Is the Gold/Silver Ratio at a Tipping Point?

Yes, it’s very difficult to predict short term moves in any market; stocks, bonds, silver, gold, etc. But there are some fundamental principles that govern long term financial activities. The fundamental that most seem to forget is when the money supply is expand without a corresponding increase in the quantity of commodities, in general, PRICES WILL RISE. The money supply has been expanding ever since the Federal Reserve System began operation in 1914 and between then and now a lot of the money has been created that has gone into foreign hands during that 97 year period. Foreigners have been holding onto those dollars for a number of reasons which I’ll not explain here. There is more than $7 trillion in foreign hands due to the trade deficit alone and that doesn’t include foreign aid, loans to third world countries, etc. Foreigners, especially the Japanese, Taiwanese and Chinese have been supplying us with cheap products that have kept prices in the U.S. much lower than they would have been if all that money had stayed home. This has delayed the operation of cause (expansion of the money supply) and effect (rising prices) in the U.S.

Foreigners see Bernanke’s radical expansion of the money supply and know it will cause prices to rise. Of course this is just one way of saying that the value of the dollar will fall – which it’s doing. Thus foreigners want to get something for their dollars before they lose any more purchasing power so they are purchasing U.S. commodities including gold and silver. Thus we have dollars coming back to our shores and commodities going out. This further upsets the balance between the quantity of money and the quantity of commodities.

Once this is clearly understood, it’s easy to predict that prices of everything, including gold and silver, will continue to rise for quite a while yet because there is still a lot of money that’s coming home. Foreigners will see the current drop in specie prices as a fortuitous gift and it’s my bet that they will buy with both fists full of dollars. However, they may wait to see how much further it drops before they jump in and buy. This will drive prices back up.

How will the rise in the prices of gold and silver compare to the rise in other commodities? That’s almost impossible to predict with certainty. To a large extent it depends on the outlook of foreigners. Do they want long term financial security or short term “flash in the pan” profits? It’s not possible to predict what percent of foreign held dollars will go into gold and silver and what percent into other commodities or investments (real estate, factories, etc.). But one thing you can count on for sure is that a portion of the those dollars will go into gold and silver until all the hoard is returned and by that time we will probably be in hyperinflation.

Yes, there will undoubtedly be some pull-backs in precious metals prices, but in the overall picture prices will continue to rise until money creation by the FED is stopped and foreign dollars are back in the U.S. How high will they go? I don’t have any idea, but I’m certain it will be much higher than they are now because there is so much fraudulent money floating around and people will naturally try to protect themselves from dollar depreciation. Buying gold and silver is a good way to do it.

It’s very likely that the dollar will be replaced by another currency before it becomes worthless like the German Mark did in 1923. But the new currency will also be a managed fraudulent currency which looks different but will continue to be the product of legalized counterfeiting, just like the dollar is. This may delay the ultimate world-wide economic collapse but it will not prevent it.

I see some comments about “deflation” which is a commonly misused word. Inflation is expansion of the money supply which causes prices to rise and deflation is the converse – a decrease in the money supply – not falling prices. Using the word “deflation” to denote falling prices confuses cause and effect relationships and leads to false solutions to problems. It’s true that a reduction in the money supply would cause prices to fall but so does a lot of other things which do not reduce the money supply – such as falling real estate prices and crashing stock markets. Hoarding money also causes prices to fall but does not reduce the money supply. The money is still available for purchases when the hoarder thinks the time is right, and it’s often the worst time for the economy. People who are saving today will probably contribute to hyperinflation in the future. As Bernanke continues to expand the money supply, prices will continue to rise and savers will have the choice of watching their savings lose purchasing power or spend them in order to avoid the loss – they will spend them and thereby add to the glut of dollars floating around.

There’s a time lag between the counterfeiting operation and rising prices which confuses people. It will probably be nine months to a year down the road before prices begin to rise as a result of Bernanke’s present counterfeiting operations. The price increases we are experiencing today are a result of PAST money creation by the FED plus the repatriation of foreign held dollars explained above. Of course in the past the FED created those dollars with which foreigners buy our commodities today. Thus we see there has been a delay of several decades between cause (expansion of the money supply) and effect (rising prices).

Incidentally, the historical ratio between gold and silver has been 16, not 33, so it has some more falling to do before it stabilizes.

Bill Denman.