Why is Silver So Cheap? Why is Gold So Expensive?
At last look, silver was up 3.5% on the day extending overnight gains and building on last week's rally. Gold was up a more modest 2.2%. We've been down this road before, only going in the other direction.
Back in November, we looked at the price relationship between gold and silver ('What's Better: Gold or Silver') from a market capitalization perspective.
That's a novel view for most traders brought up using the more traditional gold/silver ratio. For a long time, the ratio was set by fiat at 15.5-to-1, meaning that one troy ounce of gold would buy 15.5 ounces of silver.
If those laws were still followed today, silver would be trading at $58 per ounce. In 2007, the gold multiple rose from 47x to 57x (see "Gold vs. Silver" below).
Gold Vs. Silver
So, why IS silver so cheap? I mean the earth's crust, on average, contains 19 units of silver for every one unit of gold according to the U.S. Geological Survey. If gold and silver were equally accessible, that makes gold three times more expensive than it "ought" to be.
There's, of course, a big difference between "ought" and "Unload the truck, Lenny."
Theories abound, but there are a few favorite notions. Most commonly mentioned is a large concentrated short position held against futures-deliverable stocks. According to the Commodity Futures Trading Commission's Commitments of Traders report, three or four traders are short about 140 days' worth of silver production.
Better to ask, I think, "Why is gold so expensive?" The simplest argument centers on gold's greater acceptance as a store of value. In times of crisis it's gold rather than silver that people rush to.
More on this later...
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This article has 1 comment:
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fuzzywzhe
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19 Comments
Sep 10 04:55 PMThrough a good portion of history, that's what was drawn out of the ground, in respective percentages.
Furthermore, I dispute your claim of it's availability in the crust.
Last year, about 20,000 tonnes of silver were extracted from the ground (about 600,000,000 troy ounces) and 2500 tonnes of gold were produced (about 80,000,000 troy ounces). That ratio is 8.
In an entire year, enough silver is drawn out of the ground to give every American 2 ounces of silver, or at today's price, about $23.
So, indeed, why is it so cheap? In 1950 nearly every American had a least a few ounces of silver but then the government demonitized it and replaced it with steel, nickel, copper, later zinc.