Silver Is Also Very Undervalued Compared to the Monetary Base.

In Investment Returns, Money Supply on July 13, 2011 by CQCA

I few days ago I wrote that the high nominal price of gold is actually relatively inexpensive if we compare it to the U.S. monetary base. I was also curious about the price of silver. The results are below.

The blue line shows how many billions of ounces of silver it takes to equal the monetary base. The lower the line is, the more expensive silver is; the higher the line is, the less expensive it is. In 1979, the average price of silver was $21.79 per ounce, and the monetary base stood at $133 billion, so the monetary base was worth 6.12 billion ounces of silver. In 2002, the average price of silver was $4.60 per ounce, and the monetary base stood at $639 billion, so the monetary base was worth 149 billion ounces of silver.

The bi-weekly ratio is shown below. Similar to gold, the real price of silver is actually decreasing.

On June 29, 2011, the U.S. monetary base was worth 76 billion ounces. This is only slightly lower than the 1993 ratio of 78 billion ounces. Even though the Dollar price of silver has increased almost 500% between 2000 and 2010, in terms of credit expansion, silver is essentially as cheap today as it was when the average Dollar price was $4.97.

Now for the exciting part. How high would silver have to rise before it reached a 1980’s style bubble?
(1980 high point)/(1980 monetary base) = (equivalent high point)/(current monetary base)
(49.45)/($133,436,000,000) = (X) / ($2,645,989,000,000)
X = $980.57

The price of silver would have to reach $980.57 before it is in 1980 bubble territory. The closing price yesterday was $36.90.

3 Responses to “Silver Is Also Very Undervalued Compared to the Monetary Base.”

  1. I hate to point this out CQ, but mankind has yet to find 50 Billion ounces of silver, and most of that has been consumed in such a way that its recovery would be far more difficult than it was the first time around. I don’t know about you, but I cringe at the idea of going through graveyards to get silver.

    The point of the analysis wasn’t lost on me, I just had to point that out.

    Thanks for the great work!

    • If you’re morally against it, then more fillings for the rest of us.

      Good point, though. There is sort of the same problem with gold. According to the World Gold Council, there are only 165,000 tones (5.3 billion ounces) of gold in the world. We currently need 1.75 billion ounces to equal our monetary base, or 33% of the world’s gold. So unless the world gifted us 33% of its gold, we would have no way of matching our monetary base. Then what do we do about the total money supply? I’m actually working on this, and I’ll post the results soon.

      Also, if silver is becoming more rare, shouldn’t it become more expensive compared to the monetary base?

  2. In my thinking, yes, silver should become more expensive.

    Some argue that silver is now an industrial metal, and shouldn’t be considered “precious” anymore. I don’t see it that way though. I think it makes silver even more precious.

    We’ll see.

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