The Great Debate Continues: Silver vs. Gold

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 response.

You 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 gold?

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.

I 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 chart.

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 2007. 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 Congress.

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.


Easy 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.

February 15, 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