Skip to main content

History and trading two different things

I happened to check bullion prices yesterday afternoon. It was a holiday in the United States, but not elsewhere in the world. Gold and silver were dropping to very near the nice round numbers of $1,200 and $16 when I looked.

On my morning visit to the Kitco website I see there is a bit of a bounce going on for gold. It is $1,213.30, up a bit more than $8 while silver at $16.05 is up eight cents.

Another round number is the price of gold is almost exactly 75 times the price of silver.The gold/silver ratio is something that we all think about, write about and lend importance to, but other than day to day comparisons of strength or weakness, or perhaps even year to year, does it matter?

I know that not all that long ago silver had been even weaker relative to the price of gold and market pundits were recommending its purchase, essentially swapping out of gold for silver.

For short term trading, it seems to work.

What about the long term? Coin collectors especially are aware that historically gold was 16-1 during the American gold standard period.

Officially, the USA was on the gold standard from 1900 to 1933, but it kept an eye on the relationship to set coinage weights.

In 1834, gold coin weights were reduced because the official ratio was out of whack compared to what the market was indicating.

Then after the California gold supplies swamped the market, the value of silver relative to gold rose, forcing the government to reduce the silver weight of silver coins.

In 1873, because of large silver supplies from the Comstock Lode, silver coin weights were increased again.

In the 19th century, the changes were modest. Silver kept falling and this was one reason the U.S. government finally went all in for gold in 1900 rather than continue the bimetallism that had been in place since 1792.

World War I inflation gave silver a reprieve and pushed its price up after the peace in 1918 to levels in 1919 and 1920 that pushed silver above the face value of the silver dollar and even for the circulating dimes to half dollars.

During the depths of the Depression in 1932, the price dropped to less than 25 cents an ounce, 0.2425 to be precise, putting gold’s price, then $20.67, at more than 85 times silver’s price.

We are in the same neighborhood now. The Depression was the low for silver and at that point, prices increased for many years running.

Bullion traders have to decide if these historical facts can provide any guidance to the long term future of silver in the 21st century.

Buzz blogger Dave Harper has twice won the Numismatic Literary Guild Award for Best Blog and is editor of the weekly newspaper "Numismatic News."

• Liked this blog? Read more by subscribing to Numismatic News