John Butler Interview Transcript
Speaker key:
BS Boaz Shoshan
JB John Butler
BS Hello, and welcome to our silver symposium. In today’s video, you will see an interview I conducted with John Butler recently. John is a financial market historian. He’s also an Austrian economist. And he has a very long career stretching back through Wall Street and within the financial system generally. But he turned to precious metals during his career and he’s since wrote a book called The Golden Revolution, which is all about how we might end up back on a gold standard.
There’s an awful lot about gold and silver. And of course, in today’s video, we’ll be focussing on silver. I hope you enjoy it.
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John, thank you so much for joining me. And it’s going to be great to discuss silver. Of course, we have had many discussions on gold in the past, but we haven’t dwelt on silver quite so much. Thank you very much for coming on. In terms of how you look at silver and in terms of the way in which you think investors should treat silver, could you give us a brief introduction?
JB Silver is an interesting market in many respects. And one of the things that makes it interesting is that even though it is a precious metal, it’s also an industrial metal. And indeed, in recent years and in some cases very recently, silver has found new sources of industrial demand. And believe it or not, some of these are even related to Covid and to disease and antiseptic properties generally, where silver scores very, very highly.
Depending on how you adjust the environment for silver, that is, temperature, humidity and some other factors, some people argue it is the most antimicrobial metal of all. Hence why it’s becoming used as a weave addition into fabrics, say, that are meant to be antibacterial. But I said antimicrobial a moment ago for a reason, because it also appears, that is, silver, also appears to have antiviral properties. That’s an interesting one in this Covid world in which we now live.
BS Definitely. The medical properties, it’s a timeless aspect to silver. Do you think in terms of medical demand, though, in the future, that’s going to become serious, like a really big consumer of silver?
JB As it happens, I happen to have a mask, which of course I’m required to wear, depending on where I go. And my mask is a silver weave mask, that is, it has… It’s a trace, but it’s still silver thread, which is woven into the fabric of the mask. And the manufacturer of this mask, and it’s not one of the biggest, but it’s certainly not one of the smallest manufacturers. This is the big selling point. This is how they differentiate themselves.
And there are other people, firms, that are producing garments where they highlight the silver component as being a differentiating factor. Now, to the extent silver can go mainstream in the medical community, that really depends. Fabric is one thing. Actual antimicrobial or antiviral treatments are another, because those get into a regulated area where, who knows what testing or official approvals might be required to promote any silver-based therapies?
But certainly, I would say we’re drifting in that direction, but I’m not enough of a medical expert to know how close we might be to one or more silver-based remedies for Covid or anything else, for that matter, potentially being approved or employed.
BS There are always so many different uses for silver that you really can run all the way through a list and never really get to the bottom of it. I remember when I was younger, while I’ve still got really bad circulation now, but I remember having gloves that had silver thread in it because silver’s such a great insulator and it would keep it really warm. But moving on to more of the monetary metal side, we saw the more classic approach to silver.
Silver, its relationship with gold, it’s obviously very tightly related. Now, in terms of what silver actually is when it comes to a strategic asset, a monetary asset, what do you think people miss? What’s the untold story of silver, would you say?
JB In a way, the untold story is that silver, because we’re not taught this any more, silver used to be actual de facto circulating money in much of the world. And there’s a good reason for that. Because silver, being somewhat more plentiful than gold, of course, in the Earth’s crust, and also being nevertheless precious enough to serve as money, it ticked the right boxes to be the actual circulating coinage. And the history of mankind, monetary history of mankind, actually has a lot more to do with silver than gold as a result.
Gold might have formed the monetary base, as it were. It might have formed the base money supply, the narrow money supply to a banking system under the gold standard in particular. But silver was for day-to-day transactions historically used far more than gold. And that really only began to change in the 19th century. And by the 20th century, silver was in a series of steps, essentially, fully, completely removed from the monetary system.
It’s strictly a collectible now, in that sense, and has no de facto or de jure monetary role. Whereas gold, obviously, still retains this monetary character being a central component of central bank reserves. And being an asset that most large institutions, most wealthy families and so on have at least some conception of, in their investment process, some allocation to gold in their investment process, in their portfolio.
Whereas silver, big question mark. I think that it’s regarded much more as a speculative play vis-à-vis gold, potentially, depending on where the gold-silver ratio lies at any point in time. And I think very little silver speculation is really part of something more meaningful, that is, people treating it truly as a precious metal store of value on par with gold. I think that that is a very fringe view. It’s one that could come back in vogue under certain circumstances.
But it’s certainly not something I would regard as anything approaching the more general mainstream acceptance we do now see for gold, as a highly useful, desirable, alternative store of value to the currency, government bonds and other so-called risk-free assets.
BS Let’s unpack that a bit. Because for me, the big question mark for silver, which I think it really hasn’t been answered since, is what is silver really after its demonetisation? Because as you say, gold is still being used by central banks. Even though gold is no longer part, officially, of the monetary system. When it comes to the value in currencies, there’s no gold peg anywhere. But it is still being bought and sold by central banks.
Some governments also have interests in it. But silver, after its demonetisation, it is utterly demonetised. It is no longer in the financial system. Now, there are yet stories of Russian strategic reserves of silver and things like that, but it’s all very fringe. And there’s no official status. There’s no rubber stamp on silver any more, which marks it as any monetary asset. And what that looks like in the future is something I’m very interested in.
Because I find it hard to imagine that silver simply remains this speculative, strange commodity that is related to gold, but it’s really just uses of the poor man’s gold or gold’s schizophrenic, little sister, that kind of thing. I feel that that will change some point in the future, but I don’t really know what it’ll change into. When you think of silver in that way, when you talk about the certain circumstances that could change silver’s status, as it were, what circumstances are those? And is it just a much higher price?
JB First of all, let’s go back quickly to the industrial uses, because silver really is extraordinary. Don’t get me wrong, every element is extraordinary in its own way. But silver is extraordinary in ways that are potentially immensely practical. It’s not just the case that silver is a precious metal. It’s also the case, as you mentioned, silver is a great insulator. And there’s a reason for that. Which is that silver’s reflective qualities, that is, when it comes to radiation of essentially any kind, silver is the most reflective of all the metals.
And this, of course, is why silver was originally used in film for taking photographs, because of that sensitivity. Also, silver has the highest photovoltaic properties of any metal, which is why it’s ideal for use in solar panels and why it also has a number of other uses within electronic components. And finally, there’s what I mentioned before, it’s not just that silver has antibacterial properties. Now, that’s been known for a long time.
But in more recent years, they’ve discovered silver has general antimicrobial properties. And that includes the ability of viruses to replicate in a silver-rich environment. These are fundamental qualities that if we simply wait and allow technology to do what technology does, allow human ingenuity to do what it does, I think it’s simply inevitable that we’re going to keep discovering new ways in which to employ silver.
Because it simply, physically, by definition, as its place in the periodic table, etc, has the superior properties to other metals for some very, very fundamental things. That’s number one. Shifting over though, in a very different direction, you have a completely different case for silver. Which is that if we keep going down this road whereby fiat currencies in general are being printed, being debased, are being used to service debts that are growing exponentially in a negative interest rate environment.
Or who knows what it’s going to be going forward, in order to support who knows what, Covid relief, universal basic income, MMT, that is, Modern Monetary Theory-driven policies in which supposedly deficits don’t matter. I could go on and on about that. But if we remain in that environment, I believe it’s pretty much inevitable, as a first step, that gold becomes properly remonetised. That is, people simply will start to lose faith in fiat currencies, generally, as a proper store of value.
And therefore will start to build up what they see is basically their savings account, which will need to be denominated in something that can’t be arbitrarily devalued. And that’s gold. And I think we’ll see a huge shift in the demand function for gold. However, what we saw earlier this year, and indeed, what we’ve seen for several years running, is that the gold-silver ratio is extremely elevated, relative to a long-term historical comparison.
And it’s also extremely elevated relative to the supply of gold vis-à-vis the supply of silver in the Earth’s crust. Now, that natural ratio, if you want to call it that, is way below where the gold-silver price currently is. And if gold demand were to remain elevated and increase in the future because of general fiat currency debasement and silver were merely to follow along from here, there’s a lot of upside there.
But if for any reason that the monetary demand for gold spilled over into silver, then you’re talking about a market that actually is much, much thinner. And it’s one where the natural ratio of gold to silver is not 80 or 100, where it’s been for much of the past few years, but rather closer to 20. And the potential adjustment is huge. That’s not a prediction. It’s not a forecast. But I can envision a scenario where gold simply keeps moving higher for monetary reasons.
And silver starts to play catch-up. There’s much more upside in silver from that side.
BS With the gold-silver ratio, for me personally, it’s never been quite as compelling as, I think, for some other folks. They really see it as the metric by which to measure it. But because so much of silver supply is as a result of mining for other metals, I wonder how important or how the gold-silver ratio itself could end up driving a change in the silver value.
But as you say, when you talk about the ratio in the Earth’s crust itself, it still does present that quite compelling argument where gold and silver, they have similar properties. Of course, they’ve been used as monetary metals for so long. If one of them goes one way in terms of value, you would expect there to be some similar relationship.
JB You’re right to point out the supply side, which I hadn’t really got to. And you’re right that there are very, very few dedicated silver mines in the world. And there’s a very good reason for that. And the fact is, is that the price of silver vis-à-vis other metals simply has not been high enough over the past decade or two to lead people to bother with opening up new or reopening silver mines that still have silver in the ground.
It’s just very expensive to get out because it’s so deep now, etc. But the silver price simply has not been high enough to generate that interest in silver mining for its own sake. And as you say, it’s primarily a by-product of copper mining, nickel mining and some other metals as well that just happened to throw out some silver in the ore as it comes out of the ground. And they figure, if somebody wants to go through our tailings and extract the silver, be our guest.
We’ll share those revenues accordingly. You’re absolutely right that the supply side for silver isn’t really driven by silver demand. But beyond a certain point in the silver price, then things change. There are silver mines in Nevada that have been sitting idle for a half century, in some cases. And I actually know some people who aren’t ready to get their shovels out now. But they’ve actually run through the numbers and they’ve actually gone through the calculations.
What level of silver price would make some of these old operations cost-effective, profitable, to reactivate, reopen? And beyond a certain point, and I’ve seen numbers in the 30s, I’ve seen numbers in the 40s. If people think those sorts of prices are sustainable, other factors equal, then you might start to see some reinvestment in actual silver-dedicated supply. And that will shift your supply curve a little bit.
But we’re a long way from that. We’re a long, long way. And we can have this conversation again, if we start to see those sorts of sustained silver prices.
BS There’s an interesting opposite side to that. You’re speaking about all of these incredible applications one could use for silver when it comes to either industry or when it comes to medical innovation. They’re finding ways to use silver for all manner of things. Do you think that’s actually a product of the really, really low price? And do you think at a higher price, that actually some of that would stop?
JB It really depends on what you’re talking about. Because when you’re talking about technology, as a general rule, you’re talking about a way in which you’re generating qualitative benefits, that in some cases are so large that the underlying cost of the input almost isn’t a factor. Let me give you a wild example. Let’s say that in, I don’t know, a few months’ time, some lab comes out and they figure out that silver, if combined as part of a vaccine for Covid, turbochargers it.
Supercharges it and multiplies the antibody effect by some order of magnitude. And now, if this is literally then perceived as a lifesaving technology by a significant portion of the population, then whether the silver price is $20, $30, $40 or $100, it’s almost beside the point. And the technology and the patent and everything else that goes into it is going to be so incredibly valuable to whoever gets there first, that you could see just a huge increase in the price of silver before suddenly that new technology becomes uneconomic.
We’re talking about qualitative leaps in technology, way beyond the normal quantitative scale of input costs for the ingredients for that technology, say. And you see many examples of this throughout history. And indeed, copper itself, as a base metal, is a good example of this. Before the advent of electricity and wiring, demand for copper was so much lower than silver, which had these known uses in cutlery and tableware and in whatever else.
That’s shifted a whole hell of a lot. And copper, as a result, made a huge progress vis-à-vis silver. You have examples of this. And I don’t think we’re anywhere near a silver price, even at that $30 to $40 level that would stimulate silver supply. We’re miles away from anything that would get in the way of demand.
BS I agree. I was just wondering, because silver has become effectively so cheap, whether or not that was leading to people…
JB No, I don’t think so. It’s simply, even if silver were expensive, if it was a silver bullet for Covid or anything else, I think the research would still be there.
BS I was just wondering if universities and things, research labs, because it’s so cheap, you may as well tinker around with it and see…
JB Maybe at the margin. Maybe a little bit at the margin, sure.
BS When you’re looking at how silver might behave in future, we probably should address gold a bit here because as we’ve already discussed, they are joined. They are siblings to each other. When you see gold behaving the manner in which it has this year, for example, do you think there’s anything in that which tells us how silver is going to behave in future? Because generally, gold moves first and silver moves after, when it comes to some of the moves.
What do you think gold is telling us about the silver price now and how it may behave in the future?
JB Whether gold leads silver or the other way around, it actually depends on why gold is going up. If gold is going up primarily as an alternative store of value money, then yes, gold will lead the charge, because that’s a risk-averse environment. If people are worried about the stability of fiat currencies, the sustainability and serviceability of debt burdens and so on, then yes, gold will lead the charge, absolutely.
If it’s a more conventional cycle where you’re just seeing activity pick up and people adjusting demand in general for just about everything, it’s going to pick up as a result of healthy growth, a healthy recovery. I would say that silver in that environment leads gold. However, I believe strongly we’re in the former environment. Not the latter. And that indeed, that’s a structural environment. That is what we’re going through now worldwide, for that matter, is a structural debt problem that does not have a quick or easy cyclical solution.
No central bank or fiscal authority can just wave their magic wand and somehow get us through this. It’s not going to work out like that. I do believe that gold will be leading silver. And if I look at what gold is doing now and the bull market that established itself over the course of the past year, quite clearly, notwithstanding some recent consolidation, that gold is going up. It’s going up solidly and it’s going up for all the right reasons.
The fact is, is that even before Covid, and we have to make these adjustments. Because many people dismiss Covid as a one-off, we’re going to get through it and then life goes back to normal. And that view may be correct. However, even before Covid showed up, government debt and deficits were still rising at an elevated rate historically. And indeed, in some cases, were accelerating because there were some signs of a slowdown in a few parts of the global economy pre Covid.
Also, you had clear willingness by central banks around the world to ease policy even before Covid showed up. There are a few small exceptions to that, but I’m talking about the major central banks. And this policy bias to spend and print with zero or negative interest rates, if necessary to finance it all, that mentality was still firmly clear to any observer before Covid even showed up. Gold has every reason to respond to that by getting back into the bull market that clearly it has not been in now for a full decade.
Depends on how you measure bull and bear markets and whatnot. But it’s been years. Gold had every reason to get back into a bull market. And I think that if you look at history, this gold bull market is not even in the middle stages. I think we’re still in the early stages. The middle stages for me will be reached when you see that gold has become a standard core holding in a typical household-diversified pension pot portfolio, alongside stocks and bonds.
We’re on our way to that, but we’re not there yet. That’s the middle phase. The end phase will be some blow-off phase that may not be sustainable, of course, by definition, but we’re not even in that middle phase yet, my opinion.
BS On that note, that the inflation angle with silver seems quite an interesting one to me. Because gold normally moves oppositely to real interest rates. And silver, of course, has been very quite depressed for quite a long time now. And it always seems to be that because of that industrial application of silver, that the inflation makes it more sensitive. Now, do correct me if you think I’m wrong, but it’s always felt to me that inflation would be what would really ignite a really strong and a long bull cycle for silver in general.
Do you agree with that? And also, in terms of where you see inflation going, it feels to me that the Covid crisis has brought forward an awful lot of the political firepower when it comes for really aggressive fiscal spending. The government spending, government stimulus, government-led stimulus, rather than relying on central banks. And that feels to me to be a really strong inflationary force in the future.
Do you agree with that? Do you think inflation is going to be coming in the future when it comes to as a result of Covid? And do you think silver is more positively sensitive to that than you would say gold?
JB Silver is more sensitive than gold in general. Whether the specific cause of metals’ prices rising is general real demand or general inflation expectations, silver might well be more sensitive in both those scenarios. But you have to adjust for risk aversion. Gold will do better in a risk-averse environment. This we know. Inflation expectations might be rising. But if risk aversion is also rising, then gold might be doing better than silver.
If inflation expectations are rising and risk aversion is more or less holding stable at some level, then yes, I agree with you, silver may well outperform. Silver is a much thinner market than gold. Much thinner. It’s not even close. Silver production, once again, as you say, is a by-product of other metals for the overwhelming part. And we’re going to have to get to much, much higher levels for that to begin to change.
And it will take time from those levels anyway for the investment to take place. Silver is much, much thinner, because what is produced goes overwhelmingly into industrial demand and jewellery. Very little silver finds its way into new bars for new monetary investment via ETFs or direct physical or whatever it is. Very little. It’s such a small amount of annual silver production. And aboveground stocks of silver are very, very small relative to gold.
Again, because so much of it has been consumed through the years for a variety of industrial purposes. The silver market is extremely thin compared to the gold market. And other factors equal, almost any reason for precious metals to rise or fall for that matter, results in silver being more volatile. The average is two to three times more volatile. On any given day, if gold’s up 1% or down 1%, silver tends to be up 2% to 3%, or down 2% to 3%.
There is some asymmetry in that and that’s due to the risk aversion angle. Other factors equal, silver’s more volatile on the downside vis-à-vis gold than on the upside vis-à-vis gold. But that’s just a function of risk aversion and you can adjust for that. But yes, I agree with you. Other factors equal, there’s more upside in silver for a variety of reasons. It’s cheap relative to gold. And depending on the environment, it can be more sensitive on the upside than gold.
BS When you’re thinking of so much of the way silver behaves is a result of, I think, the production dynamic and of course the industrial dynamic. When it comes to the production of it, new supply reaching the market as a by-product of other metals and also with the manner in which it is consumed for industry and jewellery and the like, do you think that relationship is really going to change? And if you do, how long do you think it would take?
For example, if we, say, managed to get to $50 silver and those mines in Nevada that you were referencing come back online, how long do you actually think silver would need to be $50 before that would really happen?
JB That’s the thing. If people think that it’s just a speculative blow-off, they’re not going to sink millions of dollars into reopening an old mining operation. Many people don’t appreciate just how capital-intensive deep ground mining is. That the fact is, most silver that would ever be produced by open pit mining has already been produced or is being produced as a by-product of copper-nickel operations in various parts of the world.
The silver that exists in the world today that would be mined in the eventuality that prices get sustainably high enough, it’s deep in the ground. And the fact is, you cannot just flip a switch and suddenly start pulling silver out from a deep mine, even if you know it’s down there. Think about all the modern requirements for workplace safety and needing to make sure and check out that an old mine is indeed structurally sound.
The lifting equipment, the air conditioning equipment, whatever it is, this stuff is not trivial. And yes, even if you know there’s a mine, know there’s silver down in that mine and know that, in theory at least, you can get it out of the ground for, let’s say, $40 an ounce or something like that and the price of silver gets to 50. If you’re going to invest in this multi-year project, you still need to be confident that that $50 is sustainable.
And no one’s going to make that decision on a whim. How long would silver have to be at that level? I’d say at least a couple of quarters before the conversation even gets serious. And before you actually start to reach out to your partners to try and generate the amount of funding necessary to make it viable, you’re probably talking as much as a year.
BS And if we imagine this scenario takes place and we get a few more of these pure silver mines actually reopen, and which should be really good for investors because we finally have a real pure play on silver. There are very few of them out there. But how do you think that dynamic actually changes and/or it could end up changing the silver price dynamic as it currently exists? We’ve already said silver is a by-product of all of these other metal mines.
And that actually creates quite a bullish environment, really, because it means that the price of silver is less. It doesn’t constrain supply so much. In theory, if not much silver is getting thrown off by these other mines and the price goes up, you don’t actually end up with more silver on the market, which means prices can go up even further. I know it’s quite a bullish story that you can tell. But if you’ve actually got more silver mines out there, how do you think that could end up changing the way the silver price flows up and down?
Is supply of silver actually a bit correlated to the price?
JB Look, the price elasticity of silver when you get to that level is going to increase a lot, but it will take some time to get going. And other factors equal, of course, if you have that new supply coming online that is shifting your supply curve in a way, that will then make it more difficult for the price to keep rising. But keep in mind what we discussed earlier, these new sources of silver demand that we can see coming, that they really are qualitative.
You’ll need to see far larger increases in the price of silver to prevent those shifts in demand. Yes, you might get a shift in the supply curve for silver and yes, it could be material, but I just don’t see how it’s going to keep up with the shifts on the demand side. And really, and this is true of gold more than silver, but it is also true of silver. The fact is, is that demand will remain the most important factor, even if some of these old mines come back online.
Even if they do add to the overall supply. And of course, if that supply is more price-elastic, because those are silver-dedicated mines as opposed to silver just as a by-product, which is going to come out of the ground anyway. I don’t think that that gets in the way of the bull case. And as you say, if anything, it gives investors an additional way to get exposure to silver other than just through an idle physical ETF or monetary angle.
But through the actual operational aspects of pulling silver out of the ground, getting it refined and getting it to market. There’s more leverage in that. There’s more risk, of course. But if you trust your operator and think they’re a competent mining outfit, there’s no reason not to get the kicker by getting exposure to your silver in that way.
BS When you discuss the demand side and the demand side that’s coming, that’s arriving, these forces to be hoovering up silver ultimately, what really is getting you excited about that? What is it that you see arriving in the future that you think is really going to change the game when it comes to the demand side?
JB This again is what I mentioned earlier. It’s that the fact is, silver simply has certain immutable physical properties by nature of its very existence. These were not created by man, but they were discovered by man a long time ago, actually. But what was not discovered by man, until very, very recently, was that, indeed, some of those superior immutable properties actually have effects on bacteria, actually have effects on viruses.
These are the fundamental. I can’t stress how fundamental viruses and bacteria are to the general health of, and not even just people, but the general health of life as we know it and the ability to treat and maintain and enhance life. How big is this market? It’s one of the biggest, deepest markets in the world, that is, for medical applications generally. And they’re only beginning to scratch the surface of this.
That is, serious scientific research into blending nanosilver into various things or weaving silver fabric into various materials, this really only got going about ten, 20 years ago. This is new from a technology point of view. It’s still very, very new. And again, I’m not a medical expert. But it just seems to me almost intuitive that the metal that simply scores highest in these key immutable characteristics will be the preferred option for going down this road of trying to supercharge or turbocharge.
Choose your metaphor. Various forms of treatments, antibiotics, antimicrobials, whatever it might be. This stuff is not going away. I believe some work is currently being done on using silver-based cleaners to help clean the hospitals that have been invaded by some of these really nasty superbugs in recent years. But that’s going to be a huge, huge market. But one wonders, how long it will take to finally solve the best possible cleaner option based on silver.
But it’s out there. It’s coming. And then again, the photovoltaic properties, let’s face it, solar is here to stay. It has huge challenges ahead, certainly, in particular, in certain parts of the world. And in particular, its reliance on battery technology continuing to improve so you can store electricity cost-effectively between periods of relatively high and relatively low solar activity.
But simply, the very fact that silver has the highest photovoltaic score of any metal, almost by definition means that no matter what solutions are found in the future, once again, silver is going to be first in line for some role in those applications.
BS I am sympathetic to the view, definitely. And it’s incredible just the number of things that people can end up doing with silver. It’s hard for me to imagine huge amounts of silver being taken in for this development. And I could be completely wrong on this. But when you’re talking about nanoparticles of silver being used in various medical applications, it’s nanoparticles. You don’t need huge amounts of it. Because I remember, they’re going after cash, as they always do.
And transmitting Covid is, of course, something we all need to be really afraid of. We shouldn’t be using cash and stuff. And I remember a reader of mine saying if we were still using silver coins, we would have been fine because it’ll be silver.
JB This is true.
BS Could we have gotten silver-lined bank notes or something like that? Do you think, in the future, we’ll be covering things with a lot more silver, ultimately?
JB I don’t see why not. I think it’s logical. Do keep in mind, however, silver does compete with copper in this regard. Depending on temperature and humidity and certain other factors, copper does as well as silver does. And obviously, it’s cheaper, other factors equal. Silver, depends on the environment. But there will be some competition there coming from copper as we move down perhaps this road towards finding more practical ways of using nanoparticles, be it silver, copper or anything else, for that matter.
But again, copper is good, but silver tends to come top of the table when it comes to these sorts of applications in general.
BS I think I read recently about how silver was being used in the Manhattan Project simply as an electricity conductor. Because I think, from my understanding of it, silver is better at conducting electricity than copper.
JB It is. Silver is better at conducting electricity than copper by a not insignificant margin. It’s strictly a question of cost, the fact that copper is used for general transmission, general circuitry. Silver therefore tends to be reserved for switches and other parts of the circuitry that need to have not only the extra conductivity to be as effective as possible, but also at the margin, it’s a bit more corrosion resistant. And certain applications benefit from that.
BS Now, we can of course talk about the applications of silver and how it can be used. And it does seem to me that especially in this Robinhood environment where Robinhood, the trading app for millennials, it’s hugely popular in the States. Sadly, you don’t get it over here, though there are similar applications over here. But it seems these days, the transmission of any narrative, especially when it comes to stocks, is it just gets faster and faster.
If there’s any hint of any investment going up in the future, ultimately, that has some narrative that can be applied to it, that’s compelling it all, it goes up a lot. And in Capital & Conflict, the e-letter I write, a while back I said the GLD and the SLV ETFs will become number one and number two on Robinhood. But of course, actually, they don’t give that data away any more. I won’t actually know unless I end up working for Citadel or something like that.
I really do think that there will be a narrative that will go out where lots of punters and lots of young punters will go buy the SLV or they’ll buy one of these silver ETFs or something. And I think that that transmission of narratives where the idea that fiat currency is less trustworthy, I think now in the 21st century with information technology, that that narrative will be able to spread very, very rapidly.
And you get people will be looking silver faster than they would be… Or they’ll be wanting to buy silver. It’ll be easier for them to buy. And you could get much more rapid price moves than you would have expected in previous decades. But in terms of where we are now and where you think we’re going in the future, of course, you’ve written The Golden Revolution and The Golden Revolution, Revisited on how you think gold will be remonetised.
Taking a silver perspective, where do you think we actually are now in 2020? And what do you think we’re going to see in the years to come when it comes to both gold and silver as this continues? Because it feels to me that Covid really, it’s just an accelerant. It’s just pushed all of these existing trends a few years ahead. When it comes to debt, when it comes to government spending, the will to spend and even things like demographics is pushed forward somewhat. Where do you think we are and where do you think we’re going?
JB I agree with you. Covid’s a very good example of just how sometimes you need an event to demonstrate just how people are actually thinking anyway. And the fact is, the fact that there was essentially no hesitation to throw a lot of money at this and to lower interest rates as required and expand the money supply as required. There was no hesitation at all, no pushback.
Even though the science of Covid is still developing and there’s a lot of disagreement out there regarding just how serious this is, that didn’t stop various authorities from acting in a very, very dramatic way. Which is, I guess, the medical example vis-à-vis a financial crisis. But basically, it’s just confirmation. When in doubt, spend. When in doubt, print. And that mentality is firmly entrenched on both the left and right sides of the mainstream political spectrum.
And that’s the case in essentially all developed countries. And that’s simply the world we live in. And yes, Covid just accelerates what, in a way, we already knew and confirms what we already knew. That does lead, in my opinion, to an inevitable remonetisation of gold, at least at the international level. The fact is that you cannot have other countries trading with each other, running surpluses and deficits in their trade accounts with each other indefinitely in a world of very unstable and wildly expanding money supply and debt.
That’s not a sustainable situation, because countries will increasingly not trust each other to maintain stable currency values and to maintain stable debt service. At some point, the cooperation begins to break down. And in fact, I argue in my book, it’s already breaking down and there’s some evidence for that. Something that has to step in to fill the gap. And logically, what governments will do to restore confidence in their trading partners is they will start to rebuild gold reserves.
Now, this is already happening. Central banks have been net buyers of gold for a number of years now. But it has accelerated over the past few years. And I think that that will continue. What then happens to silver as gold is being remonetised and the demand curve shifts? And because the gold supply is essentially fixed, the price of gold has to rise by an order of magnitude. What happens to silver? Other factors equal, I think it also rises by an order of magnitude.
It may be trailing behind. As per our earlier discussion, if this is all occurring in a risk-averse environment, gold may be leading the way. And the gold-silver ratio may not decline materially while this is going on, at least initially. But look, no matter how much fiscal and monetary mayhem there is out there, the fact is, human ingenuity keeps on going. Technology keeps on going. And as we’ve discussed, silver is in front of the queue to benefit from a lot of this on the demand side going forward.
And you’ll get these, I believe, occasional surges in interest and demand for silver along the way. You can’t time them, at least I can’t time them. But they’re out there. And I do believe that we’ll see a series of these over the coming years. And if gold is going to $3,000, $4,000 or $5,000 an ounce over the next few years, anyway, which I think it is, gold I think should at least be able to keep up in ratio terms. 70, 80, something, gold to silver ratio seems entirely reasonable to me, assuming we remain in a somewhat risk-averse environment.
But every time you get a breakthrough for silver, of which several we’ve alluded to in this podcast, you’ll see silver outperform and that ratio decline. And it’s my strong belief that if you wait a few years, the gold-silver ratio in fact is likely to be below 60. You can do the math, if you like. That is, gold is up several thousand dollars from here and the gold-silver ratio is down to 60 or below from here. And we’re talking about a triple-digit gold price at that point, easily. We’ve got a long way to go.
BS A triple-digit silver price, sorry, I think you mean.
JB Sorry. Yes, triple-digit silver price, indeed. Thank you.
BS Let’s hope not a triple-digit gold price. But I understand.
JB No, indeed.
BS We are running a bit late on time. But in terms of just one last thing to leave to our listeners and to our watchers, you have much more experience when it comes to precious metals than I. If there was one thing that you would tell a silver investor, one thing that they should always remember and one thing that you think maybe people don’t pay attention to nearly as much as they should, what would it be?
JB Look, even if you don’t have a strong view whether silver is over or undervalued vis-à-vis gold, the fact is, it is simply another metal. It’s another metal that has found demand for a variety of uses since the dawn of recorded history. If you therefore believe it’s legitimate to hold gold as part of a diversified portfolio, including of course, stocks, bonds and other more conventional investments, then there’s no reason not to also have a silver allocation.
The question then becomes, what should that allocation be? Again, if you don’t have a view, per se, then how do you come about solving for that? One way to do it is simply on a volatility-adjusted basis. If silver is two to three times more volatile than gold, then you want to have two to three times more gold in your portfolio than silver, other factors equal. And I frequently do advise people not to get too clever about something like this and simply to work with rules of thumb.
And therefore, you can make a very simple case that a conservative portfolio would be, say, three-quarters gold and one-quarter silver. And a more aggressive portfolio would be, say, something more along the lines of two-thirds gold, one-third silver. What I would not do for those who are not looking to speculate on silver, that is, just to regard it as definitely undervalued, definitely going to outperform on whatever time horizon someone has, I wouldn’t do a 50/50 allocation.
Only if you truly think silver is undervalued, should you move to a 50/50 allocation. Otherwise, gold should be the majority of your precious metals portfolio. In my opinion, that’s what history tells us. That’s what portfolio mathematics around diversification benefits tell us when you look at volatilities and look at correlations. Three-quarters gold and one-quarter silver being a conservative position. Two-thirds gold and one-third silver being a more aggressive position. Anything beyond that starts to look outright speculative pro silver for me.
BS John, this was a great conversation. Thanks so much for joining me.
JB Thank you, Boaz.
BS There you have it, folks. That was John Butler. I hope you enjoyed it. It was very interesting listening to his thoughts on how silver may be incorporated into our future lives, as well as, of course, what the silver price may be in the future when we see what happens with gold. If you’re interested in hearing more of his thoughts, do give his book a read, which is The Golden Revolution, Revisited. It’s a very interesting one.
It goes through monetary history and tries to take the lessons learnt from the past of monetary history and apply them to the future. That’s all for today. Hope you enjoyed it. I’ll see you in the next one.