Why Gold's Worse Than Silver (But Still Worth Buying)

goingbroke

A number of otherwise smart gold commentators believe that only gold is money and that silver will not work. I find myself puzzled and feel that I have to highlight the flaws in their viewpoint. At the same time, they gloss over a critical point (without even knowing it) that makes me reconsider my silver bias. To be clear, I own significantly more physical silver (100%) vs. gold (0%). In fact, I think the arguments that "pure goldbugs" make against silver are totally ridiculous. Before we get there, let's outline the most common "pure goldbug" points and debunk them.

1. Point: Gold has a better stock/flow ratio, which makes it a better “store of value” and therefore better value overall. Counterpoint: It’s a better “store” of the value it already has, but that doesn’t make it a better “value.” The overall value is determined by 1) how well it maintains the value it has and 2) how much value others will place on it for its uses. By goldbug logic, if hypothetically people needed to eat a tiny amount of gold each year to live (let’s call this an “industrial use” of gold), it would be less valuable than it would have been as a pure store of value. This fails the common sense test – nothing has to be a “pure” store of value to HAVE value.

2. Point: The rich and the governments/central banks only own gold, and they set the price, so gold must be that much more valuable. Counterpoint: Depends on how you see it – sort of. For example: two shoe salesmen visit a distant land in ancient times. One returns and says, “It’s horrible…nobody there wears shoes!” The other says “What an opportunity…nobody there wears shoes!” Pure goldbugs assume that demand for silver from central banks is nonexistent and will always stay that way.

Over the course of human history there has always been some ratio of gold to silver – I believe the 20th century decision of governments to get rid of their silver is just another stupid decision like “Brown’s Bottom” and is an aberration that will correct. In fact, China’s already buying – proving my point. Eventually, governments will buy it again to maintain strategic stockpiles for usage in: military applications, currency, and reserves. Does that sound like silver shouldn’t have much value compared to gold? Or is the opportunity that much greater?

3. Point: Silver’s not as rare as gold, and even if it is more scarce, scarcity doesn’t mean much – many things are more scarce. Gold's monetary value means that the gold/silver ratio (GSR) should be over 1000 to 1. Counterpoint: Yes, technically scarcity doesn’t matter. What matters is how scarcity is relative to importance. For example, I’ve got a unique rock, the Galt’s Gulch Special rock. Would you like to buy it for 100 gold coins? No? So there’s a tight supply (1 rock), but NO demand.

On the other hand, if we’re 1 mile underwater, and I’ve got the only 2 oxygen tanks – I’d like 100 gold coins for a tank of something that usually is free. Scarcity does mean value if the item is undersupplied. Furthermore, on a GSR of over 1000, with a few tons of gold, one rich person could control global silver supplies (which many different groups actually NEED), compared to gold (which just stores value). How likely is it that the world would just let 1 person control the global silver supply? If you think that's not possible, then a GSR ratio of 1000 is also not possible.

4. Final Point: The gold/silver ratio reached over 1:100 during past crises. Clearly, gold is always a better investment. Counterpoint: Exactly, during crises (non-normal periods) some people sold silver to hold a “more portable” savings (silver’s volume is much greater than that of gold) in case they needed to run. Viewed another way, people went crazy and provided a fire sale on silver. Using this time to determine the proper GSR is like measuring food inflation during a hurricane – prices are not rational at that time. If that was really what silver was worth, it would have STAYED at 1:100. If pure goldbugs were right, this would mean that the GSR of 1:16 in the earth’s crust is too low. This point also fails the common sense test.

HOWEVER – if people go crazy for gold and sell silver – why, then, you’d better have gold to sell to them. It probably makes sense to buy gold so that you can sell to the “gold-crazy” at a GSR of 100, wait for the GSR to return to 16 or lower, and then swap for 5X your original amount of gold. The risk here is that silver has been so suppressed that a GSR of 50 is never reached again, never mind 100 – and the GSR will eventually decline to the single digits in my opinion, just to clear the market.

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edmundfitzgerald

Point #2 is the crux of the problem. Gold is recognized by the major market players as money. It has always been that way, and
it will most likely always stay that way.

Although I didn't see it, I heard that Larry Kudlow last night mentioned that he has a "plan" to peg the dollar to gold. No one ever
mentions of pegging the dollar to silver.

Gold standard recent article

pmcollectour

(Kitco News) -- China is likely to remain a major importer of silver, says Commerzbank. The bank cites a report from the Antaike state research institute saying demand for silver is likely to increase further in China. “In addition to industrial use, mainly in the electronics and solar energy industries, demand is being driven by private investors, who regard silver as a safe-haven investment,” Commerzbank says. “China is therefore likely to remain a major importer of silver in future, also exerting influence on prices.”

jmski52

All good points, goingbroke. I can appreciate both metals, and my primary motivation is that both have a recognized street value whether the government thinks so or not.

JCMhouston

Point 1 - people have always valued gold more highly than silver, it doesn't have to fit some preconceived idea someone has, it's just always been so. There is nothing new in the world to change that.

Point 2 - this point is incorrect, China has also buying huge amounts of gold in addition to silver.

Point 3 - This argument doesn't hold water, I have not seen anyone saying the GSR should be 1000:1 can you provide a reference for that number? See number 1, the GSR has always ranged from around 15:1 to 45:1 throughout recorded history and there is nothing new in the world that should cause that to change. Having an argument about some rock or air tanks under water is simply a way of confusing the issue, they have absolutley nothing to do with the historical GSR.

Point 4 - is apparantly a rehash of point 3 - noboby claims the GSR should be 1000:1 so the entire paragraph is an argument against nothing.

jmski52

People who rely on the GSR are making things too complicated for themselves.

cohodk

<< <i>People who rely on the GSR are making things too complicated for themselves. >>



Its pretty easy to understand GSR. When greed is high--GSR is low. When fear is high--GSR is high. Both emotions represent extremes and are therefore unsustainable.



Central banks have absolutely no use for silver.

The "value" of a store of value is only as good as the relative price paid for it. Pay too much, and you have no value.


It is more common to see people convert silver into gold, than visa versa. Hence gold has more "value".

Rob85635

You make good points but I think it boils down to point 3. I recently read and linked here an article about silver, the Hunt brothers, etc. and according to many it is simply a matter of gold being more rare. It has its qualities of look, not tarnishing and since the dawn of man it has been the most sought after PM. Most easily accessible gold has been mined while silver is much more abundant in ore than gold.

Time can only tell but if you go by the last 3000 or so years, gold has always been the PM of PMs.

MrBear

There appears to be a lot of unsubstantiated assumptions in this argument, as well as dismissing some of the central points of the whole gold/silver value debate as being irrelevant. Unlike silver, gold has almost no industrial use. It's primary use is as bullion and decoration (i.e., jewelry), which is tied to the whole "store of wealth" concept. One of the reasons that central banks don't hoarde much silver is because of its relative lack of value. There are people in the world whose net worth would allow them to buy up all of the silver in the world, even at $50 (this is a thought experiment only - obviously, the price would skyrocket if Bill Gates or Carlos Slim started buying it all up).