The Great Debate Continues: Silver vs. Gold

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I published
my report on "Buy Silver or Gold?" on February 7. By the
end of the week, long-time silver bull Franklin Sanders responded.
On February 8, I published Sanders’ article and my paragraph-by-paragraph

can read it here.

Unless you
are invested in gold and/or silver, the details of this debate may
not interest you enough to read a long debate. But you should at
least know about its existence. It is a debate over this question:

Will above-ground
supplies of silver run low before above-ground supplies of gold
— gold actually available to the market — run low?

I answer in
the negative. Sanders answers in the positive.

It is also
a debate over this question:

In a time
of an unexpected level of price inflation or after a terrorist
attack, is the demand for silver likely to exceed the demand for

I answer in
the negative. Sanders answers in the positive.

Finally, it
is a debate over this question:

During a
recession, is silver’s price likely to fall by a greater percentage
than gold’s price?

I answer in
the positive. Sanders answers in the negative.

think a recession is coming next year, and maybe late this year.

This is not written in dry cement yet. Wet cement, yes.


Those of us
who are old enough to remember Fred Foy’s introduction to every
Lone Ranger episode remember that famous phrase. Yet in the history
of silver, this phrase has applied only once: 1979. That momentous,
incomparable opportunity to make potfuls of money ended with the
worst bloodletting in modern commodity history. To understand what
happened, take a look at the chart of silver’s prices, from 1792
to the present.
Go to this page.

Then go to
"Yearly Silver Charts." Click the box for "1792-present"
and then "View Charts."

From 1792 to
1972, silver went essentially nowhere: 180 years of no profits for
silver investors. Then silver began moving up. I began selling silver
as an agent of a broker (Monex) in 1973. I did this for less than
a year. Then I went into writing full-time.

In 1979, silver
spiked upward by 10 to one. It hit $50/oz in January, 1980. There
had never been anything like this before in silver’s history. Then,
beginning in mid-January, 1980, it fell like a stone. It kept falling
until 1991, when it bottomed at $3.60.

Search long
and hard; you will not find anything to match the spike in silver’s

What happened?
Bunker Hunt happened. The multibillionaire oil man started buying
silver futures contracts in 1973. He kept accumulating contracts,
pyramiding them: using profits in his position to buy more contracts.
He then started demanding delivery in 1979, when the price of silver
was $5.

Demanding delivery
of actual commodities is rarely done in the commodity futures market.
Those who have gone long (buyers of future commodities) buy an offsetting
short position and take delivery of their money. There are vastly
more futures contracts promising to deliver any commodity than there
are supplies of this commodity. Some of those speculators who were
short silver saw a crisis looming: no silver to deliver. They sold
their positions. They did this by buying "long" positions,
which drove up the price. It was domino time for silver shorts all
through 1979.

Hunt was trying
to corner the market on silver. As a multibillionaire, he was feared.
He might be able to do it, investors thought. They were wrong.

Two things
happened to stop him. First, the FED reversed policy in October,
1979, from monetary inflation to monetary stability: tight money.
Interest rates began to skyrocket. The end of double-digit price
inflation was imminent. Second, the commodity exchange changed the
rules. No one was allowed to buy "long" contracts except
to cover existing "short" contracts. Demand for silver
futures contracts died overnight.

This caused
the peak price in January. Then down went silver. Hunt could not
cover his pyramided long positions. The commodity exchange sued
to collect. The FED intervened and provided a billion-dollar loan
to Hunt to give him time to liquidate his oil holdings and meet
his silver contracts’ obligations. He had to collateralize this
loan with his oil holdings. Hunt and his brother soon went bankrupt.
He had to liquidate everything except his home, which was protected
by the Texas homestead law. All that remained was his famous quip
regarding the billion-dollar loan: "A billion dollars just
doesn’t go as far as it used to."

Newcomers to
the silver market may not remember what has gone before. Silver
is approaching $10 now, up from $3.60 in 1991. That is a nice move
upward. It began before gold’s move in April, 2001. The two metals
have moved up in tandem since then.

The question
is: Will this continue?

I think it
will, but not in lock-step. If we get a recession, the upward move
could easily reverse. With
the inverted yield curve almost here, a recession looks likely for
Only the FED can lower this risk by inflating, which it
is now doing.


There is a
story that the U.S. government at one time owned 1.5 billion ounces
of silver. It no longer does, or so the story goes. It is not clear
exactly when it was sold, or how, or to whom. You get different
stories from different silver bulls.

There should
be only one story: The government sold it into the market at particular
times at particular prices in specific quantities. There must be
public records. If there are, then we know when it was sold. If
there aren’t, then all we have is a really good sales brochure story.

The standard
account is provided by the Silver
Users Association
. In 1970, the government authorized the sale
of its remaining silver hoard, which was converted into commemorative
coins. By the early 1980s, the government had sold off all but 139
million ounces of its silver. This was finally sold by 2000. By
the end of 2000, silver’s price was down to a little over $4.50.
The following December, it bottomed at $4.10. It began its upward
move, one month after the retroactive official end of the 2001 recession.
It ended 2002 at $4.75. Silver users could buy all they wanted from
above-ground supplies, just as they had been able to do since 1980.

It is always
the same story among silver bulls: “Next year, silver will be in
short supply.” I ask: Why was this story wrong for over two decades?

When Hunt began
buying, the price of silver responded rapidly. By late 1979, people
were selling their silverware to silver users, who were melting
down these spoons and forks. If there was any silver in the world
to sell, people were selling it to commercial silver users.

This is why
the familiar story of the hundreds of supposed hundreds of millions
of ounces of silver serving as an overhang, 1968—2001, is not credible,
apart from specific evidence that it was being sold into the market
by the government, in dribbles and drabbles, all the way up and
all the way down.

If a specific
quantity of any commodity is available for sale, then it is in people’s
inventories. It is therefore in the market. It can have no future
effect on price until it gets sold off and used up to make things
that leave behind no scrap.

It costs money
to hold silver in inventory. You lose any interest on the money
you did not invest. You pay for storage and insurance. Why would
anyone in his right mind have held silver in inventory after 1980?
Only for short-term reasons. If speculators held 1.5 million ounces
of silver inventory throughout the 1980s, they were dumber than

My point is
simple: Only economic ignorance or the fear of an imminent cataclysm
kept silver bullion hoarders from selling their silver to silver
users, 1980—2003. If we are now facing an imminent depletion of
above-ground silver supplies, then the reason has to be that the
poor dumb clucks who held silver bullion are at last dying off,
and their heirs are selling silver to users. But this has been going
on for years. What is new?

When any commodity
is sold to final users, the inventory shifts from speculators to
the final users. If silver is used in jewelry, it is still in buyers’
personal inventories. If it is used for most industrial products,
it is still available as scrap. Only as the old products are junked
and buried in landfill does silver cease to be in someone’s available
inventory. It may not be in bar form. It may have to be melted down
and poured into bars. But it is still in someone’s inventory.

We saw this
form-transformation process in action in 1979. Silver came out of
personal inventories all over the world. Bunker Hunt had no possibility
of ever cornering the silver market, even if the exchange’s rules
had not been changed. Either at $60 or $80 or $100, he would have
faced the reality of the silver market: Demand calls forth newly
available supplies, which keeps prices from rising. When that day
arrives, those who are "long" are trapped.

We are told
that the COMEX used to have 1.5 million ounces in reserve. If true,
this means that silver was in an easily accessed form: labeled bars.
But the fact that these bars have been bought by silver users and
converted into new forms of silver is not proof of a major decline
in the quantity of above-ground silver. It only means that silver
will be more expensive to purchase. It means that converting scrap
silver to bars of silver will have to be paid for.

This will mean
a rising price for silver if demand continues to rise, but not necessarily
a spectacular increase. It is not that purchased silver has disappeared.
It is only that it has moved from owners who hold it for commercial
purposes to owners who use it for decoration.

Silver users
are not fools. They have more incentive to monitor statistics relating
to silver than almost anyone else does. Yes, they have bid up the
price of silver since April, 2003, when it bottomed for the year
at $4.37. Silver has had a nice move upward. But let us not mistake
a move that was preceded by gold’s move by two years as some sort
of alarm bell on an imminent shortage of silver.

Here is my
main point: I have heard this same argument about silver’s imminent
shortage ever since 1973, when I sold silver for a living. All through
the early 1980s, silver guru (emeritus) Jerome Smith told people
in a series of books that $50 silver was only the tip of the iceberg,
that silver would be at $100 an ounce by 1986, and on and on. It
was all nonsense. Silver was headed for $3.60.

When a wise
man hears the same argument used over and over, decade after decade,
to buy silver, yet the price only once has moved far out of a trading
range of a few dollars, then he grows suspicious every time he hears
the argument.


I am a gold
bug. This means that I believe that the dollar price of gold will
eventually rise, because the purchasing power of the dollar will
decline by a much greater percentage than is presently expected
by conventional investors.

Price inflation
alone will not drive up the price of gold or silver, as we can see
in the prices of both metals after January, 1980. There was steady
price inflation and also a price collapse of both metals for two
decades. Unexpected price inflation is the deciding factor.

I think the
economy is getting closer to a recession. So, I think silver — an
industrial metal — is more vulnerable to a decline in price than
gold is, which retains its status as money for central banks.

I warn everyone
not to accept as proven the assertion that the alleged decline of
inventories of silver in bar form is the same as a decline in the
above-ground supply of silver. There is a transfer of silver going
on: from professional speculators (few) to users (many). There are
also inventories held in bar form by silver users.

Decade after
decade, part-time silver speculators (readers of newsletters) have
been assured that silver is running, out that a shortage will soon
emerge, and prices will go up.

From 1792 to
1972, this was not a problem. Bunker Hunt came and went. Then silver’s
price collapsed back to the level it had traded in since 1792.

Don’t get your
hopes up for a killing. Some profits, yes, but not until after the
next recession. Is it better than owning fiat money? A few thousand
dollar’s worth, yes. You
have probably heard that Warren Buffett supposedly owns all that
silver that he bought in 1997
: 139 million ounces. But, as a
percentage of his wealth, this is peanuts. It is worth noting that
this investment performed poorly for five years after he bought
it — one of the most well-publicized clunkers in his career. Finally,
he probably leased out 50 million ounces.

I have seen
it all and heard it all since 1962, and I even participated in 1973
as a silver salesman. Silver is always running out. A new generation
of part-time silver speculators is always lining up.


Street is not paved with silver, contrary to William Jennings Bryan
in 1896, 1900, and 1908; Bunker Hunt, 1973—80; and Jerome Smith,
1982—198?, who has long since disappeared. There is a time to buy
and a time to sell. When recessions loom ahead, it is best to sit
on the sidelines unless the FED is pumping hard (as it is today),
or unless a major terrorist attack occurs in the United States,
or unless some nation bombs Iran. None of this has much to do with
an alleged imminent shortage of silver.

15, 2006

North [send him mail] is the
author of Mises
on Money
. Visit
He is also the author of a free 17-volume series, An
Economic Commentary on the Bible

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