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Massive Silver Correction Makes Silver Incredibly Cheap

by Trace Mayer, J.D. on September 23, 2011 · 8 comments

Reading time: 4 – 7 minutes

Lately, my crystal has been clouded.

The European turmoil is roiling global markets as counterparties increasingly distrust each other’s collateral leading to the liquidation of pretty much everything. The mantra must be, “If there is a bid then hit it.” This daily noise has opened up some tremendous buying opportunities. Chief among those opportunities is silver.


On 19 Sep 2011 I wrote about gold and silver consolidating, “The real value seems to be in palladium which is trading at an extreme discount of 0.9224x its 200 day moving average.” This was because statistically speaking palladium was extremely outside the standard deviations of its usual trading ranges relative to its 200 day moving average. The 200 day moving averages acts like gravity to filter out the daily machinations of the market.

In a secular bull market, like the precious metals are currently in, when silver moves below 0.95x the 200 day moving average then a buying opportunity presents itself where the probability of a gain on the position relative to the numeraire is much more likely. On 23 Sep 2011 the price of silver is $30.45 and the 200 day moving average is $35.76 which yields a relative price between the two of 0.8516x.


This ratio has never been lower in the past decade except shortly after Lehman brothers collapsed. Within a year the price had doubled. Within three years the price had gone up five-fold. The current correction and ensuing consolidation is setting the stage for a triple digit FRN$ silver price.


But the savvy investor may ask, “But is not gold the proper numeraire?” Yes. Sure, this chart is showing silver through the FRN$ lens. The gold to silver ratio, currently around 48 ounces of silver per ounce of gold, does tell a different story. Silver is not nearly as cheap today as it was in the early part of the decade when the ratio was over 100. But as this secular bull market progresses the ratio should continue declining.

It will likely reach 16:1 and may even overshoot to 8:1 or as some rather bombastic commentators have made the case it may even go to parity, 1:1, or it may actually take more than one ounce of gold to purchase one ounce of silver. While it may seem unbelievable and in my opinion a low probability I do not think it is a completely unrealistic scenario.

Currently it takes less than one ounce of gold to buy one ounce of platinum. Platinum is much scarcer than gold, there is less platinum produced per year.

Since the Lehman Brothers collapse the gold to silver ratio has moved from about 80 to 40-45. While gold is the better numeraire; silver has been the superior speculative currency. Remember, you make money when you buy not when you sell.


Six years ago South African gold market analyst Peter George said at GATA’s Gold Rush 21 conference in Dawson City, “In the last 10 years the central banks have effectively shown that when there’s a real crisis, gold actually goes down, and it’s so blatant, it’s a joke.” The central bank script has not changed.

But we do know that price controls lead to shortages. Last time silver got this cheap there was silver backwardation for weeks while the price clawed higher to clear the market.

Remember, you make money when you buy not when you sell.


Following provident living principles I like to accumulate the precious metals on a regular basis usually in proportion to excess free cash flow. Like Rick Rule I am a fear investor regarding them and rarely do I move into them based on the greedy speculative component. There are other less manipulated assets for that purpose.

But in this case the markets have been in major liquidation mode and silver has not been spared. This has opened up a tremendous buying opportunity. But due to the large amounts of manipulation in these markets I would caution against the use of leverage. This is just the latest step in a long staircase of The Great Credit Contraction.

DISCLOSURES: Long physical gold, silver and platinum with no interest in DOW, S&P 500, the problematic SLV ETF, gold ETF or the platinum ETFs.

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ABOUT THE AUTHOR: Trace Mayer, J.D., author of The Great Credit Contraction holds a degree in Accounting, a law degree and studies the Austrian school of economics. He works as an entrepreneur, investor, journalist and monetary scientist. Follow him on Twitter. This is merely one article of 242 by .
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{ 8 comments… read them below or add one }

1 Steve Way September 23, 2011 at 4:31 pm

I hold physical gold and silver,and I agree that this massive selloff presents a buying opportunity especially in silver if only for the increasing demand for its industrial use. ( that demand may wane dramatically in a worldwide recession and today’s price may be a reflection of what is ahead.) I will look for silver backwardation before buying more, and that is my suggestion.

Note: Eric Sprott..was predicting not long ago $100 silver before March 2011 so he certainly has egg on his face, along with Hommel and other dimwitted fortune tellers.
Exercise caution!

2 john anderson September 23, 2011 at 10:12 pm

@dave way
“eric sprott…was predicting” Somtimes the real pros make exageragerated prognostications. I have done the same probably from exuberant anxiety. Over time the trend and the fundemental forces driving true price discovery get stronger and will prove the FRN silver value to to be correct.One of those forces is the coming global rush to safety. Sprott and others including myself can be guilty of counting our chickens before they hatch. Going long physical means going long. So short term predictions mean nothing to me. It bothers me not that my last sixty rounds were purchased for 49 each. When i got in at 15 I knew a minimum hold of 5 yrs was expected. I am having fun with the knowledge I have gained concerning pms from those like hommel,sprott,trace and so many others. I am lucky to “sit in the room “with so many experienced and knowledgeable minds . After digesting so much extraordinary info on any given day i go to bed with solid confidence I have sound money that is having value transfered to it regardless of the day to day burps. stack it up brother.

3 Peter September 26, 2011 at 2:08 pm

Hi Trace, Have you thought about setting up a website called run to US Treasuries? LOL

4 Trace Mayer, J.D. September 26, 2011 at 6:24 pm

Peter, yes, but I would rather skip that layer in the liquidity pyramid and go straight where everything is eventually headed. But yes, capital will oscillate between the two and volatility will probably get even more violent.

5 Steve Way September 27, 2011 at 12:48 am

Hi Trace
Is there a general level on the CC Pyramid where you think that most of the flow is currently occurring.?
Obviously some have moved to PM’s in some small way at least.
Recently I read that Muni Bonds were under some pressure.
I note your comment above re capital oscillation and volatility and would appreciate your thoughts on just where things are.
I feel it has about 3 years yet to run through to…some sort of grand finale?

6 Trace Mayer, J.D. September 29, 2011 at 8:40 am

I think some of the capital has already moved into the yellow and green sections. But this has only started. While it may be nice to have it done in a mere three years, or even overnight through hyperinflation of all fiat currencies, I doubt that will be what plays out. In fact, I think it is fairly probable, 25-30% chance, that this will last at least 15-20 years. The Great Credit Expansion took a very long time, over 500 years. So having it reverse, bottom and reverse in 20-40 years is actually very fast, relatively. Look at the speed at which the Information Age is being transitioned into compared to the Industrial Age from the Agricultural Age.

It is really too bad GoldMoney did not publish the full interview I did with James Turk as he asked some very important questions in this regard.

7 Gabe September 16, 2012 at 11:39 am

@ Trace, Can you expand on your statement the great credit expansion took 500 years? We’ve only been a Country for 200+ years, even if the credit expansion began on day 1 which it hasn’t thats still not 500 years.

8 Trace Mayer, J.D. September 17, 2012 at 1:39 am

Gabe, Gold and silver circulated as money and currency for thousands of years ago. About five hundred years ago money substitutes, bank vault receipts, began to be issued for physical metal and these receipts circulated as currency. That was the beginning of The Great Credit Expansion. From warehouse receipts to gold certificates, the 1694 credit contraction, Newton’s gold standard, the other various gold standards, etc. all were part of The Great Credit Expansion.

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