S&GS Notes: See also
Tracking The Re-Monetization of Silver
by Vincent Bressler
July 2, 2008
Silver has been thoroughly de-monetized. The best way to observe this phenomenon is by looking at the above ground stock of silver. Many words have been written on this subject over the last ten years by Ted Butler and others. Let me simply state that that there is very little above ground silver left in the world, perhaps less than 1% of what there used to be.
In order for anything to effectively act as money, there must be a stable supply. Today annual mine supply is about 900 million ounces and above ground silver supply is about 1/3 of that. This is not a stable situation, not the situation that existed 100 years ago when silver really was money. In order for a metal to function as money, the above ground supply should be equal to the mine supply for the last several decades at least! This is certainly the case with gold.
The second best way to observe the level of monetization of silver is via the silver/gold price ratio. When silver is a monetary metal, the silver/gold price ratio should be equal to the relative abundance of silver vs. gold in the Earth. When both silver and gold are money, mining each metal is a form of direct money creation. Capital will compete to create the most money for the least cost. The cost to produce an ounce of new silver will track the relative abundance of silver in the Earth, as will the cost to produce an ounce of gold. Therefore the natural silver/gold price ratio will settle in at about 1 to 15.
Now that I have given you some tools to track the re-monetization of silver, the big question is, will it happen?
I think that we don't know the answer to this question yet. The critical point in this process will occur when the silver to gold price ratio crosses the 1 to 15 line in a few years time. At this time, investor demand for silver will be running wild. Silver is bound to overshoot the 1 to 15 ratio this time (in 1980 the 1 to 15 ratio was the peak). If the silver to gold ratio continues to go up and stay up above 1 to 15 for several years while the above ground supply increases year after year after year for a decade, then silver will have been effectively re-monetized. Only monetary demand can support the price of silver at 1 to 15 as the above ground supply grows. This will be a natural process which will play out over decades, if it happens. My suggestion to the investor today is to load up on physical silver and start selling it for gold as the 1 to 15 ratio is breached.