After the U.S. (under Nixon) took away the backing of gold and silver for the dollar and made coins out of other metals, governments dumped over three billion ounces of silver and 150 million ounces of gold on the market.

With that history, the following chart shows the gold/silver ratio for the last 36 years.

You can see the dip in 1980, when the Hunt brothers drove the price of silver to $50 per ounce. Over the next 11 years the ratio climbed until peaking at 100 to 1 in 1991. Since then, the market seems to have established a “normal” range of around 60 to 1. The chart below shows the last three years with a horizontal line drawn at 60 to 1.

Is a ratio of 60 to 1 the new normal? Since the last of August 2010, silver has been moving higher faster than gold.  Since it was making larger percentage gains, the ratio went down.

Here is a chart of gold over the past three years. I have included a blue line for the 200-day moving average.

In August, silver gained favor as the "poor man's gold" as protection from inflation. Here is silver with the same 200 day average line.

The fall in silver in May let it consolidate and now appears ready to move higher with gold.  The 200-day moving average for silver is rapidly approaching the lows set in May.  Gold hasn't been below its 200-day average in over 30 months.  Silver has hugged it a couple of times but rapidly recovered.

We wonder if Silver will return to the "historical" relationship of 15 to 1.  At current gold prices, that would mean silver over $100 per ounce!  It makes sense to look at ratios before central banks and politicians actively worked to destroy the perceived value of precious metals.  The harder they work, the more the true value of precious metals comes to the surface.

Quote:
It’s not tyranny we desire; it’s a just, limited federal government.---Alexander Hamilton

The mailbag:
Thanks for the list of cuts the Republicans provided earlier this year.  Just imagine; if the Republicans cut the Federal Travel Budget in half, providing a $7.5 billion annual savings....then the OBAMA FAMILY would have to be responsible for their own travel costs. Blahahaaaa! Never would the Obama's voluntarily remove themselves from the ENTITLED list.---subscriber B.S.

Thanks for yesterday's article.  When you look at some of the places our tax dollars go, it makes me sick.--subscriber J.P.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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