Wednesday, August 1, 2018

As shortages in silver continue to escalate, a reversion to the mean of a 10:1 gold/silver ratio becomes increasingly likely in near future

On July 31, French precious metals analyst Cyrille Jubert published an in-depth look at today's silver market and determined that not only are shortages in the metal very quickly leading to a day of reckoning, but behind the scenes banks and governments have been denoting the gold/silver ratio at around 10:1 in their own reports for years despite the fact that the commodities markets have that ratio currently at 78:1.

We know from Wikileaks reveals that the paper futures market was put into place in the 1970's as a means to control (manipulate) gold and silver prices as well as to dissuade the common people from investing in the metals.  And despite the fact that regulators have changed and modified rules on the fly many times to protect their manipulated system from outside entities seizing control, on at least two occasions they have lost control over this mechanism and prices quickly sought to revert back to their natural mean.


The natural mean for gold to silver is around 15:1, or in some instances even as low as 9:1.  However this constant began to change significantly when the metals were taken out of the free market and put under the control of either government or central bank regulation.


As you can see from this chart, the gold to silver ratio was constant leading up the government demonitizing silver during the Populist movement of the 1870's.  And from this point forward a primary gold standard was instituted for the U.S..  And you can see by the massive divergence in the ratio following this move, it subsequently got worse after 1913 when the Federal Reserve took over control of monetary policy.


The last time the gold to silver ratio was below 20:1 was in 1980 when high inflation threatened to tear apart of the confidence in the dollar and the fledgling Petrodollar system.  And as a result of this, the pricing of gold and silver was solidified in the paper futures market and from there the ratio has rarely been below 40:1 over the past 38 years.

Reversion to the mean

For anything in finance as in nature, when an asset, commodity, or eco-system is artificially manipulated outside its natural growth, the result is a buildup of forces which at some time in the future will explode beyond the manipulators ability to control them, and that thing that was suppressed or boosted will violently revert to its correct level.  In fact we saw this happen in the equity markets between 2000 and 2011 when the Nasdaq lost over 50% of its Dot Com value and the Dow fell from a high of 14,000 all the way down to 6,600.
Mean reversion is financial theory suggesting that asset prices and returns eventually return back to the long-run mean or average of the entire dataset. This mean or average can be the historical average of the price or return, or another relevant average such as the growth in the economy or the average return of an industry. - Investopedia
Today gold and silver (but especially silver) has seen its price controlled and manipulated to the point that the industry is now threatened with production costs being higher than the market price.  Additionally, industrial use of silver for many years now has been more than double the annual production of the metal, leading to shortages that will very soon cause an 'explosion' in price like a coiled spring held down too far and for too long.

Ironically while the paper markets 'fix' the prices of gold and silver to unreasonable levels to protect the devaluing fiat currencies of sovereign nations, these same governments and central banks report in their own analysis the gold and silver ratio based upon a 10:1 range.
If you study the global derivatives statistics on the Bis’s website Here 
The ratio between gold and silver is once more 1/10

So in the end if governments and central banks recognize the gold to silver ratio as supposedly being 10:1, and twice in recent history the markets have sought to return to that average mean (1980 and 2011), then with manipulation much greater now than at either of those times, and supply levels in a far worse position than at any time in history, how long until they once again lose control over the market and we see a silver price far beyond the $49 of just seven years ago?

Could it be as early as September?  Either way it will be a fun ride when nature once again demands a reckoning.

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