Why I Prefer the Silver Lining

Howard Ruff
The Ruff Times
Posted Apr 6, 2009

In my recent interview on CNBC’s Squawk Box, I was asked why I preferred silver. Here’s why:

1) I am bullish on gold. I can enthusiastically endorse all the bullish arguments. In fact, my investment in the Central Fund of Canada Ltd. (CEF) contains one ounce of gold for every 50 ounces of silver. I am not negative on gold; far from it. It’s a question of better or best.

2) At these prices, gold is not a greatly in-demand industrial metal. It has industrial uses, but many of these uses are too expensive for gold. Gold is a monetary and jewelry metal. It also is enthroned in human consciousness as a store of value. I expect gold to continue to rise if Barack Obama continues to create so much currency.

3) Silver is also a jewelry and monetary metal, but it is also a very important industrial metal. It has over 2,000 industrial uses. Back in the ‘70s when I liked silver over gold, there was ten times as much silver above ground as there was gold. Despite that, we made two to three times as much money on silver as we did on gold.

Now the ratio has changed. Industrial use has so depleted our silver inventory that government now owns none and there is six times more gold above ground than silver, which is by far the scarcer of the two metals. So why hasn't the gold:silver ratio changed? Right now, it's at $870/$12.10 or 72:1! So as silver becomes scarcer and scarcer, it's value is declining! Maybe the demand for silver has declined???? Nope, it's actually RISING because of the ultra low prices. Any market that suffers a 60 year price decline in the face of exploding demand and imploding supply reeks of manipulation. The fact is, that American use of futures to suppress and depress prices, makes the old Soviet price-setting committees look tame..... At least in the Soviet Union they just held prices static in the face of shortages!

So why is gold many times more expensive than silver? Because 99.9 percent of the people in the world think gold is much rarer than silver. But they are wrong – dead wrong – and sooner or later the supply/demand equation will favor silver and narrow the pricing gap between the two metals. There are 6.5 billion ounces of gold in the world in all forms. This includes priceless art and cultural heritage items as well as bullion. There are over 5 billion ounces of gold bullion in the world. There are only 2 billion ounces of silver in the world and that also includes priceless art objects and cultural heritage. As far as bullion is concerned, I can verify only 200-400 Moz of silver. So there is 5000 million ounces of gold bullion and only 400 million ounces of silver,or roughly 12 times as much gold as silver. Here's the rub, you could lose all that gold and it would cause an inconvenience to human quality of life, but remove silver and our modern civilization would crash. So why is silver so cheap? Answer: because silver is MONEY as defined by the US Constitution and the Federal Reserve note is NOT, on pain of death, as defined by that same Constitution. So, it is literally a matter of life or death for the Federal Reserve, and the government it controls, to suppress the return of silver as money. So, the American (and British) government suppress silver. Herein lies the rub: We are down to the last few months of silver supply and to continue to suppress the price will lead to major industrial disruption, which will translate to major drops in the quality of life for people. Right now this drop of quality of life can be blamed on the financial crisis which suggests to me that silver will continue to be suppressed until the Americans can no longer wire their cruise missiles. I expect the spot price to continue downwards, but don't expect to find any silver to buy.

Most of silver is as a byproduct of mining base metals, like copper and zinc. In this economic collapse, we will mine a lot less copper and zinc, and produce a lot less silver. Silver supplies will become tighter and tighter, which means higher prices. This will happen only if the pricing of silver goes off the futures markets. In a futures market, "supply" can be manufactured as fast as you can print up futures contracts. Silver has been in physical deficit of supply for 53 consecutive years, and during that entire period the price mostly declined if you adjust for inflation. (Note, there was a brief hiccup in this price decline in the mid to late 70's when the Hunt Bros were buying.

It is a very simple fundamental: if something is scarcer than something else, the way to place your bet is with the scarcer of the two commodities, as long as they are both in demand. They will both continue to be in demand.

But, Howard, I hear you say, if silver goes as high as you think it will and the gap is narrowed, won’t that hurt industrial usage of the metal when it becomes too expensive and people start using cheaper alternatives?

Yes! But do you hear what you’re saying? That can only happen when silver prices are a lot higher than they are now. The answer is self limiting.

Silver is by far the better bet of the two. Two or three years from now the price gap between gold and silver will be far narrower.

How is Price Measured?

The moment-by-moment price of gold and silver is determined by the futures market. The Kitco and 321gold charts that track minute-by-minute prices of the metals are based on the spot price, which is closely related to the nearest futures contract.

In other words, price is not determined by supply and demand for the basic commodity. But sooner or later, it will be, and will detach itself from the futures market. Futures contracts are influenced by lots of factors. Eventually bullion will separate itself from that relationship.

A Dead-Cat Bounce

If you throw a dead cat off a skyscraper, it will bounce. Not because it’s alive; just because it hit bottom. The stock market has made a dead-cat bounce, even though the returns are spectacular for short-term investors, which I am not.

The long-term problem with the stock market is two-fold: 1) its earnings will decline as business sags deeper and deeper into this recession which will depress stock-market prices; and 2) the price/earnings ratio (PE) is still way above the typical PE at the bottom of bear markets. The stock market will have its ups and downs and literally suck Wall Street investors into short-term rallies as they try to pick “the bottom.”

What’s left of Wall Street believes the stock market will sooner or later get well. They believe you will eventually make a lot of money in the stock market.

Perhaps you can make some short-term profits, but I don’t trust such short-term calls; I don’t make them, and you can’t depend on them. I’m in for the long haul, and the long haul says down, down, down, regardless of short-term rallies.

Sell into these rallies. The stock market is toxic, and will be for several years.

Certain industry groups will do quite well over the next few years, if that’s what you want to do, but you will have to be a short-term trader.

Oil service companies, Uranium Mining, and Gold and Silver Mining stocks should do very well. I would bet for the long haul on the Uranium Mining stocks, and the Gold and Silver Mining stocks. Their long-term prognosis is excellent.

Watch with interest the spectacular gyrations of the stock market, but don’t fall for them.

I won’t touch the Dow Jones or the alleged “growth stocks”. It will be some years before they come back, and perhaps never. Remember, they are all tied to the assumption that the dollar is still a medium of exchange (yes) and a store of value (no), and stocks will reflect those values. What Howard is saying here is that in an inflationary environment, the prices of stocks could rise, but you could still lose, if the appreciation in the stocks was less than the depreciation of the dollars in which the stocks are denominated. Stocks are dollar investments firstly, and company bets second.

The dollar is still a means of exchange, but not a store of value. The day will soon come when you will have to adjust all stock prices to inflation.

Will Roger’s advice still rings true, “invest in inflation, it’s the only that’s going up.” Invest in those limited areas which best reflect inflation. I prefer gold and silver (with the emphasis on silver) because they also protect you in a worst-case, which is that the stock market may be gone forever and the dollar may disappear into history. This is why gold and silver are hit with interventions when the stock market is in decline, like it is today. The exact opposite should occur as a sell off in stocks usually results in a rotation out of stocks into treasuries and gold. We haven't seen too much of this pattern as far as gold is concerned because the derivative crowd makes certain of a surge in derivative selling in gold everytime the stock market falters. This tends to guarantee the rotation goes into government debt vehicles, which have been inflated into the latest financial bubble.

There are already national and international expressions of lost confidence in the dollar. China and Russia suggest we need a new world-wide currency made up of some indefinable basket of currencies.

Gold and silver are not just to make money, although they will do that, but also to preserve the value of all your assets. Liquidate as much of your assets as possible and buy gold and silver at these depressed and even manipulated low prices. I know people who liquadated their houses, bought silver and moved into apartments and did this 8-10 years ago when silver was $4-$5. I don't advise that, but I would sell paper assets and convert to silver and gold.

Howard was a guest on CNBC on March 4th. You can view the interview at www.rufftimes.com.