Buy Silver or Gold?

This problem faces every contrarian investor who has decided that the U.S. dollar will not reverse from the course it has been on since 1913: a 95% reduction in purchasing power.

There are a few contrarians who think that deflation is coming: both monetary deflation and price deflation. As far as I know, there are only about a dozen of them who write newsletters or run websites. For some reason, most of the deflationists seem to think that gold’s price will rise in a mass deflation. They do not warn their subscribers, “Don’t buy gold or silver!” If they did, they would have fewer subscribers.

Robert Prechter has never joined this camp. He started predicting $125 gold at least 15 years ago. He is consistent. The other deflationists are either inconsistent or silent on the gold question.

In contrast, I think gold’s price will rise because the money supply will rise. I recommend that your first $10,000 in gold be purchased as one-ounce coins. American eagles are more expensive than Krugerrands. Eagles by law are designated as numismatic coins. In 1933, when the U.S. government confiscated gold coins and bullion, it exempted numismatic coins. If you are worried about gold confiscation — I am not — then the eagles make some sense. But you get more gold for your buck with Krugerrands. On these and other precious money issues, click here.

Why gold’s price should rise in the face of falling prices, including all other commodity prices, remains a mystery to the rest of us gold bugs.

The original deflationist, J. Irving Weiss, announced a looming price deflation in 1967, at Harry Schultz’s original gold conference. I was there. He told us to buy T-bills. I bought gold coins instead. Since then, American prices have risen by about six to one. He remains the model deflationist: he never retracted his prediction over the next three decades. His son Martin continues to announce it. But the father had an excuse for his blindness. He had borrowed $500 from his mother in 1929 and turned it into $100,000 by 1931.

He had made his fortune in the classic bear market of all time, and he never figured out that this was a once-in-a-career opportunity. The Great Depression dipped his investment strategy in cement.

Here, I am talking about hard-core inflationists. Most of them favor gold over silver. A few prefer silver over gold for their core holdings. I am not one of them. Let me tell you why.


In June, 1963, the government passed legislation severing the legal connection between silver certificates and silver. No longer could you take in a silver certificate to the U.S. Treasury and get a fixed number of ounces of silver.

I could see exactly what was coming. Gresham’s Law was about to be re-confirmed: “Bad money drives good money out of circulation.” That is, the government-overvalued money drives out of circulation the government-undervalued money. I began buying silver coins the next month with my first full-time paycheck. I made $500 a month, and by September, I had bought over $1,000 in silver coins. I believed in thrift!

I bought them because the local bank had silver coins. I kept buying more every paycheck. I remember a teller — a young woman — who told me: “You can always get coins. Why do you want to buy so many of them?” I don’t recall what I told her. I doubt that I explained Federal Reserve policy and Gresham’s Law to her. Technically, the bank had to provide coins for me on request. They had only silver coins, other than pennies and nickels. I knew what would come soon: clad coins. They did.

By October, silver coins were going out of circulation. There was a shortage on the turnpikes for making change. There were no clad coins yet. They came in 1964. So, dimes, quarters, and fifty-cent pieces were in short supply.

That was the de-monetization of silver. Collectors removed them from circulation. Occasionally, we would find a silver coin among the legally authorized slugs, but not often after 1966.

The public did not know the difference. There was no outcry against the government for having legislated this gigantic counterfeiting operation. Copper coins with shiny laminate on them were just fine with the average Joe.

Beginning around 1968, gold began to be demanded in ever-greater quantities by foreign governments, especially France. This had been going steadily for a decade. The Johnson Administration attempted several counter-measures, such as a two-tier gold price: one for the European free market in gold and the other for central banks to buy American gold. Nothing worked. Finally, Nixon unilaterally ended gold convertibility in 1971, which destroyed the 1944 Bretton Woods agreement: central banks’ use of the dollar as their reserve currency, with the dollar redeemable in gold at $35/oz, but only by national governments and central banks.

The central banks still kept their interest-bearing T-bills and other dollar-denominated assets as part of their legal reserves. They kept gold, too, but from 1971 on, they still bought mainly dollar-denominated assets, not gold. This is true today. The dollar has never lost its reserve currency status, despite the closing of the gold window. The bankers ignored this semi-final de-monetization of gold in 1971, in much the same way that Americans ignored the final de-monetization of silver in 1963.

I say semi-final. Why not final? Because the U.S. government did not immediately sell off its gold hoard in 1971. Most central banks have refused to sell all of their gold. They have generally ceased buying newly mined gold or gold from the free market, but they do buy gold bullion from each other. Some of them have sold off part of their gold supplies, but this has been done mainly since the mid-1980s.

Silver, in contrast, has been completely de-monetized. It is an industrial metal or a jewelry metal. Its price peaked in January, 1980, at $50 an ounce. It then fell for the next 23 years, bottoming at $4.67 in January, 2003. That was a 90% loss of price, but really closer to 94%, because of the fall in the dollar’s value, 1980—2003. In short, silver was an investment catastrophe for over 20 years.

Gold is perceived as a money metal that is used by central banks. It is used by Asians as an inflation hedge. Silver has lost that perceived value. So, silver is more volatile. There was nothing to prevent its fall after 1980.

There is something else to consider. For almost the entire 23 years of its price decline, there were bullish silver brokers who kept talking about the huge gap between low silver production and high silver consumption. Here is my question: If that argument led to losses for 23 years, why should anyone believe the same argument today? There was a negative correlation for most of those 23 years between that argument and the price of silver.

The official figures for demand and supply remain steady, year after year: from 770 million ounces to 900 million ounces. See the figures for 1995—2004.

I have seen no plausible explanation for the fact that for 23 years, a metal that was being consumed out of unknown storehouses could keep falling in price. If the publicly available supply/demand statistics were that impossible for that long a period — silver supplies by the hundreds of millions of ounces per year coming from above-ground sources (where?) — then why should anyone trust price forecasts based on today’s supply/demand statistics?

Until a silver bull can explain clearly from verifiable evidence the origin of the silver held in above-ground sources — at least 200 million ounces per year every year for 25 years — I will pay no attention to the argument. How was it that above-ground supplies did not decline in availability, despite a 94% decline in silver’s real price? When you hear this argument, be polite, but ignore it. Do not invest a clad dime based on this argument.


For at least a decade, central banks have been lending gold to specialized brokerage firms, called bullion banks. The bullion banks borrow this gold at absurdly low interest rates — well under 1% per year. Then they sell this borrowed gold into the world’s private gold markets. This keeps down the price of gold: added supply.

The bullion banks then take the money they earn from the sale of this borrowed gold and purchase higher yielding debt certificates. They may get 6%. So, they are borrowed short — the low lease rate — and lent long: bonds.

They owe gold, not money. The central banks still list this leased/sold gold on their books. But there is no leased gold in central banks’ vaults; it has been leased out, then sold. The public believes that this gold is there, but it’s gone. It has gone into jewelry, maybe in India. Some daughter has her share of the central banks’ gold in her dowry in the form of a necklace or rings.

The central banks do not report that it is gone. So, there is always the threat that the public will figure out that the leased gold is gone. But, for now, the politicians either are as ignorant as the public or content with the arrangement. So, the odds are that the public will not learn about the missing gold. In any case, voters are just about incapable of mounting a political attack on central banks, which truly are untouchable politically.

But the fact remains that the banks have depleted their hoards of gold. So, their ability to push down the price of the gold is becoming more limited. Central banks have not announced lately the usual warning: “We are going to sell gold over the next few months.” Of course, no profit-seeking owner of a commodity ever announces his plan to sell. That would depress the price. He wants to maximize the sale price. In contrast, central bankers do make these announcements. This indicates that their profits come from other sources. One such profit source is political: the public’s perception that monetary policy is sound, a fact testified to by the fact that gold’s price has not risen much. The central bankers are temporarily buying the illusion of price stability: a lower gold price.

This perception is now changing as gold’s price keeps rising. Yet the kitty is depleted. The gold has been leased, then sold. There may be some future announcements of some central bank’s looming gold sales, but the silence so far has been deafening.

So, the gold overhang of the central banks is no longer the sword of Damocles. It is more like the switchblade knife of Damocles.

The central banks now face a major problem. If gold’s price gets too high, the private bullion banks will be trapped. They owe gold to central banks, but they cannot afford to buy gold in the private markets in order to repay it to the central banks. If they are ever asked to repay, they will go bankrupt.

The central banks therefore will face exposure as being in collusion with a bunch of profit-seeking Enrons: busted and owing the government’s gold to the central banks. My guess is that central bankers knew from the beginning that they would never see this gold again. They just wanted a cover: “leasing” rather than “sales” of the government’s gold.

The downward pressure on gold is today no longer so great as it was a decade ago. The threat is reduced because the vaults are less full.

No central bank holds silver as a monetary reserve. No central bank is committed to buying or selling silver for public perception reasons. Silver has been de-monetized. It is no longer on the political radar. So, silver is closer to a true free market commodity. It is therefore more subject to the ups and downs of the business cycle.

You can make more money in silver when the market rises: no overhang of leased silver in central ban vaults. You can also lose more money when silver falls, along with the economy: no central bank buying of silver.

Finally, if the bullion banks are ever asked to repay the gold, the gold bullion market faces a day of reckoning: massive buying by shorts (bullion banks) or else the widespread awareness that central banks do not have as much gold to sell off to keep down its price. Both events would drive up the price of gold. There is no comparable upward pressure for silver.


There was a close correlation for many decades: 15 to one. That was because this ratio was set by Federal law. It was a price control. Gresham’s law always took over. The overvalued metal would drive out of circulation the undervalued metal. For as long as the government would supply the undervalued metal, the coins would circulate side by side. But when the gold/silver ratio diverged too much from 15-to-one, speculators would buy up the coins of the undervalued metal and ship them abroad or melt them down for their value as metal (higher) rather than money (lower).

To find today’s ratio, divide the price of gold by the price of silver. It is nowhere close to 15 to one. In 1963, when silver went out of circulation, silver was about $1.30, while gold was $35. That was 27 to one. Before 1963, silver’s price was lower, so the ratio was higher. But the ratio did not matter. Gold’s price was a fake price. Americans were not legally allowed to own gold bullion. So, silver circulated. Gold didn’t. Then, in 1963, it became profitable to buy silver coins and hoard them or melt them down. Silver coins disappeared.

Again, the gold/silver ratio as a forecasting tool produced only losses, 1980 to 2003. Silver’s market price fell by 90%. Gold’s price fell by 70%. The gold/silver ratio increased.

When you discover an alleged semi-fixed price ratio that produces forecasting errors for 23 years, it is best to avoid adopting it as your precious metals allocation strategy.

In any given 12-month period — and you can’t be sure which 12 months — the price of gold or silver may rise or fall by a greater percentage than the other. It does no good to trade back and forth, given the income tax consequences. You may do it once, but let it go at that.


The best way to buy silver is to buy 90% silver coins: pre-1964. Take delivery. The sack of coins weighs over 56 pounds. Get them divided into two bags. I recommend dimes: more transactions per bag. But it doesn’t matter that much unless there is a complete monetary breakdown.

Gold coins are far more versatile. That is because they are worth more per unit of weight and volume. They are easier to hide. They are easier to move across a border.

February 8, 2006

Gary 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.

Copyright © 2006