gene arensberg comments on the gold/silver ratio

The Gold:Silver Ratio (GSR) has been rising since the first of June and ended the week at 66.75. A rising GSR is usually not a good sign for precious metals bulls, but the rise is probably corrective in nature, in the context of a much longer trend going back to October. Since the panic peak then, the propensity of the GSR has been to contract or get smaller, meaning that it is taking less silver to buy an ounce of gold as time goes on, as expected. We should expect that contraction to continue so long as the world holds it together. See the nine-month daily GSR graph for more commentary.

Along those lines, we are convinced a quiet, but nonetheless very real reduction in world silver stockpiles over the past three decades, coupled with the fantastic success of investor-driven silver ETFs since 2006, has resulted in a material tightening of remaining global silver metal stocks to their lowest level in over 100 years. Gone are overly large government stockpiles of silver.

That is one of the reasons we are all so interested in SLV and whom the new custodian or sub-custodian will be. Perhaps more important than who, is how much storage and the silver to put in it the new custodian will commit to in the new agreement. At 280.5 million ounces, just one ETF, SLV, probably controls a quarter or more of the static silver available in London warehouses. London is inarguably where the largest known private reserves of silver on the planet are stored and those reserves form the basis for the OTC market, the largest silver market, which clears there through the London Bullion Market Association or LBMA.

The consistent annual deficit of silver production to consumption has resulted in much of the world’s readily available silver in storage having been consumed in myriad uses since the 1980s. Analysts say it is now likely that something less than two billion ounces of commercial-sized bar silver is currently extant world wide. If true or even half true, that isn’t very much silver stockpiled for an entire world and if the current pace of escalating investor interest continues, it won’t be all that long before news of the coming silver shortage blasts its way into the mainstream press.

When that day finally arrives we will want to have already topped off the tanks in our silver holdings, because once the general public learns of the shortage (they don’t have a clue yet) they’ll want in. Just like they did in 1979 when silver mushroomed up to a mania-driven $50 the following January. Only this time there will be less than half the amount of physical silver to go around and many more people able to instantly buy into the action via the world’s silver ETFs. If that run-on-silver scenario unfolds, then the GSR could plunge to record lows and a mere $50 per ounce will seem “cheap.”

Some ideas have staying power. People who were alive and sentient in the 1970s remember that silver spiked up to $50. They also remember that it collapsed thereafter in controversy leaving a sorry, bad taste in their mouth for the metal. We submit that there was no legitimate reason for silver to have shot up to $50 in 1980. There was nothing like the kind of scarcity of physical metal then as we believe there is today. We also believe that today there certainly is a legitimate reason for silver to reach that level and more. We’ll see.

Speaking of physical metal, from emailed dealer reports and from online web sources it is apparent that physical premiums for gold and silver bullion coins and bars firmed up a little this week as gold tested the $920s and silver tested the $13.60s. The up-tick in premiums was apparently limited to the most popular bullion items as some physical silver products were still offered at minor discounts as late as Thursday.

http://www.stockhouse.com/Columnists/2009/June/29/Indicators-supportive-of-gold,-silver--Got-Gold-Re