Thursday, May 5, 2011

Silver to Aluminum Price Ratio v.5



Silver is currently $34.66 per troy ounce.
Aluminum is currently $1.174 per pound.
There are 14.5833333 troy ounces in a pound.

That puts the ratio at 430 to 1.


Still frothy.

May 5, 2011
Panic in the Pits: Silver Plunge Spreads to Oil, Copper

Silver [SICV1 36.231 -3.152 (-8%)] was the first to crack five trading days ago and is now down more than 27 percent since its high last Friday, including a 10 percent drop today alone. The silver panic forced traders to sell other hard assets to raise cash, with the selling spreading to oil and copper over the course of the last two days.

Money
To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time.

I think we can pretty much cross silver off the "money" list. In my opinion, this is near proof that silver is and has been one of the most heavily leveraged assets of the past decade.

If you own silver outright and hold it in your possession, then you are just like I was owning my house outright and holding it in my possession. That didn't protect me from the insanity of others though. I watched the price of my house rise and then I watched the value of my house fall based on the excess leverage in the housing market. How is this any different?

Keep in mind that I did own a lot of silver in physical form from 2004 to 2006. I certainly know the appeal of hard assets in an uncertain world.


See Also:
Silver to Aluminum Price Ratio
Silver to Aluminum Price Ratio v.2
Silver to Aluminum Price Ratio v.3
Silver to Aluminum Price Ratio v.4

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

33 comments:

CP said...

Mark,

We sure called this one. You should use an extra square of paper towel tonight - you deserve it!

CBS

Stagflationary Mark said...

CP,

I won't claim victory unless silver is trading more in line with its historical average relative to aluminum and toilet paper. We'll see!

February 24, 2011
Silver Bubble Construction Set

When silver hit $45 on April 20th, I was heckled for simply suggesting how a silver bubble could be formed. Check out the comments. I found it interesting to say the least.

Stagflationary Mark said...

The heckle was from "Anonymous". I should point that out.

getyourselfconnected said...

I was wrong on how much hot money was in silver, I am a bit shocked really. My last real silver trade was back in August 2010-October 2010 ($18-$22) and after that it got a bit nuts, too nuts for me. Still I wanted it to go to $500! LOL.

I may be interested in silver again back where I sold my last trade, 22-24 but depends how it gets there.

My long term physical holdings are going no place.

Mr Slippery said...

"The value of the money must also remain stable over time."

Silver sure is frothy. All commodities got savaged today.

But please don't tell me that the value of the US dollar remains stable over time.

Everything floats against everything.

Mr Slippery said...

BTW, I sold silver into the front side of the parabola all the way through this last Saturday. Some guy on ebay will receive my last shipment today. The price dropped about a 1/3 during shipping. I kind of feel bad about that.

But I still hold my core of physical silver that I got in 2008 and I won't be selling any more. I expect silver to bottom soon, but I also won't be buying any more.

My gig now is nickels!

Stagflationary Mark said...

GYSC,

I was wrong on how much hot money was in silver, I am a bit shocked really.

Join the club. I was wrong on how much hot money would get into silver when I sold in 2006, lol. ;)

Mr Slippery,

But please don't tell me that the value of the US dollar remains stable over time.

Generally speaking, the things I actually buy have been far more stable priced in dollars than they would have been if they had been priced in silver. That's especially true over the past few weeks.

Toilet paper offers perfect stability though, assuming you don't stack it too high. ;)

getyourselfconnected said...

Is there an alogo than can tell me why, OH WHY, I always replace the roll of toilet paper? I mean come on! The odds it is empty right when I get there for years in this house seems statistically impossible!

Stagflationary Mark said...

GYSC,

I have a theory based on the etiquette involving that last slice of pizza. The proper thing to do is split it of course.

Therefore, your wife only uses half of the toilet paper that is there and leaves you the other half. It therefore never technically runs out for her.

If you look close I bet you can see just a hint of toilet paper still clinging to the cardboard tube. Shame on you for belittling her generosity!

Hahaha! :)

getyourselfconnected said...

Obviously you are not married......LOL but not really :)

mab said...

I think we should start measuring non-FIRE sector jobs (the ones that don't pay well and lack benefits).

The non-farm measure just doesn't cut it anymore.

Stagflationary Mark said...

GYSC,

I joke. Your problem stopped happening to me. My girlfriend conceded that she did that in the past but doesn't do it any more.

I told her (joked) that I trained her. The look on her face when I said that was like a MasterCard commercial. It was priceless. Hahaha! :)

Stagflationary Mark said...

mab,

I think we should start measuring non-FIRE sector jobs (the ones that don't pay well and lack benefits).

If nothing else, picture the headlines.

Stocks on Fire as Non-FIRE Payrolls Show Firing Trend

Cost cutting spree is creating unprecedented prosperity for investors.

foo said...

wikipedia: "The value of the money must also remain stable over time."
mark: "I think we can pretty much cross silver off the "money" list."

This article is way off the mark. You can't (validly) blame something for not being stable money when (by law) it is not allowed to be used as money. If we were in a situation where gold/silver actually *were* legal money (and there was no real concern of them being confiscated and replaced with fiat, or their money status otherwise messed with by governments), then you would find (after an initial stabilization period) that they would be much more stable than they are now. But that stability would be at a level much higher than their present day value -- thus the current run-up and volatility as we do not yet know the outcome of the current world-wide government fiscal madness.

I.e., will gold/silver become money again or not? If yes they skyrocket in value, if not then they tank. In the mean time, there will be much volatility, and their value represents the market's current best guess on the answer to this question.

And note that even while the dollar *has* been legal tender (not exactly money, but we're all legally forced to use it as such), it has failed miserably in the "stable over time" test. (It's lost, what, 97% of its value in the last 100 years?)

What's even more insane, is that if you look at the $ over the same time period, it has *lost* more value than silver has *gained*. ($ down about 30x with silver up only about 15x.) So even with the $ being legal tender and silver not allowed for use as money (and it's value thrashed around due to that), silver has *still* held value in a tighter range than the $.

Stagflationary Mark said...

foo,

The dollar has not lost 97% of its value over the last 100 years unless you buried it in your backyard. Most investors earned interest on it.

Silver paid no such interest though.

My point here was that silver is not money. Silver bugs claim it still is. It was once money but is no longer. Cattle was money once. Where are the cattle bugs?

foo said...

"Silver paid no such interest though."

Yes, because there's no such thing as commodities futures and nobody makes any money selling long options backed by their physical. The premium one can get from risking/lending one's silver has been significantly less than it would be if it had been legal money during that time, but it has not been zero. Now riddle me this -- if federal reserve notes were not legal tender, how much could you get for risking/lending them? -- oh, that's right, they have no inherent value, so that would be a big fat zero.

"My point here was that silver is not money."

Your point, like your article, completely misses the mark. When deciding what might be legal money in the future, the real question (for non-banksters) is: What would be better money, fiat or precious metals? To ignore that precious metals would be better money (if legally allowed to be so once again) while arguing that they are not better money right now (while and because they are legally prevented from being so) is a point with no value whatsoever.

"Silver bugs claim it still is."

They understand that it is currently legally prevented from acting as money. But they also understand that historically precious metals have often been money, have made for the best money, and they suspect we will go that route again. (Now, there may be some that claim it is money now, perhaps in a black market setting, but I think most are not betting on it being money now so much as being money once again in the not-so-distant future.)

"Cattle was money once. Where are the cattle bugs?"

I already explained that the rise in gold/silver is because many people suspect we might end up switching back to a gold/silver standard. No one expects that we might end up switching to a cattle standard, thus the lack of "cattle bugs".

Let's see, why might we not use cows?: Cows have never been legal money in the USA, cows are not of uniform value, cows are hard to carry in one's pocket, it's hard and messy to break a cow, they don't hold their value very well after they die, the carry costs are pretty high while they're alive, using something that can reproduce as money would just lead to another tulipmania of sorts, the price of grains would be driven through the roof, and the AGW nazis would go ballistic. Seems pretty obvious why someone might think precious metals are a more practical form of money than cows for modern-day first-world countries, and why more people would be betting on a gold/silver outcome than a cattle outcome.

So, did you really not already understand why some people think gold/silver may become money while they don't think that cows will become money? Or was your question simply disingenuous rhetoric?

Stagflationary Mark said...

foo,

So, did you really not already understand why some people think gold/silver may become money while they don't think that cows will become money? Or was your question simply disingenuous rhetoric?

The article was not based on what some people may speculate about the future. Even then, silver at today's price is extremely expensive relative to aluminum.

I am simply arguing that silver is NOT money right now. I said...

I think we can pretty much cross silver off the "money" list.

You said...

You can't (validly) blame something for not being stable money when (by law) it is not allowed to be used as money.

Clearly you do not think silver is money right now. I do not think silver is money right now. You are of the belief that cows aren't money in the USA and never will be again. I am of the belief that neither cows nor silver will be money in the USA again. These are our opinions. Both of us could be ultimately proven wrong (if world apocalypse occurs and we go back to the pre stone age then cattle has a small chance of being money again).

And yet there are 22,000 search for results for "silver is money". This myth gets repeated over and over again on the Internet. Silver is not money. You can speculate that it might become money again if you like. I'm not trying to stop you.

Stagflationary Mark said...

It is my opinion that we will eventually move to a digital cashless society and we will no longer be exchanging any coins or paper at some point. That means that I am about as far from a new silver standard for our coins as far can be.

It is just an opinion of course.

Stagflationary Mark said...

I would also point out that although gold has a 5,000+ year history, it has only been recently that a digital cashless society was even possible.

The same goes for the wonder of flight. Aluminum didn't exist 5,000 years ago either. It wasn't even discovered until the 1800s.

Aluminum is truly a remarkable metal to me. I don't know where we would be without it and it only costs about a dollar per pound.

foo said...

"The article was not based on what some people may speculate about the future."

Yes, it is. Your article is based on what you speculate about the future. Specifically, you believe gold/silver will not become money, and that assumption underlies your entire article. If your assumption is incorrect, then your conclusions (e.g., with respect to the sanity of silver speculators) are likely wrong. Just because you failed to state your assumption does not change the fact that your article was based on it. And not stating your assumption in this case was a fairly egregious omission since a large reason why silver has moved as it has (i.e., the _stated_ basis of your article) is because many people are betting *against* your underlying assumption.

Another example of how your article is based on your assumption is when it asked "How is this any different?". Well, it's different because no one believed that houses were going to become legal tender or that they would have to be massively revalued in order to fulfill that role.

"Even then, silver at today's price is extremely expensive relative to aluminum."

Or not. The world's present day aluminum needs are currently being met more or less. And the world's future aluminum needs (at least per the market's best guess) don't differ drastically from today's aluminum needs, or at least not enough for increases in demand to outstrip increases in production. Thus there is not so much wide-spread upside speculation for aluminum. I have already explained (and you seem to understand) why there is some upside speculation for gold/silver. But what I guess you are not accounting for is that if we were to switch to a gold/silver standard, gold/silver would likely have to be revalued up by many times from even their current "inflated" values. That is because the current valuation of the world's total gold/silver supply is many times too small to monetize the world's total non-gold/silver assets.

"I am simply arguing that silver is NOT money right now."

No, you were not. You were doing more than that. You were arguing a specific reason for silver not being money. The reason gold/silver are not money right now has nothing to do with any inability to hold value (when they are money). Instead it is because government abandoned the gold/silver standard (because it wanted to spend more than it could collect, so it desired the ability to print; that and it was influenced by banksters with their own agenda). Precious metals have always done a fairly good job of holding value (while they were money) -- that is exactly why governments tend to abandon them (and usually screw their own citizens in the process).

foo said...

"And yet there are 22,000 search for results for "silver is money". This myth gets repeated over and over again on the Internet."

To be fair, those results are not all saying that silver is money in the complete technical sense. The very first hit is an article titled "Is Silver Money?" and its conclusion is "Ultimately people not government determine what money is and what money is not.". It sounds to me like they are saying ultimately the people may choose silver even if at present governments choose fiat. And while I'm not going to go through and read all 22,000, I'm guessing many of the sites that literally say silver is money do so with the recognition that governments currently prevent it from fulfilling that function. Also, I think it's important to separate out pages written by precious metal dealers trying to scare up business and more genuine individuals just stating what they actually believe -- a lot of what you call "myth" may just be widely-recognized "hyperbole", and its ilk can be found on any shopping network channel 24/7. Anyways, I don't want to be the defender of every kook/charlatan on the internet, so I will concede a priori that silver kooks/charlatans do exist on the internet, and I don't really know how many of those 22,000 might fall into that category. If you want to point me to a paper which includes an objective analysis of a scientific sampling then I'll take a look. Otherwise I will assume that you don't really know either.

"Silver is not money."

While I agree that this statement is technically true at present, I believe you are wielding it as a bludgeon, without due concern for the greater truth. It's like those that proclaim "You can't eat gold!" as if that technically true (at least in the digest/utilize sense) statement is the be all and end all of gold's valuation.

"digital cashless society"

You do realize that option does not preclude gold/silver-backed "bits", right? There will always be the struggle between those that wish to print and those that want sound money. Whether or not we go cashless is an orthogonal issue. (Whether or not you can demand redemption of the underlying asset, though, is not an orthogonal issue. You can't have sound money if the backer of the bits can refuse to redeem them.)

foo said...

"That is because the current valuation of the world's total gold/silver supply is many times too small to monetize the world's total non-gold/silver assets."

Sorry -- I misspoke there (and used the word "monetize" incorrectly). What I should have said is that to maintain sane (not too high) leverage in an economy you need a sufficiently large monetary base, and if gold/silver were to be used for that purpose it would need to be revalued accordingly.

Stagflationary Mark said...

foo,

"Your article is based on what you speculate about the future. Specifically, you believe gold/silver will not become money, and that assumption underlies your entire article."

My primary assumption here is that silver "is and has been one of the most heavily leveraged assets of the past decade". I listed my reasons for creating this chart in my first post on this subject.

I believe that aluminum is at the other end of the spectrum. I also believe that is what is responsible for the silver to aluminum price ratio being extremely high right now.

You clearly believe otherwise. We'll be able to look back many years from now and know who was right.

You have your opinion and I have mine. We clearly do not agree but that's okay.

Stagflationary Mark said...

As a side note, I have no problem with people claiming that the price of silver is high because they believe it will someday be money again. I think that is a fairly good argument if you believe that.

I do have a problem with the people that claim that "gold is money" and "silver is money" now though. They aren't. I can't currently pay my bills with either of them.

I should have made that more clear in this post.

Stagflationary Mark said...

One more thought. You brought up lease rates. You seemed to think I was biased for not mentioning them.

From where I sit, the typical retail silver investor (such as myself when I invested) does not earn any interest on silver.

If we invest in SLV, then we PAY 0.5% per year to own silver.

If we invest on our own by buying physical silver (as I did), then we pay a fee to buy it, we pay a fee to sell it, we pay for a safe (I did), and we should pay for insurance. I chose not to pay for insurance but I took a big risk in doing so. I also considered it to be a job since I was pretty much put in the role of a guard protecting it. Since the amount I purchased was worth about the same as my house, I even bought a handgun. No joke.

I did not make any money leasing my silver out and if I had it all to do over again, I still wouldn't.

foo said...

"I listed my reasons for creating this chart in my first post on this subject."

And one reason you give is "Aluminum is the most abundant mineral in the earth's crust."

FYI, that is a false statement. (Aluminum is the most common metal, but not the most common mineral. Quartz and feldspar are both more common that aluminum.) I'm not sure how none of your readers noticed that -- the abundance of silicates is covered in highschool science class. (At least I remembered it from mine.)

I really don't want to get into the other problems I see with that article, but this one is just too hard to resist: "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."

And you would have gone bust shorting precious metals. (If I were you I don't know that I would be pointing people back to that article unless your goal is to demonstrate that they probably shouldn't listen to you.)

"You clearly believe otherwise."

I'm not sure what you think I believe. I'm not exactly in the "silver is going to be money again" camp -- at least I place the odds of that (for any time in the next 10 years) at something less than 50% -- I haven't thought too hard about exactly how much less. It's definitely not that I have anything against sound money, nor is it that I think precious metals are a bad way to achieve sound money. It's just that I think there are a lot of powerful interests that don't want to see that happen, and there's a good chance they continue to prevent it. (The odds of returning to some kind of asset-backed currency would be very high if the public really understood money and wealth, but alas...)

That said, if anyone wants to have any hope of understanding why silver moves the way it does, they need to understand and account for the logic of those in the "silver will soon be money" camp (among other things).

"If we invest in SLV, then we PAY 0.5% per year to own silver."

And if you invest in dollars (not stocks or bonds or other investments, but dollars) you pay a lot more than 0.5% per year to own dollars (due to inflation). Even a savings account earning interest is not going to match official inflation, much less the much higher real inflation. Aluminum is also going to have higher carry costs than silver (due to the much lower value-density).

Stagflationary Mark said...

foo,

I meant metal. I said mineral. I stand corrected. I get my data from the USGS mineral statistics and therefore had mineral on the brain.

And you would have gone bust shorting precious metals. (If I were you I don't know that I would be pointing people back to that article unless your goal is to demonstrate that they probably shouldn't listen to you.)

Fantastic argument. First, I don't run my portfolio like a hdge fund due to the risk of being on the wrong side of a bubble trade. Second, I would not have gone bust. The ratio has yet to double. Third, this is the same sort of reaction dotcom bubble and housing bubble articles receieved. Don't listen to the naysayers!

I have no problem pointing people back to my former predictions. Sometimes I am right (note when I started this blog and how the economy has done since then, note how real yields have fallen and my TIPS have therefore performed, and so on). Sometimes I am wrong (investors continue to pile into precious metals long after I took profits, California Pizza Kitchen has done better than I expected, and so on).

And if you invest in dollars (not stocks or bonds or other investments, but dollars) you pay a lot more than 0.5% per year to own dollars (due to inflation).

I can only assume that you mean over the long-term because we have had deflation over the short-term in recent history. Who on earth invests in dollars over the long-term and therefore avoids the interest? I certainly can't help them if they choose to do that. My most recent TIPS purchase pays interest over 2% and adjusts for inflation. I can't say it is a safe investment over the long-term, but it will most likely do better than buried cash.

Stagflationary Mark said...

foo,

I'll take that back. I may have gone bust. I think the ratio might have touched 600 at the recent peak. I'm not sure. It was close. Once again though, I do not even remotely run my portfolio like a hedge fund. I'm all too aware that Nobel Prize winning economists managed to lose big at Long Term Capital Management.

I value safety.

Stagflationary Mark said...

Here's a link to the California Pizza Kitchen call if you are curious. The timing was awful. I think it has underperformed the overall stock market since then, but that's not saying much. The stock is up about 50% since then.

March 1, 2009
A Risky Bet

I am sure you can find other bad calls if you look. It has been 3 1/2 years.

foo said...

Another (perhaps trivial) difference from the housing bubble -- Peter Schiff tried to warn everyone that there was a housing bubble and that it was going to pop and hurt the banks and the whole economy:

http://www.youtube.com/watch?v=2I0QN-FYkpw

But he doesn't seem to think silver is in a bubble:

http://www.youtube.com/watch?v=8-Sv3g7XZdM&feature=player_embedded

If rather than making assumptions about leverage you would prefer to just see how much leverage there is, you can get futures/options data here:

http://www.cftc.gov/MarketReports/CommitmentsofTraders/HistoricalCompressed/index.htm

On TIPS -- I don't know if these can lure me in: I am seeing negative base yield for the 5 year. CPI is of course a lie with real inflation at least 1+% higher (or 7.5% higher and growing, depending on who you ask: http://www.shadowstats.com/alternate_data/inflation-charts) so you're probably still looking at inflation-based losses (though less than cash) except maybe with the 30 year. You have to pay taxes on the inflation adjustments (so that's just like precious metals where mere wealth preservation is taxed with the result that wealth isn't actually preserved). And right now our government is really insolvent and considering what they did to GM bond holders I'm not sure how much I want to be holding gov bonds (of course holding cash also has its perils due to gov insolvency), and it's looking like Greece may soon be setting a modern precedent for a government giving bondholders a major haircut. Right now with chance of default high and yields low, bonds don't seem very attractive. Maybe once (if) the government manages to get its act together (i.e., cut $1+T from its annual budget) and lets yields go up to where they should be I could see putting some fraction of my wealth into gov debt. The whole "taxing preserved wealth" rip-off has driven me into using leverage so that I can preserve wealth even after paying taxes. Don't think that trick is suited to bonds though.

Stagflationary Mark said...

foo,

Schiff's clients certainly felt serious pain when the housing bubble popped. He wasn't exactly positioned for deflation and a rising dollar.

That said, I took some pain too as my TIPS deflated, just not as much. Less gains, less pains.

The inflation trade did resume for both of us though.

The short term TIPS rates are awful (although they are a dream compared to real rates in the World War II era) and the long term bonds are hardly risk free. The tax situation is actually potentially a lot worse for TIPS than gold and silver. TIPS are not tax deferred. If we hyperinflate, the taxes would ruin me (eventually). I'd be paying heavy taxes each year. I think many don't realize this risk. I see people rooting for higher inflation so TIPS pay more. That's a really bad thing to hope for. Higher inflation lowers the after tax purchasing power of TIPS.

I'm not a believer in shadowstats and their alternate inflation index. I track my expenses to the penny. I just don't see what they see. Unlike shadowstats, I'm okay with hedonics. If something improves but the price doesn't go up, that's deflationary to me. As for substitution adjustments, I substitute more than most. If something is on sale, I back up the truck. If something is full price, I tend to avoid it.

I managed to get about 25% of my nest egg into long-term I-Bonds. They are tax deferred. The government reduced the amount we could buy by 83%a few years ago. The real rate for new purchases is now at the 0.0% floor. My weighted average is over 1.8% though.

I can't say my investments are safe. I think they are safer than many alternatives but that's not saying much. I'm actually planning for negative real growth long-term. I'm retired and don't wish to swing for the fences any more. I got lucky a few times doing that (especially on the investment that retired me). I'm done.

Unlike Greece, at least we don't owe Euros. That won't help those hoarding dollars though. We don't promise they'll be worth much, especially if they are stuffed in a mattress. Sigh.

Stagflationary Mark said...

For what it is worth, the seasonally adjusted CPI is definitely running hot right now. Over the last four months (cherry picked for maximum shock value) it has been running at a 5.9% annual pace.

Stagflationary Mark said...

foo,

"If rather than making assumptions about leverage you would prefer to just see how much leverage there is, you can get futures/options data here:"

Do you really think that is the only place that leverage is being applied?

How about the investors in SLV who are so sure that it only goes up that they have bought in on margin through their brokers?

How about the silver investors who bought using this program or this one? Or any number of other similar programs?