Disaster Scenarios, Part Deux

This is the fourteenth post in a series entitled Currency, Money and the Economy.

Let’s re-examine our three disaster scenarios discussed in the eleventh post, this time adding silver to the equation. In addition, let’s use both a conservative ratio of 10 and an aggressive ratio of 4 and observe the results.

Scenario #1: Deflation
The Dow crashes to 2000. Gold remains at $1000 an ounce. To reach a ratio of 10, silver rises to $100 an ounce. To reach a ratio of 4, silver rises to $250 an ounce.

Summary: Paper assets: -80%, Costs: -50%, Gold: 350%, Silver (C): 2000%, Silver (A): 5000%
Winner: Silver

Scenario #2: Stagflation
The Dow stagnates at 12,000. Gold rises to $6000 an ounce. To reach a ratio of 10, silver rises to $600 an ounce. To reach a ratio of 4, silver rises to $1500 an ounce.

Summary: Paper assets: 0%, Costs: 50%, Gold: 2150%, Silver (C): 12,000%, Silver (A): 30,000%
Winner: Silver

Scenario #3: Inflation
The Dow surges to 60,000. Gold rises to $30,000 an ounce. To reach a ratio of 10, silver rises to $3000 an ounce. To reach a ratio of 4, silver rises to $7500 an ounce.

Summary: Paper assets: 500%, Costs: 1000%, Gold: 10,800%, Silver (C): 60,000%, Silver (A): 150,000%
Winner: Silver

In each of our scenarios, silver outpaces everything else, even using a conservative estimate. So while gold shines bright and gets all the glamour and publicity, it is silver that has the most potential to outperform.

Now let’s say you have $2000 to invest right now. You have the choice of buying 110 ounces of silver or 4 shares of Google. Before we began this series of posts, I would be willing to bet that most of you would have chosen Google. Now knowing what you have learned, which is more likely to double first, silver (moving from $18 to $36 an ounce) or Google (moving from $500 to $1000 a share)? Remember, since 2000, the Dow has dropped 17% (price only, not value), but gold and silver have both increased 350%. It’s not so clear cut anymore, is it? Welcome to your new reality.

Here’s one more fact to consider. If a superbubble forms over the precious metals market, the primary target will be gold, since it gets all the publicity. Something similar happened during the Great Depression. In order to preserve the gold it had on reserve, the United States made it illegal for a US citizen to own gold. From 1933-1974, a United States citizen could not purchase gold or redeem dollars for gold, even though the dollar was backed by gold.

If there is another superbubble, there is no reason that the United States cannot pull the same trick and close the gold window again. What better way to attempt to stop a bubble than by making the demand side of the supply/demand equation illegal! After all, the Federal Reserve is currently the master of currency manipulation. If that happens, where will people turn to protect the value of their assets? You guessed it, silver.

So what kind of silver/gold ratio should one have in his/her portfolio? Using an actual supply/demand ratio of 4, this would be a realistic conservative ratio. If you really want to be aggressive and bet hard on silver, than you may want to move your ratio up to 10. Remember an ounce of gold is $1000. Ten ounces of silver is still less than $200. So a ratio of 10 is not that much of a burden financially (although physical weight becomes a factor).