gene arensberg discusses the gold/silver ratio and the fundamentals of the silver market:

The Gold:Silver Ratio (GSR) put in a bounce up to the 50-day moving average around 68 ounces of silver to one ounce of gold, which is probably a correction of the sharp break lower the first two weeks of the month. The GSR ended the week just over 67:1. We wouldn’t want to see this ratio above the 50-day moving average for more than a day or two as that would be a bearish signal short term.

For a number of reasons liquidity has been slower to return to silver than gold, but on balance so far the trend of this ratio continues in silver’s favor, albeit in fits and starts. Since October, when the GSR peaked at near a panic-driven 88 ounces of silver to one ounce of gold the relative purchasing power of silver has improved 24% to roughly 67 ounces. Prior to the 2008 stock panic the average GSR ranged from 50 to 55 ounces more or less, so the ratio has plenty of room to improve further just to get back to where it “used to live.”

As long-time readers know, eventually we fully expect that the GSR will blow right through the recent “normal” in the 50s on its way much, much lower as people come to understand just how little of the white metal is available for an entire planet. We would not at all be surprised to see the ratio comfortably in the middle 30s eventually, perhaps spiking lower at times to the 20s when fever for silver erupts among the public again.

Thanks to a decades-long period of global government’s dishoarding and distribution of silver metal that helped sate the collective rising demand, global prices for silver were artificially low for an extended period. The consequences of that artificial market are still being felt today and will be far into the future. The extremely low price for silver of the 1990s and early 2000s stifled exploration and new production of silver (on its own merit). Silver production increases during the period were merely as a result of byproducts of the mining of other metals like copper, zinc and lead.

We have covered all this in past reports, but we have been using up the world’s collective supplies of silver metal left over from when governments actually put silver metal in their coins and held silver as a quasi-reserve asset. Today there is little in the way of government silver inventory. It’s all gone.

The punch line of our reasoning for investing and speculating in silver starts with: Today there is probably less than half the amount of available silver in bar form as there was during the last great silver mania in 1980. (Some popular analysts say it is now less than a quarter.) Worldwide there is something close to 1,000% more currency in play today than then. In 1980 world population was on the order of 4.43 billion souls, more or less. In 2008 world population had grown 51% to 6.7 billion.

A side note here. For much of the period between 1980 and today a large fraction of the population, the people of China, were not allowed to legally own silver bullion. Well, today that has changed. People of China are now not only allowed to invest in silver, government-sponsored television is even recommending ownership of silver as a wise investment as this widely circulated YouTube video reveals.

Did you notice that the Chinese commercial mentions the gold:silver ratio? The Chinese are very value conscious. So should we be.

At any rate, when silver does become more popular again and its real scarcity is better understood (and probably then over-hyped) there will be something like 51% more humans using 1,000% more “dollars” to chase less than half as much physical silver in a world where anyone can participate in a silver ETF online or from their smart phone in seconds.

The last big mania in silver was based on a false premise; based on an attempted physical corner of a market in ample supply. What will happen when there is a popular resurgence in silver with a much bigger world population and precious little of the metal to go around?

The only surprise to some of us is that it has taken so long for the word about silver’s fantastic potential as both an investment and as a safe haven to get out there. That is not to suggest that word of the coming silver shortage has gotten out to the “body-public.” It certainly hasn’t, yet. Major emphasis on the word “yet.”

Maybe with over a billion Chinese now able to own it the countdown to a gold:silver ratio more in line with nature and historic monetary policy has started.

It really makes no fundamental sense for the GSR to be where it is today, but it takes major events, shortages and price anomalies in the global market to change people’s thinking about it. (Shouldn’t be too much longer now, but patience is still the name of that game.)

http://www.stockhouse.com/Columnists/2009/Aug/25/Got-Gold-Report--Gold,-silver-consolidating,-waiti