This post is a modified excerpt from a recent TSI report.

A popular view is that silver outperforms gold during bull markets for these metals, but that’s only true if the entire bull market is considered. That is, it’s true that silver has in the past achieved a greater percentage gain than gold from bull-market start to bull-market end. However, since the birth of the current monetary system the early stages of gold-silver bull markets have always been characterised by relative WEAKNESS in silver.

To check that this is, indeed, the case, refer to the following long-term chart of the silver/gold ratio. The boxes labeled A, B and C on this chart indicate the first two years of the cyclical precious-metals bull markets of 1971-1974, 1976-1980 and 2001-2011, respectively. Clearly, silver underperformed gold during the first two years of each of the last three cyclical precious-metals bull markets that occurred within secular bull markets. Therefore, assuming that a gold bull market has either just begun or will soon begin, on what basis should we expect to see persistent and substantial strength in silver relative to gold over the coming 1-2 years?

The one plausible answer to the above question is that the scope for additional weakness in silver relative to gold has been greatly diminished by the extent to which silver has already fallen relative to gold. In particular, in gold terms silver is now almost as cheap as it was in early-2003 (2 years into the most recent previous bull market), which means that it is close to its lowest price of the past 20 years. Silver is also now vastly cheaper relative to gold than it was when cyclical bull markets were getting underway in 1971 and 1976.

In summary, history tells us to expect continuing weakness in silver relative to gold during the first two years of the next precious-metals bull market (which has possibly just begun), whereas the unusually-depressed current level of the silver/gold ratio suggests that the historical precedents might not apply this time around.

I don’t have a strong preference either way.

There are things that monetary enthusiasts* such as me take for granted that are not widely understood. In an email discussion with a friend and fellow monetary enthusiast it occurred to me that the treatment of interest paid on the debt held by the Fed might be one of those things. That’s the reason for this short post.

The Fed currently has about 4.2 trillion dollars of debt securities on its balance sheet, about 2.5 trillion dollars of which are US Treasury securities. The interest that the Fed earns on all of its debt securities — less a relatively small amount to cover the Fed’s own operating expenses — gets paid into the General Account of the US Treasury. In other words, the interest that the US government pays on the Treasury bonds, notes and bills held by the Fed gets returned to the government. This effectively means that any US government debt held by the Fed is interest free.

An implication is that if government debt is held by the Fed, the interest rate on the debt is irrelevant. An interest rate of 20% is essentially no different to an interest rate of 1%, since whatever is paid by the government returns to the government.

Another implication is that when considering what-if interest-rate scenarios and the ability of the US government to meet its financial obligations under the different scenarios, the assumption should be made that the portion of the debt held by the Fed has an effective interest rate of zero. For example, let’s say that at some point in the distant future the average interest rate on the US government’s debt has risen to 10% and the Fed owns 80% of the debt. In this hypothetical — but not completely farfetched — situation, the effective average interest rate on the US government’s debt would only be 2%.

The bottom line is that it’s not so much the Fed’s interest-rate suppression that benefits the US government, it’s the fact that the interest-rate suppression is conducted via the large-scale accumulation of the government’s debt.

* People who spend significant time every week tabulating/charting monetary statistics and poring over reports published by the US Federal Reserve and other central banks.

In the blog post “Some gold bulls need a dose of realism“, I noted that relative to the Goldman Sachs Spot Commodity Index (GNX) the gold price was at an all-time high and about 30% above its 2011 peak. I then wrote: “Rather than imagining a grand price suppression scheme involving unlimited quantities of “paper gold” to explain why gold isn’t more expensive, how about trying to explain why gold is now more expensive relative to other commodities than it has ever been.”

A rational explanation of gold’s relative expensiveness begins with the premise that major trends in the gold/commodity ratio are invariably associated — in an inverse manner — with major trends in economic confidence. Since credit spreads are one of the best indicators of economic confidence, with generally-widening credit spreads signifying declining confidence and generally-narrowing credit spreads signifying rising confidence, it would be logical if there were a positive correlation between the gold/commodity ratio and credit spreads. As evidenced by the following chart, that’s exactly what there is.

The current widening trend for credit spreads dates back to mid-2014, which is when the oil price began to trend downward and obvious cracks began to appear in the global growth theme. More recently, cracks began to appear in the US growth theme and the pace of credit-spread widening accelerated, leading to an accelerated rise in the gold/commodity ratio.

Could gold become even more expensive relative to commodities in general? The answer is yes, but only if economic confidence continues to decline.

I doubt that the decline in economic confidence has run its course, so I expect the gold/commodity ratio to move further into new-high territory before something more important than a short-term top is put in place. However, there’s a good chance that the gold/commodity ratio will make a multi-year peak this year, due mainly to increasing strength (catch-up moves) in other commodities.

The assertion that the gold price has been successfully manipulated downward over a great many years via the relentless selling of “paper gold” contains more than a few logical and factual holes. In this brief post I’m going to highlight one of these holes.

Before I get to the main point, it’s worth pointing out that in order to sell “paper gold” there must be demand for “paper gold”, since demand for physical gold cannot be satisfied with paper claims. It is also worth pointing out that downward pressure on the price of “paper” gold that was not supported by the “physical” market would inevitably result in the price of “paper” gold making a sustained and substantial move below the price of the physical commodity, which hasn’t happened. Over the past several years the prices of gold futures contracts have generally been very close to the spot price and there have been regular small dips in futures prices to below the spot price, but this situation is a natural and predictable effect of the Fed’s unnatural zero-interest-rate policy. Taking the US$ interest-rate backdrop into account, the price of “paper” gold has generally not been lower relative to the price of physical gold than a knowledgeable observer would expect.

The main point of this post is that while gold is different from other commodities, under the current monetary system the price of gold should never become completely divorced from the prices of other commodities. In particular, the price of gold should always remain within certain bounds relative to the price of platinum.

Now, the platinum market effectively ‘lives from hand to mouth’, in that the bulk of the current year’s consumption will be satisfied by the current year’s production. It should therefore be obvious to anyone with a modicum of objectivity that it isn’t possible to manipulate the platinum price downward, beyond brief fluctuations, by selling paper claims to the commodity. As a result, the multi-decade high in the gold/platinum ratio illustrated by the following chart is evidence that if there has been a concerted attempt to suppress the gold price, it has been ineffective to put it mildly.

I’ve come to understand that adopting the view that the gold market has been subject to a successful and long-term price suppression scheme is like adopting a child — it’s a lifetime commitment through thick and thin. I therefore don’t expect to change anyone’s opinion on this topic, but I’m hoping that some readers still have open minds.