Silver Price And Inflation

In the course of writing a newsletter on silver and seeking new angles on the metal, it is necessary to maintain a wide array of datasets. Some of these I update on a weekly and monthly basis for subscribers, but I thought I would update one that gives us the very long-term view on the price of silver.

First is the monthly chart on the price of silver since 1792. As you can see, the price of one troy ounce of silver remained remarkably constant for the first 175 years as silver remained under the firm control of Western governments. And for good reason as silver was recognized as a monetary metal constituting the metal of choice for most everyday commercial transactions.

For example, a Morgan silver dollar weighed 26.71 grams. Since 90% of it was silver, its silver content was 24.04 grams. A troy ounce is 31.1 grams and so silver had to be fixed at a price calculated as (31.1/24.04) or about $1.29 per troy ounce. In fact, to be more precise, the US Coinage Act of 1792 defined a dollar to be 371.25 grains of silver or 0.7734 of a troy ounce.

The remaining 49 years of the chart proved to be rather more volatile as silver was completely removed from coins across the world. As of today, a dollar is now equivalent to not 371 grains, but 24 grains and has gone as low as 10 grains. That single dollar Morgan (apart from its numismatical value) is now worth about fifteen dollars. It is clear that the continued and excessive expansion of the money supply in relation to real economic growth has long since divorced fiat money from any relation to its original intent.

So, the price of silver on this graph is being measured against a ruler that is constantly changing – the US Dollar. To get a better idea of how silver has actually changed in price, the next graph expresses the price of silver in constant 2016 dollars. That is, the silver price is adjusted for inflation.

Note the early silver peaks of 1878 and 1890, both at about $33 an ounce. These coincided with the American Bland-Allison and Sherman Acts which mandated the increased purchase of silver by the US government to help farmers and miners. Since silver was money, this expanded the money supply, causing inflation, reducing farmers’ debt burdens and, not surprisingly driving down the price of silver as it flooded the market.

Clearly, one does not need just pure fiat money to degrade money. That led to a 40 year silver bear market as the price dropped to about $4.50 in inflation adjusted terms during the Great Depression. By the way, if someone says you should buy silver because the government is printing too much money, this chart does not bear them out. The US government has been overprinting money for a century, but silver has not kept pace but either flatlined, spiked or crashed.

Silver races up in price for other reasons as silver stockpiles are built up and then drawn down in response to various government, corporate and investor factors. Just remember, the vast stockpiles being built up in silver just now as investors pile in will form the prolonged draw downs of a future mega-bear market!

You may wonder what the thick black line running across the chart at the $15.70 level is. This is the average inflation adjusted silver price between 1792 and 2016. One could argue this is the “fair” price for silver. Well, there is no real objective measure for that, but I would also note that when silver was money and held at a ratio of about 16 to 1 with gold, its inflation adjusted price was about $30 an ounce.

But the mother of all silver bulls continues to be 1980 as silver spiked to about $118 on a closing basis on our inflation adjusted chart. You will perhaps get other inflation adjusted estimates based on intraday prices at different exchanges (I have seen $136 cited elsewhere). That continues to be the benchmark for silver as we head into the new bull market in silver.

Will that $118 or higher be finally taken out when this bull finishes? That seems a far cry from the current price of around $20. I believe it will, but the question for investors when that time comes will be how much a dollar will purchase if it takes 118 of them to get a single ounce of silver?

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Further analysis of silver can be had by going to our silver blog at http://silveranalyst.blogspot.com where readers can obtain subscription details for the Silver Analyst newsletter. A free sample copy can be obtained by emailing silveranalysis@yahoo.co.uk.