Sunday, November 29, 2009

Silver to Aluminum Price Ratio



This chart shows the price of silver divided by the price of aluminum going back to the year 1900. I've also included today's data point. Silver is currently trading at $18.25 per troy ounce. Aluminum is currently trading at $0.8887 per pound. There are 14.5833333 troy ounces in a pound. The ratio is therefore currently 299.50 to 1.

Why the chart?

I chose aluminum because...

1. It represents overcapacity of hard assets (deflation).
2. It is plentiful. Aluminum is the most abundant mineral in the earth's crust.
3. It is hard for speculators to influence its price. There's nearly an unlimited supply of aluminum available to be hoarded.

I chose silver because...

1. It represents overcapacity of printed money (inflation).
2. It is rare. Silver is one of the rarest minerals in the earth's crust.
3. It is easy for speculators to influence its price. There's a very limited supply of silver available to be hoarded.

I've mentioned in the past that if I was running my portfolio like a hedge fund then I would buy toilet paper and aluminum foil and sell precious metals. The chart is my attempt to show why I feel this way. Can the parabolic ratio continue higher? Of course it can. Might it someday revert to the mean though? Of course it could. Either aluminum could get more expensive, silver could get cheaper, or both.

I guess you could say that I am just not a believer in the theory that silver is good at any price, any more than I was a believer in the theory that real estate was good at any price. I could be wrong to think this way. Time will tell.

Disclosure: I own a LOT of toilet paper, aluminum foil, canned goods, and so on. As you can see, I am not exactly bullish on our long-term economy. Other than several silver coins held for sentimental value, I currently have no position in precious metals though. Right or wrong, I took profits at much lower prices.

Source Data:
USGS: Historical Mineral Prices
Kitco: Spot Silver Price
Kitco: Spot Aluminum Price

14 comments:

watchtower said...

Hmmmm, I'm still thinking we need a gold to TP price ratio chart : )

Seriously though, I do have some PM's and I hope it's a way that I can consider myself somewhat diversified.

Who knows for sure what the future holds but your take on hoarding essential items is still a slam dunk IMO.

Stagflationary Mark said...

watchtower,

I would have used gold instead of silver in this chart had the government not fixed its price for so many years (thereby distorting the data).

I would have used toilet paper prices instead of aluminum had I been able to do an exact apples to apples comparison. I'd need to know sheets per roll and historical number of plys (for hedonic adjustments) to do it justice.

So I think we're pretty much stuck with this chart it seems.

"Who knows for sure what the future holds but your take on hoarding essential items is still a slam dunk IMO."

It sure seems like it to me.

Even if you are wrong to hoard basic necessities, you won't lose much, if anything. First, they haven't gone up in price much so they probably won't fall in price much. Second, you won't need to find a greater fool to buy them from you.

If you are right to hoard basic necessities, then clearly you won't lose either. You won't profit off of it, but you'll still be thankful you did it.

This is a no-lose no-lose situation. There's something to be said for no-lose no-lose situations, especially in a world that still thinks win win situations are the norm.

"The Rules To Trading A Bear Market"

http://blog.trending123.com/2009/02/the_rules_to_trading_a_bear_ma.html

"Bottom line, try to lose less than the guy next to you."

It's obviously a generalization. Some people will get rich. The majority sure won't though.

getyourselfconnected said...

Mark,
Leave my beloved silver alone!!

That aside, the current run up is starting to look a little like the blow off top in 1980, as it relates to aluminum.

I want to see how the following items resolve:
-bad debts vaporized (Dubai, Iceland, Greece, etc)
-ZIRP for up to maybe 4 years
-FED unable to stop bying MBS
-US debt sales issues mostly at the longer end of curve

Until those items get cleared up I think the metals are a still a go.

Stagflationary Mark said...

GYSC,

Sorry! Just trying to point out some of the risks. You should feel good. You can now climb a healthy wall of worry. ;)

The metals may or may not be a go, but the better question might be...

Which metals? Aluminum or silver?

You can currently buy a whopping 300 ounces of aluminum for just one ounce of silver.

Of course, if we experience yet another deflationary crash then neither may be a particularly good bargain right now. Who knows?

Bad debts? ZIRP? Reminds me a bit of deflationary Japan.

getyourselfconnected said...

"You can currently buy a whopping 300 ounces of aluminum for just one ounce of silver."

So what weighs more on the Moon, an ounce of silver or an ounce of aluminum??

Stagflationary Mark said...

GYSC,

Trick Question Joke ;)

http://www.ebaumsworld.com/jokes/read/5301

Anonymous said...

Mark -
The Al to Ag comparison is very good analysis.
I mean VERY GOOD.
Congratulations on an excellent blog.
- jus me

dearieme said...

Buy wooden nickel futures now.

Remy said...

Hello all,

I do enjoy the metals debate :), but thought I should add this...

Below is a link for real estate/rental vacancy rates since 2000. The chart seems pretty deflationary:

http://www.cepr.net/index.php/data-bytes/housing-market-monitor/tax-credit-temporary-boost/

cheers,
Remy

Stagflationary Mark said...

jus me,

Thanks! It was inspired by many of the comments left for me here.

dearieme,

Good one, lol.

Remy,

From your link...

"The drop in market rents will eventually put downward pressure on house prices. The amount that homebuyers are willing to pay for a home will inevitably adjust to rents in the market. Also, landlords will be more likely to put homes up for sale as rents drop."

I've mentioned this before but it is worth repeating. I live in the Seattle area and there's an apartment complex with a large sign out front.

Pay On Time, $50 Off

Remy said...

Agreed! times are tough for the rental owners.

Rentals in coastal areas of long beach are also taking much longer to rent out. What took 1-2 months to rent now takes 4+ months and at lower cost...

Stagflationary Mark said...

Remy,

Ouch.

The 1.3% rate on my online savings account looks pretty good.

4+ months earning ZERO on the investment?
Property taxes each year on the entire investment?
Investment requires ongoing maintenance?
High transaction costs to buy and sell investment?

Good thing the investment (real estate) ALWAYS goes up in price much faster than inflation. Otherwise it might be a real money loser.

One more thought. Being a landlord sounds like a lot of fun. Just need to find tenants too poor to own their own house and too rich to default on rent payments. You also need to find tenants smart or lucky enough to keep their jobs, but not so smart as to want to haggle on future rent payments.

mab said...

Being a landlord sounds like a lot of fun.

Indeed. Being one of the commercial banks that hold 45% of the outstanding $3.47 trillion in multifamily and commercial mortgages sounds like fun too. Especially if you like make believe/pretend games.

http://www.dsnews.com/articles/commercial-multifamily-mortgage-debt-outstanding-declines-in-second-quarter-2009-10-07

In case you have doubts about how fun it really is to be a bank sitting on a pile of commercial mortgages allow me to mention that prices have fallen back to 2002 levels.


http://www.dsnews.com/articles/index/commercial-property-prices-sink-to-2002-levels-report-2009-11-30

Good thing we stress tested our banks and then promptly changed the accounting rules.

Prices will bounce back even in the face of a glut. They always do, just ask Qwest, Sprint, Global Crossing, Level 3, Lucent, Nortel, Winstar, WorldCON, etc.

Stagflationary Mark said...

mab,

"Prices will bounce back even in the face of a glut."

Oil prices rebounding nicely? Aluminum, steel, and cement pumping out of every orifice? No wonder the stock market is up.

Misery loves companies!

METALS-Copper ends up as funds seek safety in hard assets

http://www.reuters.com/article/marketsNews/idUSGEE5AT0W220091130

Rising prices have triggered a restart of smelting capacity, especially in China, the world's largest producer.

That will check price gains, but analysts expect support from higher energy prices, which make up 30 percent or more of aluminum smelting costs.


Once 8% of the earth's crust (aluminum) has been converted into investment opportunities just imagine how prosperous we all will become.