by Peter Reagan, Birch Gold Group:
This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: The gold-to-silver ratio makes silver look incredibly attractive right now, China’s motives for underreporting its gold reserves and gold has become America’s most popular investment.
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The gold-to-silver ratio says silver is an incredible deal
The price of silver has declined from nearly $26 per ounce back in December to approximately $23 today – an 11.5% drop. In December, we thought silver was a good investment opportunity based on the gold-to-silver ratio. Considering the current lower silver price, the gold-to-silver ratio has risen even higher. Today, silver seems even more appealing than it did at year-end.
Briefly, the gold-to-silver ratio indicates how many ounces of silver are needed to buy one ounce of gold. Since both silver and gold price fluctuate based on supply and demand, their prices move independently over the short term. Over the long term, gold and silver prices are highly correlated… And that’s why the gold-to-silver ratio can be an extremely useful indicator for us.
A high gold-to-silver ratio suggests that silver might be undervalued. In December, the ratio was 81 to 1, well above the average range (between 40 and 60 to 1). It has since increased some 10% and at the moment sits at 89.5 to 1.
We think it’s wise to diversify with silver as a long-term hedge against inflation when combined with gold.
Looking ahead, industrial demand for silver is forecasted to increase significantly over the next decade. Silver is a key component of solar panels, batteries, electric vehicles and other “green” technologies.
The long-term prospects for silver remain robust. The elevated gold-to-silver ratio indicates positive signs for silver in the short term, particularly if the Fed decides to lower interest rates later this year. Remember, lower interest rates and other “easy money” conditions tend to benefit investments in tangible assets like silver and gold.
With the Fed anticipated to resume monetary stimulus soon by lowering rates and financing global conflicts through increased debt issuance, combined with an attractive gold-to-silver ratio, we think it’s smart to accumulate silver now.
Diversify with precious metals as well as within precious metals for the long-term.
Why might China under-report its gold reserves?
Ever since we heard the idea of China under-reporting its gold reserves, we’ve hoped to see a detailed analysis on the how and why. Speculation as to how big the actual reserve is vary depending on how bullish the analyst is on gold. Double the official report was a lower-end figure we’ve come across, while the other end of the spectrum placed China’s hoard in the ballpark of a gargantuan 30,000 tons.
Numismatic News’ Patrick A. Heller, whose view on the matter we haven’t previously covered, believes the hoard is over 30,000 tons, or as he calls it, a billion ounces. Heller doesn’t necessarily believe China’s central bank has a warehouse with 30,000 tons of bullion, but it doesn’t need to.
He’s well-aware of the line between public and private sectors being kind of nonexistent, not unlike as in the case of Russia. Heller outlines four ways the Chinese government could own gold:
- A larger-than-reported gold hoard held directly by the central bank
- Chinese sovereign investment funds (of which just one has $200 billion in capital for “currency allocation” purposes)
- The Chinese military, both directly and through business fronts
- Gold held in the inventories of government-owned business entities
Interesting and highly believable, but Heller is only getting started. He notes:
But what could be the reason the Chinese government would want to build the world’s largest hoard of physical gold? In my judgment, as many others have said, he who owns the gold rules.
Physical gold has been used as a financial asset for 6,000 years and never failed. With that track record, it would be the ideal asset to accumulate to win an economic war.
…Do I think that the Chinese government plans to inflict an economic World War III on the U.S. and other nations at some point? I do.
Again, not exactly difficult to believe, especially during power struggle between BRICS countries and the West. It’s been said many times that a credible gold-backed sovereign currency would, by definition, doom all free-floating fiat currencies. There would be no reason to own an asset that’s constantly depreciating when there’s a highly liquid alternative form of money that doesn’t suffer from inflation.
