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Paul van Eeden: Debunking the Gold Silver Price Ratio

Issue 56, September 2013

There is no meaningful relationship between the prices of silver and gold, says investor Paul van Eeden, “and nor should there be.”

Silver has outstripped gold’s losses this year, dropping 29 per cent, with industrial demand failing to cushion its hard asset status. Traders have watched the gold-silver ratio, termed the “Mint Ratio” by the Financial Times, rise to a three-year high of 67 in July, before dropping to 58 in August. Citigroup analyst Tom Fitzpatrick has told clients he expects the ratio to halve, whilst analysts at GFT Markets point to a historic average of 16-to-1, indicating 280 per cent upside in silver, or 75 per cent downside in gold.

Van Eeden rejects the idea as nonsense. An average ratio of 16, he points out, stems from US currency laws in 1792, which fixed silver coins at one-fifteenth the value of gold coins of an equal purity and weight. In 1834 the ratio was adjusted to one-sixteenth, where it was held until 1900.“The price was set by decree,” van Eeden says, “so how can there be any inference as to what a market price ratio should be?”

Van Eeden is president of Cranberry Capital, which invests in junior miners that finance their exploration through partnerships. He sits on the board of Toronto-listed Miranda Gold and says he has recently been buying shares in Lara Exploration, currently drilling the Liberdade project in Brazil in partnership with Chile’s Codelco.

“Even if two commodities traded at some average ratio 200 years ago,” he says, “it’s no reason to believe that they should trade at the same ratio now. 100 years ago, the primary use of silver was money. 50 years ago, it was photography. So there’s no basis for a fixed ratio if the usage of silver is changing over such short periods of time.”

He cedes that there is a correlation, but rejects any significance. “There’s also a correlation between copper and gold, or oil and gas.” Silver, he adds, is more volatile than gold simply because it is a smaller market. “Molybdenum is even more volatile than silver.”

Van Eeden views silver as “entirely an industrial commodity,” refuting the idea that as a store of value, it becomes a form of money. “Central banks hold gold and not silver. The primary use of gold is not in industrial fabrication. Anything can be a store of value, but that doesn’t mean it’s money.”

“Central banks hold gold and not silver. The primary use of gold is not in industrial fabrication.”

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