Understanding Gold And Silver Prices

[gold and silver coins]

Understanding gold and silver prices is the key to unlocking the mystery of fiat money.

Gold and silver have a 6000 year history for their use as a currency, and until the last century, the price of gold and silver maintained a healthy valuation ratio of 1 ounce of gold to every 15 ounces of silver. This purchasing power ratio is strengthened by the fact that there are 17 ounces of silver for every 1 ounce of gold in the earth's crust, although physical silver stocks have dwindled, as the metal is used in a wide variety of industrial applications.

Gold And Silver Prices: Historic Purchasing Power

It has long been said that an ounce of gold will buy a custom tailored man's suit. In the 1930s, an ounce of gold cost $35, and a suit was nearly the same price. When you look at gold prices today, gold trades for $1150 and a custom suit does as well. Even thousands of years ago, the best clothing cost one ounce of gold, or 15 ounces of silver. Gold and silver prices are intrinsically tied together; however, manipulation in the price has made silver trade at an artificially low ratio to gold.

Market Manipulation

The gold and silver spot prices are highly manipulated by the trading of “paper metals.” Paper metals are any instrument that is not physical metals, such as options, futures contracts, exchange-traded funds or even precious metals “accounts” which hold gold and silver for their clients. (Most precious metals accounts hold futures, not physical metals.)

Paper metals increase the amount of silver derivatives while diluting the amount of demand for gold and silver, ultimately depressing prices. If an investor wishes to buy silver as an investment, he or she can do so through a variety of vehicles. However, there is only one way to own silver: by buying physical metals.

Manipulation of silver and gold prices isn't just perpetrated among small investors, however. When gold and silver prices increase, central banks around the world “lease” gold to investment banks, temporarily increasing the supply and pushing down prices in an effort to mask the value of precious metals as a store of wealth and as a currency. Of course, it is in the central bank's interest for consumers to use paper currency to buy and sell products instead of physical metals. Therefore, discounting the uses of precious metals and their value is the best way to keep consumer's eye on paper currency. The involvement of the central banks goes beyond metal leasing and into money supply as well.

Money Supply: The Effect on Gold And Silver Prices

Money supply and inflation are two critical elements in the price of gold and silver. However, how you adjust for inflation is just as important as inflation itself. Using dollars as the benchmark, the peak of gold silver spot prices in the 1980s of $850 and $50 per ounce respectively would be $2500 and $150 today using the consumer price index as calculated by the government.

However, if you were to use the expansion of the money supply as inflation, today's gold price should be at bare minimum $7,000 and as high as $14,000 if bank bailout promises are taken into consideration. Silver should be a minimum of $450 with a maximum of $900 per ounce. However, should those price points be reached, gold and silver's popularity as an investment will only increase, further stoking the fires of demand and increasing prices.

Silver Fundamentals

Beyond the typical underlying changes in money supply are very important elements of demand that continue to push gold and silver prices higher and higher. One element is the in-elasticity of demand for silver, particularly in the manufacturing of electronics. Silver is the best conductor of electricity known to man, and even at a price of $20 per ounce, it is very inexpensive for use in consumer electronics.

Silver Inelasticity

Silver cannot and will not be replaced by the industrial sector as a conductor of electricity for two reasons: 1) it is relatively inexpensive and 2) it is the best product for the job.

When a computer maker begins to source components to build its consumer products, it buys tons of glass, pounds of silicon, and tiny amounts of silver. When you buy a computer that costs $500-1000, it contains at most 1 gram of silver, with most carrying fractions of that amount, for a maximum cost of $.60. Even if silver were to explode in price from $18 per ounce to $180 per ounce, which is a dramatic change, the price of the silver component in a computer would grow from $.60 to $6. Thus, even after silver explodes in price, the computer markers will still be very much willing to use silver, as $6 on a $500 computer is just 1.2% of the price.

Technological Improvements

Silver's demand can easily be contrasted with the emphasis on technology during the past half century. Prior to World War II, very few homes owned electronic devices, and silver's industrial use was limited to only photograph development.

In contrast, the post-war family owned microwaves, TVs, toasters and other appliances, including washer and dryers – which all contain silver. And even in the past decade, the average consumption of silver by the average person has grown. Today each person owns a cellular phone, TV, computer, monitor, printer, router, and a myriad of computing peripherals that all contain silver. It is without question that demand for silver as an industrial metal has exploded with technological achievements, but the biggest use for silver is just now being uncovered.

Modern Day Technology

Silver is now used in polyester sportswear for a total of 1,200 tons per year in more than 50 million tons of polyester. With the silver spread so thin, it is certain that the silver cannot and will not ever be economically viable to recover – at least not until silver's price is hundreds of times higher than it is today.

Another company recently filed a patent for upholstery and fabrics that contain tiny elements of silver to kill bacteria. When the silver is activated by a minute amount of sweat, it would become an antibacterial agent, which would help keep public surfaces clean. All the while, the amount of silver used is again tiny, with just one ton of silver used for every 40,000 tons of upholstery produced.

The applications for this patent-pending product could be enormous. The hospitality industry loses millions of dollars each year to sick patrons, cruise ships are shut down for weeks at a time due to the spread of illness, and even hospitals remain one of the best breeding grounds for viruses. Just by replacing the upholstery on a cruise ship, the company could reduce the chance of a spoiled cruise, this generating millions of dollars in revenue. Today's biggest technological feats are all painting a pretty picture for silver and aiding to establish a much higher gold and silver prices in the future, with or without monetary inflation.

Gold and silver prices will be volatile all the way up as the precious metals bull market continues.

Here's a new one about the gold silver ratio and its relationship to other commodities and indices.

Here's a free guide to help you get started silver coin investing and some strategies for ignoring short-term gold and silver prices.

More Articles:

Hard Assets Are the Fading Dollar’s Replacement

Silver Coins Simply Make Sense » The Grave Danger of “Paper” Metals

Gold Spot Prices Are Rising - But Are You Missing the Silver Boat?

Silver Investment Strategies: How to Combat Inflation

Trade Imbalances Are Signal For A Silver Bullion Price Explosion

Why Purchasing Power is More Important than Investment Profits

What Is the True Gold Silver Ratio?

Gold Silver Ratio: Gold Prices and the Silver Factor

Click here to learn about gold and silver coins in a jobless recovery.

Or learn about more differences between silver and gold investing here.

Silver and Gold Prices Are Long Lost Relatives

Gold and Silver Coins Are Tangible Assets

With Silver and Gold Coins You Can Never Go Wrong

Gold Silver Ratio and Other CommoditiesThe Investing Truth They Reveal

Gold and Silver Prices and The Monetary Policy Aftermath

Read about the shifting faith bringing investors closer to silver and gold.

What do you think? Silver in triple digits? $7000 gold?

Everyone has a price in mind. What is yours and why? Share it here!

What Other Visitors Have Said

Click below to see contributions from other visitors to this page...

$9600 Silver 
Silver needs to be denominated in market appropriate numerals. The Troy Grain (Tgn) fits the bill at 480 grains per Troy oz. Given $9600.00 Silver, the …

I have NO idea how high it could go... I agree with this article. It is one of the first things you learn in underground financial research, what has …

you forgot these important points pre this century there wasn't 7 billion people! There wasn't planes and big shipping companies to transport gold …

Gold and Nasdaq 
I expect the price of Gold will always be in dollars 80% of what the Nasdaq is at.

Click here to write your own.

Some say that the gold to silver price ratio is meaningless. We disagree.

Read about defining intrinsic value when precious metals investing.

Why China wants it's citizens to own gold and silver.

Financial repression may be the policy the ultimately kick-starts the return to fair value in precious metals.

Physical gold and silver investments can take up a core position in an investment portfolio since they offer an easy way to have some wealth stashed out of Dollar-denominated assets.

The main effect of the discovery of tungten-filled gold in Manhattan will be confuse a wary gold and silver investor seeking some protection from the actions of a clear central bank policy - to dilute the value of the dollar.

At the heart of higher prices going forward lies the fact that central banks must print to fuel budget deficits.

Here is a typical example of a mid-rally, manipulative precious metal price smash.

When it comes to the financial aspect of this preparation process, the smart observer of the prevailing socialistic trend will be moving the portion of their wealth they would like retain out of the unsustainable financial system by taking possession of hard currencies like physical gold and silver.

What will be left when the dust clears, gold and silver happen to be the only hard currencies available to most investors, and silver even more so than gold.

Traders typically depend on profiting from a market system as it currently exists, and this explains why so many traders, even the most public and vocal among them, tend to remain silent about the unbalanced structure of the paper gold and silver futures market.

Those attracted to the precious metals markets are often curious about the various ratios existing between gold and silver, as well as what these ratios might reveal about the relative fair values of these key investment metals.

As history has shown again and again, hard currencies like gold and silver are perhaps the only truly safe long term investments.

When the door is officially shut on the sacrosanct social contract at the center of price discovery, and the scales tip toward public understanding, precious metals could finally see their long awaited price release.

Large gold and silver traders, which now make up the bulk of market trading volume, have almost universally gone over to algorithm trading that is deliberately designed to bypass and eliminate human emotion or decision making, while at the same time speeding up deal execution dramatically.

If you think that the prices of gold and silver are not going to rise much and that the physical metals are even going to be available immediately after the Euro collapses, you are quite the optimist.

Countering the massive credit expansion, the value of precious metals rise as the natural inverse to the ongoing monetization of everything by a powerful status quo and despite enormous efforts made to hide the move.

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