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Lear Capital: Shrinking Gold:Silver Ratio

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With some experts predicting silver at $25 to $27 per ounce by the end of the year, it is easy to see why silver demand has stepped up in the last 30 days or so.

It has long been asserted that silver prices are artificially low as global supply is said to be reported as higher than actual inventories. Indeed silver is known as much for its industrial use as it is for its monetary use.

One such use is in the production of solar panels. With research and development now being stepped up dramatically in this area, more and more silver is being consumed. If there are disparities between reported supply and actual, it is sure to surface as demand for physical delivery increases.

The original ratio of the value of gold:silver was set in 1792 via the Original Coinage Act. This act essentially put the U.S. on the gold standard but also set the relative value of silver per ounce of gold. That ratio was 15 ounces silver equals 1 ounce of gold.

In 1873, the fourth coinage act was passed. This act effectively demonetized silver, putting the U.S. on a de facto gold standard. Later referred to as the "Crime of '73", by silver miners and other silver advocates, this coinage act is sometimes referred to as the act that set the gold standard. I maintain the Coinage Act of 1792 set the gold standard as gold was the primary metal against which other metals' values were set. Hence the gold:silver ratio.

Silver's loss of credibility as money, however, was short lived. By 1878 the Bland Allison Act was passed restoring the value of silver to gold at a ratio of 16 ounces silver per ounce of gold. So it is, the Coinage Act of 1792 set the gold:silver ratio and the Bland Allison Act of 1878 re-established silver as money at a slightly adjusted ratio. As one reader pointed out, I mistakenly referred to them as one in the same.

Today, demand for physical silver is rising and rapidly so, especially in the solar arena. The race is on to make solar a viable alternative and renewable energy source. Silver is also one of the best conductors and can be found in everything from a vacuum cleaner to a car. In fact in an automobile there are as many as 40 silver-tipped contacts within the electrical system. It's shocking to learn all the uses of silver in industry so rather than list them myself, visit this article for much more detail in this regard.

The bottom line is that silver demand is growing and supply is shrinking. Hence the shrinking gold:silver ratio. Just 30 days ago the ratio sat at 62.5 ounces silver per ounce of gold. Today that ratio is 58:1. Is the ratio headed back to 16:1 or 15:1? As long as we are off a gold standard, there may be some psychological significance to the ratio. Pratcially speaking, however, the "mean" ratio over the last 100 years or so has been 55 with 14 at the low end of the graph and 100 at the high.

Based on this "mean" ratio, silver could trade today at $24.50 per ounce and fall within this range. It seems gold at $1500 per ounce by the end of the year is a consensus prediction. That explains corresponding silver predictions near $27 an ounce.

In the end this all adds up to the "D" word again - Diversification! Just as you own a variety of stocks, one should consider a variety of precious metals and coins within a savings and retirement account. Of late, both gold prices and silver prices have been on the rise as the global debt crisis drives more and more people to history's recognized safe havens.

For real time gold and silver prices and breaking news, visit LearCapital.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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