The Five Whys of Silver Investing—Part One

I worked in the manufacturing industry in the United States for 30 years. My first job after dropping out of college was machinist trainee. Ten years later I earned a Bachelor’s degree in Operations Management while working full time as a lower level manager in a 1,700 employee operation. Twelve years later I earned an MBA while working full time as a high level manager.

A couple of years after earning my MBA I made Vice President. Since I worked in multiple industries and worked my way up from the bottom, I gained a well-rounded perspective of U.S. manufacturing.Early in my career Toyota began exporting cars manufactured in Japan to the United States. Some of the country’s “best” manufacturing companies were put to shame.  Toyota offered better quality at a lower cost even though Toyota had to import steel to Japan and pay to ship autos across the Pacific Ocean to the United States. For about ten years most U.S. manufacturers made excuses. But a few learned about what has come to be called the Toyota Production System (TPS).

Everyone who has managed in a progressive manufacturing industry knows something about TPS. One of the most memorable lessons Toyota taught U.S. manufacturers is to “Ask why five times” to get to the root cause of a problem.  If you ask why only a couple of times, you get symptoms of the problem, or symptoms of a symptom. Unless the root cause is determined and remedied, the problem cannot be solved. The tremendous opportunity we have in silver investing this decade is the result of a problem. What are the chances of that root cause being discovered, remedied, and spoiling the tremendous silver investing opportunity?

1.       Why does silver have such tremendous upside potential? The ratio of the price of gold to the price of silver will eventually return to historic levels.

The ratio currently stands at about 50:1—that is, an ounce of gold costs 50 times as much as an ounce of silver.  For 200 years the ratio fluctuated in a range of 15:1 to 20:1. That makes a lot of sense when you know that the earth’s crust contains about 16 to 17 times as much silver as gold.  Over 200 years ago, people did not know this.  Geology had not evolved to such a high state. However, supply/demand forces resulted in an average price ratio of about 17:1 for over 200 years.The ratio has been as high as 100:1 the past 20 years.  I think it may get there again before beginning a swift return to a historic ratio.  It may go even lower– to perhaps 10:1. In short, I think the price of silver will plummet while the price of gold increases when the world realizes the recession of 2008 is merely the beginning of a worldwide economic depression of the magnitude never before seen.  The price of silver will drop because silver is thought of as more of an industrial metal by those who control short term prices through the futures markets where open interest equals 100 to 200 times the amount of actual physical silver available for purchase.

2.       Why will the gold to silver price ratio return to historic levels, or less? Because when the price of gold explodes it will be out of reach of the middle class.

Gold has great potential.  But silver has greater potential because when people turn to silver as a “poor man’s gold” the still high price ratio will be justification for buying silver at what will seem like outrageous prices.  Until the historic ratio is again reached, silver will be considered underpriced relative to gold.

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