Last Updated :
22 June 2010 at 12:00 IST
Silver has better commodity value than gold
By Sam Mathid Most watchers of the ratio of gold to silver have done so in the expectation that it will return to its historical average of around 15 to 16.
It is an interesting aside that this ratio is similar to the reserves in the ground. Gold at 0.004 parts per million of the Earth’s crust, and silver at 0.07 parts per million, gives a ratio of 17.5.
In ancient times the ratio of gold to silver was about 10. In other words, gold was usually perceived to be around 10 times more valuable than silver.
By the middle ages this ratio had increased to around 15. In the 20th century the ratio was in the area of about 50.
At the start of the 21st century the ratio hovers between 65 and 70. It is the conviction that at some point silver must revert to its historical average that gives heart to those who accumulate it.
This is at odds with what is actually observable, which is a consistent increase of the ratio between the monetary metals, particularly from around the start of the 17th century. It is accompanied by rising volatility. That does not in any way resemble a short-term divergence.
Is this an anomaly which will be rectified, or is there a logic to this trend? Does the market of the last 500 years have a reason to discount silver to an ever greater degree?
Can we be certain of a return to the historical average?
A look at the fundamental relationship between gold and silver indicates probably not.
The Bi-Monetary System The necessity for a bi-metallic monetary system was brought about by two of the different functions of money. One of the relevant functions is as a very high weight-to-value ratio money. This meant that an easily transportable amount could be used to finance such things as large importations of goods, and the purchase of property and other expensive assets. This was one of the jobs of gold.
The other relevant function is as a medium of exchange for daily purchases. It is hard to buy a dozen eggs using gold. Such small transactions were one of the jobs of silver.
Whether in antiquity, where they utilized cows and salt, or in more modern times where we utilized gold and silver, these were the two functions of money that necessitated a bi-monetary system.
However, technological advances over the centuries have allowed us to practically use smaller and smaller amounts gold. This has brought us to the point where in the electronic age it is possible to utilize gold down to fractions of a grain.
These new abilities of gold have increasingly usurped the job of silver.
This suggests that silver’s long-term monetary use for everyday transactions is far from certain. Indeed, the indications are that silver’s use as a money will continue to diminish.
Silver’s Industrial Use A second factor, that only entered the equation in the 20th century, could be contributing further to silver’s demonetisation. This is its growing electronic, medical and general industrial role. Make no mistake, silver is now a consumed metal.
This places further strain upon its monetary value. If its industrial value is increasing, its monetary value must necessarily be diminishing.
MCX CARBON CREDITS 14 December 2012
contract was trading at
Rs 562 , down Rs. -53 . What's your view on it?
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