{"id":20549,"date":"2011-04-07T12:55:44","date_gmt":"2011-04-07T16:55:44","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=20549"},"modified":"2011-04-07T12:55:44","modified_gmt":"2011-04-07T16:55:44","slug":"warren-buffett-the-difference-between-gold-and-silver","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/04\/07\/warren-buffett-the-difference-between-gold-and-silver\/","title":{"rendered":"Warren Buffett \u2013 The Difference Between Gold and Silver?"},"content":{"rendered":"

Warren Buffett \u2013 The Difference Between Gold and Silver?<\/span><\/strong><\/a><\/p>\n

By Adrian Ash on 6 April 2011<\/abbr><\/p>\n

The bluntest difference between gold and silver? Warren Buffett\u2026<\/em><\/p>\n

WE\u2019VE BEEN<\/strong> inundated here at BullionVault with comments and queries in response to Gold Value $3844<\/a>, Paul Tustain\u2019s new video presentation.<\/p>\n

Apologies if we\u2019ve not got round to answering your email yet. Chief amongst the queries? \u201cWhat\u2019s your view of silver<\/a>?\u201d Which on a risk-adjusted, \u2018fair value\u2019 basis, is tougher still to answer.<\/p>\n

 <\/p>\n

Just as you can with gold, you could plug your own forecast for changes to the silver price \u2013 under different levels of consumer-price inflation \u2013 into Paul\u2019s gold value calculator<\/a> (see column E. You\u2019d also need to reset the \u201cCurrent price\u201d to $40 of course in cell E3). Simply running this exercise for silver but using Paul\u2019s view of the various gold price outcomes, the current \u201cfair value\u201d would come out nearer $109 per ounce \u2013 again, like gold, significantly higher than today\u2019s market price.<\/p>\n

But silver is a very different market to gold. Most crucially, there\u2019s no commonly accepted benchmark value \u2013 such as a suit of men\u2019s clothes for an ounce of gold \u2013 against which to measure silver across time.<\/p>\n

See Forbes<\/a> magazine, for instance, on long-term valuations. All gold, no silver. Looking back 2,500 years, Stephen Harmston<\/a> \u2013 writing for the World Gold Council in 1998 \u2013 found the same long-term value reversion in gold prices vs. the cost of bread. Again, no silver. Not having a base value for silver doesn\u2019t interfere with Paul Tustain\u2019s mathematics on his calculator. But it does mess with the methodology, denying the vital importance \u2013 in the absence of cashflow \u2013 of \u201cover-\u201d or \u201cunder-valuation\u201d.<\/p>\n

Sure, you could plug in a base value for silver, figured off that suit of men\u2019s clothes, using the gold\/silver ratio<\/a>. But that would:<\/p>\n

a)<\/strong> rely on agreeing a long-term ratio (open to fierce debate);
\nb)<\/strong> ignore silver\u2019s changing industrial use (and thus its changing economic value);
\nc)<\/strong> relegate silver\u2019s value to merely a function of gold.<\/p>\n

Another route might be to track mining-output costs per ounce. Because, other things being equal, the price of a commodity should \u2013 in a free market \u2014 revert long-term towards its cost of production. Interestingly, the GFMS consultancy now puts total costs per ounce of gold, including infrastructure spend, above $800 per ounce<\/a>\u2026not too far from Paul\u2019s current \u201csuit of men\u2019s clothes\u201d. (Using Google to average the top 20 prices<\/a> for a good men\u2019s suit in the US, Tom Anderson at PassantGardant<\/em> finds a base value of gold at $800-$850 per ounce today.) But silver is typically a by-product of other mineral extraction, rather than the primary target. So it\u2019s impossible to judge today\u2019s global \u201caverage\u201d, let alone calculate historical mining costs for the kind of back-check which Paul runs for 1980 gold.<\/p>\n

Yes, both gold and silver have been used as money throughout history. But while gold has tended to adopt the \u201cstore of value\u201d function of money, silver has been used more as a \u201cmeans of exchange\u201d. India continued to mint silver rupees until 1947, for example, long after the Great Britain quit the gold standard. US silver certificates could be redeemed for Silver Dollar coins until 1968, almost 35 years after private gold-ownership had been banned.<\/p>\n

Longer-lived than gold money, the purchasing power of silver coins was much more variable over time, thanks to regular debasement by greedy governments. The English Pound, for instance, contained barely one-third as much silver in 1600 as it did 300 years earlier, while the Genoese Lira in Italy shrank by nearer 90%. Gold coins was remarkably stable in comparison.<\/p>\n

Silver\u2019s other big difference from gold has been its changing industrial use. Some 60% of annual demand now comes from industry<\/a>, rather than those store-of-wealth uses (coin, bar, jewellery and ornament) accounting for more than 89% of gold demand<\/a>. The composition of silver\u2019s industrial demand has also changed dramatically over time. In only the last 10 years, for instance, photographic demand has collapsed, while other existing uses (such as in solar panels) have surged and many new uses have been developed (in hospital linen, deodorants, wood preservatives<\/a>).<\/p>\n

The bluntest difference? Perhaps it\u2019s Warren Buffett<\/a>. The famous \u201cvalue investor\u201d has said he doesn\u2019t understand gold, because it has \u201cno utility\u201d. Never mind its 5,000-year history of storing wealth. Anyone watching the gold market from Mars \u201cwould be scratching their head\u201d to see it \u201cdug up in Africa\u201d only to be buried again in a vault underground, says Buffett.<\/p>\n

Yet his Berkshire Hathaway fund tried to corner the silver market in the late 1990s, selling its massive position in 2006 for a fair profit. So while Buffett doesn\u2019t \u201cget\u201d gold, his Graham-and-Dodd value investing made silver a valid play. Because he thought it was undervalued against the outlook for industrial demand.<\/p>\n

Gold analysts are spared having to guess how technology might affect prices. Whereas the bigger prize \u2013 for you, Warren Buffett and for the Hunt brothers, who famously attempted a silver corner in the late 1970s \u2013 may look to be in judging silver\u2019s future mix of monetary, investment and industrial use.<\/p>\n

Adrian Ash
\nfor Money Morning Australia<\/em><\/p>\n

Adrian Ash is head of research at www.BullionVault.com<\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Gold analysts are spared having to guess how technology might affect prices. Whereas the bigger prize \u2013 for you, Warren Buffett and for the Hunt brothers, who famously attempted a silver corner in the late 1970s \u2013 may look to be in judging silver\u2019s future mix of monetary, investment and industrial use.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-20549","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/20549","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=20549"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/20549\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=20549"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=20549"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=20549"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}