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Hi-Yo, Silver! A Wave!

08/26/03 04:10:01 PM PST
by Bruce R. Faber

This precious metal has been overlooked and much ignored for the past two decades. But that's about to change. Get ready for a breakout.

Throughout history, silver and gold have been the symbols of wealth. Gold has always had the upper hand, because there is physically less gold than there is silver. If we believe the experts on such matters, the silver to gold ratio is somewhere around 17 to 1.

The ratio of available supplies of silver (above ground) to gold is the converse, however. A much greater amount of the mined silver is used in industrial production than is gold. The lion's share of all the gold ever mined is stored in the vaults of sovereign nations, worn and displayed as jewelry, and, most recently, in the safe-keeping of investors. Some has been used industrially, but only a tiny percentage.

That is not the case with silver. Silver is used as a conductor in a variety of applications, in batteries, in photography, and in many other ways. As a result, the current stockpiles of gold are much higher than the current stockpiles of silver.

Another interesting development is how fast the available supplies of silver are being used up. In late 1945, there were 10 billion ounces of silver above ground in the world. Today, the known silver supplies, in the hands of government, industry, and individuals, have dropped into the millions. True, it is still the high millions, but in a world that is using an ounce and a half of silver for every ounce of silver being mined, it is a rapidly depleting inventory. Somewhere in the not too distant future, either the demand for silver must slow considerably or the price of silver will rise considerably. The latter seems more likely.


As the price of silver begins to rise, investors looking for a means of preserving their wealth in the form of hard currency will start buying. All that demand could have the same effect on the price of silver that a tidal wave has on a body of water.

Often referred to as a tsunami, a tidal wave is generated after an earthquake occurs in the ocean floor. As long as the tsunami is running through the vastness of the ocean, its energy is spread through thousands of feet of water, barely causing a ripple across the ocean surface. A tidal wave that will cause unspeakable damage once it reaches land may be less than three feet high as it crosses the ocean. The tidal wave can move through the briny deep nearly undetected compared with the normal movement of the ocean.

However, once that "undetected" wave approaches the shallower water nearing land, the situation changes dramatically. All of that unseen energy running below the ocean surface is now affecting a rapidly decreasing depth of water close to shore. The massive energy of the low running wave uncoils, developing into an enormous wall of water that finally hits land, wreaking havoc.

In many cases, the first sign of approaching disaster is the ocean along the coast seemingly being sucked out to sea, providing the water for the oncoming wave of destruction. Boats are left high and dry as the sea mysteriously disappears. Shortly thereafter, all of that water returns — only at that point it is not the nice flat bay of relatively little depth, but a powerful monster that destroys everything in its way.


In much the same way, it appears as though the silver tsunami is now nearing the shore. For 20 years the price of silver has been sucked down below its natural level. How big the approaching surge will be we can only surmise, but here are some observations that might help us estimate how extensive it could conceivably be.

To determine how much of a deviation from normal the silver wave could be, we must have some idea of what "normal" has been. If only a little water is sucked out of the bay, it is likely the resulting wave will not be as punishing as it would be if the bay was sucked dry. The same is true in almost any swing to and fro from any given norm.

As I stated at the beginning of this article, silver has been a measure of wealth for most of history. As such, it was hoarded by individuals and governments. That is how the 10 billion ounces came to be stockpiled at the end of World War II.

As the governments of the world switched from real, literally hard, currency to softer, more easily controlled and manipulated fiat alternatives, silver lost much of its luster. For much of history, the price ratio of silver to gold remained well below the ratio available in the ground. The highest (closest to gold) price ratio was just below 3 to 1, and the lowest (most distant from gold) price ratio was about 16 to 1, with an average ratio of about 8-12 to 1.

However, from the end of the 19th century until now, the silver to gold price ratio has drastically changed. In the last 130 years, the ratio has fluctuated between a high ratio of 16 to 1 and a low ratio in the neighborhood of 100 to 1, with the average being close to 30 to 1.

As with everything, whether moved by man or by the forces of nature, when something causes a deviation from the norm, there is a constant pressure to return to the mean. This is the way things have always worked. Whether we are talking about lemmings or waves, or prices of stocks and commodities, a return to the long-term norm is going to happen.

Further, it is not generally a return to exactly the middle. A pendulum does not just swing back to the center and stop there. It always goes way past the mean in the other direction, then in the other direction, until eventually, it comes to a stop in the medial position. In addition, the further the movement from normal, the more pronounced the movement past the midpoint to the other extreme.

In the last 20 years or so, the silver to gold ratio has been stretched to a ratio of between 70 or 80 to one. You could say that a lot of the value has been sucked out of the price of silver. Now, as the available silver supplies come closer to depletion, and with demand continuing as if the supply were infinite, the ratio is just beginning to decrease. The swing in the other direction has just begun.

If the ratio were just to return to the 30 to 1 average of the last 150 years, the price of silver would have to more than double, or the price of gold would have to be cut by more than half, while the price of silver remains the same. Given today's uncertain world, and the $50 million a day increase in the money supply, combined with our nation going into debt to other countries at the rate of $1 million a minute, the price of gold falling is probably not a likely scenario.

While it is possible that the price of gold could fall, it just doesn't appear likely. If it did fall, even to the lowest point it has been in the last 25 years, it would still be less than the halving of the price necessary for silver to remain at its current level. And in fact, the opposite seems to be the case. Gold has just begun a recovery of its own and looks to be on the road to much higher, not lower, prices.

For example, let's say that gold is $350 per ounce and silver is $5 per ounce. That is a 70 to 1 ratio. (As I write this, the ratio is over 73 to 1.) If silver were to swing back to the 30 to 1 ratio, and gold remained at $350, then the price of silver would have to jump to over $11.60 per ounce. If it were to push past the multiyear average to the multiyear high ratio of 16 to 1, the price of silver would rise to almost $22 per ounce. As the price of gold goes up, the price of silver increases 2.33 times as fast as it returns to the average ratio and over four times as fast if it swings to the other ratio extreme.


Though there are several websites on the Internet where you can find soothsayers of silver who believe that a rise in the price of silver is imminent, none of them want to say exactly when it might occur. Sooner or later, the fear instilled by what happened to the Hunt brothers in the debacle that reached its pinnacle in January of 1980, when they attempted to corner the silver market, will dissipate. More and more investors and speculators will begin to follow the lead of well-known investor Warren Buffett, who bought 130 million ounces of silver in 1997. You can bet that others will also become major purchasers as well.

When that speculative buying begins to happen, those already riding the silver surf will be holding on for the ride of their lives. And if they kick out at the right place near the top of the wave and get back in on the gold side of the ratio, they should be able to trade in their surfboards for cruise ships and hang 10 off the edge of a promenade deck for the rest of their ride on this big blue, and silver, world.

Bruce Faber may be reached at


Letter exchange between James Cook and John Mielke of the US Commodity Futures Trading Commission,

Duncan, Richard [2003]. "The Dollar Crisis: Causes, Consequences And Cures," John Wiley & Sons.

"The Great Silver Boom,"

Jason Hommel's letter to the US Commodity Futures Trading Commission concerning silver shorts and fraud (highly recommended),

McAlvany, Don. "Look For The Silver Lining: The Coming Bull Market In Silver, Part I,"

Sanders, Franklin. "The Gold/Silver Ratio Strategy & The Case For Silver,"

"Silver To Move Higher In A Violent Manner,"

Stott, Don. "Imagine A Siphon,"

Stott, Don. "Suppose Everyone . . . ,"

Current and past articles from Working Money, The Investors' Magazine, can be found at

Bruce R. Faber

Title: Staff Writer
Company: Technical Analysis, Inc.
Address: 4757 California Ave. SW
Seattle, WA 98116
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