Silver bulls have written a lot in recent years about the low price of silver compared to gold. I am one of those optimistic authors. In 2010 and early 2011, all the bullish rhetoric about investing in silver was more than justified by the relative increases in the prices of silver and gold, with silver surpassing gold. by almost 300% during this period. Then the money hit a big bump in the road – or more descriptive; fell into a trench on the road. The price fell more than 30% in a week, and did not recover or hit new highs in a few days, as it had in other recent sharp declines. Is the party over to invest in the money? Has the bubble burst?
Let’s take a long term perspective. After 200 years with a gold / silver price ratio of around 17: 1, the ratio skyrocketed in the 1980s and even reached 100: 1 in the early 1990s. Yet during the 1980s and 1990s , the industrial demand for silver has also increased sharply and continues to increase in 2011 as new uses continue to be discovered. With the uses of silver on the rise and those of gold remaining fairly static, one would have expected the ratio to decline over the past thirty years and not dramatically increase.
At the start of 2010, the ratio was around 70: 1. But in early 2011, on the day that gold and silver hit new intraday highs, the ratio fell to a decades-long low. around 31: 1. The ratio has fallen by more than half in just over a year, justifying the fundamental supply / demand view that a return to the long-term ratio is inevitable. Then the price of silver collapsed by about 30% while the price of gold fell by a single digit percentage resulting in a gold / silver price ratio of 43: 1. .
In the late 1970s and early 1980s, when the price of gold reached bubble territory due to fears of inflation, there were several sharp and fairly deep declines in the price of gold. gold and silver. It looks like this time around will be no different. But those who say the bubble has burst are wrong. The gold craze has yet to set in, as inflation in the United States has yet to be recognized. Measured the way it was measured in 1970, inflation hovers around 10% in the United States in mid-2011. However, under the current method, inflation is just over 2%.
Those at the bottom of the earnings scale feel the price increases, but they don’t have the disposable income to buy gold or silver. The still-employed middle class has yet to feel the inflation. And those who are out of work do not have disposable income either. When the official inflation rate hits high double-digit numbers, causing house prices and market prices to fall sharply, the middle class will wake up. The mania for gold will follow, and the mania for silver will follow closely.
The money investing part is not over. It has barely started.