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Silver demand tops gold

The price of gold is up slightly while prices for silver, platinum and palladium are all down from a month ago. With the U.S. stock market indices down several percent from their recent highs, many people would expect the prices of precious metals to be performing even better.  Why aren’t they?

As I have previously explained, the price of gold is interpreted as a report card on the U.S. dollar. If the price of gold is rising, that reflects poorly on the U.S. economy, government and dollar. It would lead investors to seek higher interest rates for being willing to loan funds to the U.S. Treasury through purchasing government debt. It would also likely persuade a number of foreign central banks and investors to repatriate their U.S. dollars and Treasury debt to replace them with goods and services or foreign investments.

To help finance budget deficits and pay lower interest rates on its debt, therefore, the U.S. government has a huge incentive to manipulate the price of gold.  A review of declassified U.S. government documents and those obtained by the Gold Anti-Trust Action Committee, Inc. (www.gata.org) through Freedom of Information Act requests show that the Feds have in fact actively manipulated golds price consistently from the mid-1930s up to about 20 years ago.

During almost all the time when the U.S. government was manipulating gold’s price – virtually always to suppress it – the Feds also denied engaging in such actions. In the past 20 years, the politicians and bureaucrats in Washington have continued to deny manipulating gold’s price, even though evidence now exists that almost every other financial market has been manipulated in recent years.  Many people, including me, expect to see that this gold price suppression has continued up to today when documents of the past two decades become public.

Like gold, silver has a multi-thousand year track record of monetary usage.  Physical gold and silver have never failed as money, though governments have tinkered with the values of monetary systems ostensibly backed by these two metals with the results that the currencies failed.

Historically, central banks held gold reserves to help sustain the values of their paper money. In more recent decades, central banks of emerging economies have been more inclined to hold foreign currencies as reserves rather than gold.  Over the past two decades, only the central banks of India and Mexico held much physical silver; though those holdings only amounted to tens to hundreds of millions of dollars.

In centuries past when silver and gold were circulating money, the ratio of the prices of silver to gold typically ranged in the 10:1 to 16:1 range.  As of last Friday’s closes, the price of gold was more than 71 times that of silver – largely because of paper commodity contract trading. Although it might seem that the U.S. government might have no incentive to suppress silver prices, it actually does. Over the years, the daily prices of gold and silver trend in the same direction about 70 percent of the time. If silver’s price is held down, that increases the market influence for a lower gold price.

No one knows what the long-term equilibrium silver to gold ratio would be.  Among those who have expressed their predictions, they range all the way from 10:1 to 40:1. I have not seen any predictions close to the current ratio.

Therefore, it should surprise no one that demand for physical silver by American investors is so strong in the U.S. that the dollar volume of retail sales by coin dealers (including my company) of silver exceeds that for gold. Over the past month, demand has been especially skewed in favor of silver.

As a consequence, there are now short-term delivery delays for many forms of bullion-priced silver coins and bars. The San Francisco Mint, which had stopped striking 2014-dated silver Eagles to get a jump on production of 2015-dated coins, has switched back to striking current year coins.

For some of the popular forms of silver ingots and rounds that are in current production, delays can now stretch out as long as three to four weeks. Premiums have increased slightly.

U.S. 90 percent silver coins, also called “junk silver,” have not been struck for 50 years. The only way to obtain them is to buy them from someone who already owns them. Over the past month, there has been comparatively little liquidation of 90 percent coin while demand has grown. As a result, the prices at which 90 silver coin is selling above its intrinsic metal value have increased about 50 cents per ounce since late September.

In the commodity markets, which trade paper contracts, supplies to cover outstanding contracts are diminishing.  My friend Eric Sprott of Sprott Asset Management in Toronto thinks that, maybe even before the end of 2014, there is a growing risk that COMEX silver contracts will default and be settled for cash instead of delivery of the physical silver supposedly backing the contracts.

Even though I think the prospects for much higher gold prices by the end of 2015 are attractive, I think silver will far outperform the yellow metal. It would appear that many American investors already agree.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com.  Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).  

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