Shae Russell Interview Transcript
Speaker key:
BS Boaz Shoshan
SR Shae Russell
BS Hello and welcome to our Silver Symposium. In today’s video you’ll be seeing an interview I conducted with Shae Russell recently. Shae is the editor of The Daily Reckoning over in Australia. She works for one of our sister organisations out there and she’s been an observer and an investor in the monetary metal market for a very long time. I hope you enjoy this interview. As she was in Australia, the time zone is a bit funny and the video quality isn’t great. There were a couple of Internet issues, but I hope you’ll find it informative nonetheless.
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Shae, thank you so much for joining me today. It will be very interesting to have this discussion with silver with an Australian living in Australia as you guys do produce a huge amount of the stuff. Can you tell us how you first got into precious metals in general?
I always feel that Australians and Brits, while we have a lot of shared cultural similarities, when it comes to things like gold and silver because we barely have any gold or silver mines in the UK – we’ve only really got one and it’s not really producing anything and in fact, I think it’s listed in Australia anyway – we have quite a different relationship with gold and silver than you guys because you guys are a huge producer of both metals. What was it that first drew you to precious metals in general, and just tell us a bit about that?
SR Okay listen, before we do, we’ll have to come back to that point of Australians and their relationships with precious metals because I actually think it’s quite poor.
But to begin with, my history with precious metals actually began long ago when I was a teenager. I know it sounds crazy but in the mornings when I was in high school before I’d get ready for school, my dad and I were often up early. And this was back when you were allowed to smoke and he smoked in the house, so over a coffee and a ciggy in the morning my dad and I would just talk about life like just little conversations.
And I remember throughout these conversations, I remember once he mentioned that we don’t actually have money, we have something called fiat currency and that really landed with me. And over the next few weeks or days, I couldn’t even put a timeframe on it now it was so long ago, we started talking about how the monetary system used to be underpinned by gold.
So for me, this was actually timed quite well with my economic studies in high school at the time. I found it quite fascinating. So that was my first introduction to gold as money way back then and it was around my mid-20s that I started purchasing gold in very small amounts myself because my old man had taught me the value of saving money rather than fiat currency. But it was in my late 20s when I started working for a derivatives firm that I got quite into precious metals.
And not just buying a little bit of gold every now and then but actively trading it as well as increasing my physical ownership of precious metals. Because when I was looking at the charts I felt that there was something going on in the gold chart, that there was going to be a strong bull market coming. So this was when gold was trading at about US$600.
So I moved to precious metals because the understanding my old man gave me as a kid, but my absolute passion for gold came in around 2006/2007 when I started working for this derivatives firm. And in all honesty, I didn’t even look at silver until my late 20s when I was working at this derivatives firm. It was only when I started trading gold that I started looking at the opportunities in silver as well.
BS What kind of derivatives were being traded?
SR Our contracts were different. I worked for CMC Markets which I believe is based in the UK?
BS Yes, it is indeed. That’s an interesting quirk to it. With CMC then, and looking at gold so much, in terms of the volumes that were being traded, I presume similarly the amount of interest they were getting was much more on the gold side rather than silver or the other platinum group metal?
SR Yes, absolutely. Look, if memory serves, even then I don’t think a lot of investors were paying too much attention to gold until the very late stages of the gold bull market in 2010/2011. But even back then in 2007 and 2008, the volumes that I was seeing come through for a derivatives firm, they were mostly for high-net-worth clients, there weren’t really ordinary retail investors dabbling in the Gold Market back then. And that was when I realised there was this enormous opportunity that I didn’t think enough people were looking at.
BS Well, can you lead us further through that story then? Because of course after that time, the gold price did explode, what was it like for you actually looking at it through that light?
SR Well for Australians it was disappointing because as the gold price approached US$1,900 for the first time ever, our currency was ridiculously strong, so for us it didn’t really get over A$1,700. So for somebody who’d been buying gold for quite a long period of time up until then, for me, my gains are actually suppressed based in Aussie dollar terms. I’d effectively paid the same amount for gold as I’d been paying for the past few years just because the Aussie dollar continued to strengthen.
I think one of my favourite memories of that final stage of the bull market though was the general retail awareness that i saw amongst just ordinary investors. But by the late stages of the gold bull market, I was in investment writing. But it was the general awareness from retail investors that it wasn’t just a metal for cranks anymore because that is really how gold is looked at from an investment point of view. People started looking at the idea of having physical precious metals and it’s around this time, too, that I started accumulating silver around the time it peaked at $50 an ounce.
BS It’s very interesting, that issue with commodity currencies and buying commodities in commodity currencies. While of course you didn’t make quite as much of a gain as investors in other currencies would’ve made, you are still, for at least the Aussie dollar was as good as gold effectively for that period.
SR Look, it actually was and I think the upside was I was in the US for a few months at that time, too, so I wasn’t really complaining because for once Aussies were getting a better deal than the US.
BS Yes, I guess the issue with the very strong Aussie dollar during that period, you don’t have that problem quite so much at the moment, right?
SR No. And I think for me, too, the currency disparity we saw back then is very unusual and highly unlikely to be repeated, so for me it just reaffirmed that any money put into precious metals I consider a multidecade investment. So you don’t go put money into precious metals thinking you’re going to take it out a week later or a month later. It’s a multidecade investment, so every time the gold price rose in US dollars but declined in Aussie dollars, I just reminded myself that future me would thank me for this decision.
BS Yes, I always think it’s kind of a good thing in a way, that selling physical bullion. If you’re one of the people who does buy physical bullion, it’s actually quite hard to do and there are loads of additional costs. So you’re disincentivised from doing it which I think is kind of a good…
SR You certainly are.
BS Yes, it pushes you towards that longer term mindset. If we could just tie back to what you said earlier where you said the relationship between Aussies and precious metals was quite poor. Could you expand on that?
SR Yes, certainly. My best estimate of the number of Australians who own any precious metals would be maybe 1% of the adult population. Where, as you mentioned before, we are literally full of gold and, if you let me bore you at any other time, I don’t think we’ve even seen the true potential of the amount of gold Australia actually has.
But hardly any Aussies know about it, they don’t know what to do with it, they also don’t understand why they’d risk putting their money in there when they could just buy houses or put cash in the bank. So even though we have this enormous wealth trapped underground, they don’t really have any interest in accessing it. I think that will change. I think this bull market will be a lot different to the 2000s bull market, it’s not a curiosity any more, where I am seeing more awareness come through in just mainstream people.
Just two days ago, I had a friend of mine who works in the circus, of all things, and he messaged me and said, oh, the owner of the circus wants to buy gold, how do we start to do it? Now, this is a person who doesn’t own a house obviously because they’re travelling but they’ve now realised that they want to save money a different way from cash. So for somebody so outside the financial system to want to do this, I think that’s how we know that gold is getting more reach.
And so I believe this time around, I believe, I’m hopeful, that Australians’ relationship with gold will change. Just anecdotally on that, back in the 1980s, the average, high-net-worth investors had about 3% of their wealth in gold, globally speaking, and I think now it’s sitting down at about 1%. So even though Australians still don’t have that strong relationship with gold, globally that strong relationship isn’t there either but there is hopefully room for it to increase.
BS Yes, there’s a good chart of the value of gold, well just precious metals, ETFs in general, and then as a value of all of the stock market ETFs there are out there and it’s quite an interesting illustration. Of course, there’s lots of things to be aware of because of course the growth in ETFs, in general, has been really quite a recent phenomenon.
But if you look at where it was in say 2011, it’s still significantly higher than it was now even when we have gold ETFs having every week almost there’s a new record in the total amount of gold that’s held by these things. So it does seem like there’s a lot more to go.
But on silver then, so it does seem like this is very much forgotten somewhat by the average Joe to some degree, maybe misunderstood. How is it that you actually see silver? Because it seems everyone has their own kind of definition for it. Some of those are very similar to each other because some people just say it’s the high beta gold, but what’s your take on it?
SR This is where I’m probably going to sound like I’m contradicting myself for the rest of the interview. I’ll be honest, obviously I’m an investor in precious metals, but I’m physically heavy on silver as opposed to gold and that’s because, historically speaking, silver has, from a percentage gain point of view, outperformed gold many times throughout the past couple of decades.
However, in saying that, because it is a commodity at the same time as it is a precious metal, that will crimp any gains going forward. Nonetheless, this is where there’s going to be lots of contradictions, I do believe there are extraordinary opportunities in silver and as a result, I actually buy my kids silver every year. I let them pick a couple of coins and then I buy the kilobars as a physical investment instead of buying them gold as a gift, as their future investment.
So, as I said, I believe the gains will be kept on silver eventually because it is a commodity, but also, too, I think the opportunity there is extraordinary.
BS Could you expand on that a bit for us? Because there is that interest in precious metal commodity mix, it’s like silver is a bit of a Gryphon kind of investment where it’s one thing and it’s another thing at the same time.
From my side, it feels almost like if we are entering a world now where it’s really growth at any cost, and it’s not just being pursued by some banks but it’s being pursued by governments as well. It seems perfect for having a precious metal element at the same time as having an actual use as a commodity because I think commodities, in general, will probably get a bit of warmth.
But expand on what you see as being the big sort of bullish catalyst also as we’re going forward?
SR All right, so stop me if you find I’m going off-track and just giving you random facts because I do get really excited about the long-term forecast for silver and there’s lots of things driving its future demand. At the same time, that future demand could potentially suppress these enormous gappings.
Look, simply put, I do think silver is well and truly undervalued for what it is. We’ve seen enormous gains in the gold price. Aside from a few months earlier, silver really did lag behind, it was only in the middle of the year that the silver gains caught up. Some people put some of these gains, the reason why silver jumped forward, is because it’s the end of the JP Morgan suppressing the price of silver. I don’t want to go into conspiracy theories but I do know a lot of people put some weight on that.
I do believe that we are going to see silver increase in strength over the next 12 months. I wouldn’t be surprised to see it hit $50 an ounce within 12 months, I think that’s entirely possible. And I also think, at the same time, we’ll be looking at a fairly normal-ish silver-to-gold ratio of around 80/90, so the gold price will be fairly elevated as well.
The problem is for silver, it’s a supply and demand problem. Supply of silver is actually decreasing, so from on the supply side of things, global output is down at 5% out of silver mines in the last decade, so that is significant. But not only that, all grades are significantly falling and it’s costing more to get less out of the ground. Compounding that is silver is really a by-product of base metals, and again that’s another conversation that we might need to have.
But silver comes out with copper, it comes out with nickel, it comes out with lead, it comes out with zinc, so we need base metal mines to be operating in order to extract that silver, so that’s the supply side of things.
On the demand side of things, there is enormous growth for silver, so a physical investment demand for silver in the last decade is 10%. In photovoltaics, that’s up nearly 7% or 8% in a decade as well and these are enormous drivers of the demand for silver as a commodity.
The other thing, too, is silver is very important in our Internet of Things future. It’s in every single electronic device that you touch, it’s in the lights, it’s in your computers, it’s in your smartwatch, so our modern devices can’t be made without silver. But adding to the Internet of Things, this is where the use of silver becomes further important because it’s basically being used to coat copper cables and that’s because silver is also a superior electrical conductor.
So basically as we need to transmit more and more information digitally, silver can help enhance in that message. So silver is needed at almost every point down our tech future road. We can’t escape its need and it’s this increasing demand for silver that I actually believe will weigh on the price.
Because one of the things we’ve seen historically is that as silver demand increases, more scrap silver comes out of the woodwork and we actually start recycling more scrap silver rather than worrying about mine supply. So this is where it’s going to be a very tricky balance for silver once it gets to a certain point because it can’t get too expensive because we need it in so many things. But the free market, the more you need something generally the higher the price is going to go.
BS Do you worry at all with the substitution of silver or simply it being used in lower quantities in electronics? Which of those dynamics do you think arrives first? Do you just get the higher price first and that’s when recycling kicks in or do you get the higher price first and then industry starts finding ways of using less and less of it?
In your view going forward, what do you think we’ll see first? Do you think we’ll just see the higher price and then would see the scrap arrive through the market? Or do you think that having the higher price for a while is going to really help some of these mines that have been really badly punished over the last few years and that might help them a bit? Can you describe your outlook for it?
SR Look, I think it’s going to be a slow burn and one of the things with the silver prices, it’s really only had short, sharp peaks that has got everybody excited and then it sort of dived off. Miners don’t worry about something that’s happened inside six months. If something’s taken 300 million years to form, they’re not worried about three months’ worth of price action.
So I think when we see these short, sharp price rallies it’s not going to hurt silver demand in electronics. I think sustained high prices for silver will be an impact. When we’re starting to see a silver price that is maintained at say $50 an ounce, that’s when our electronics devices, for example, they’re likely to turn to the scrap market.
So when silver has a sustained period of high prices, and again 2009/2010 is a good example of this, it took nearly 12 months. But that was when it started to draw scrap silver out of the market and that started moving into electronics and it filled that supply gap.
So I think when we see sustained high prices, that will suck the scrap out of the market. I think it would encourage a lot of base metal miners, too, if they’re getting higher cost per ounce for essentially a by-product then that offsets the lower quality copper that they might be getting at a lower price, they might be getting for lead or nickel or zinc. I do think though it will encourage, the higher the prices go and obviously there’s only so much scrap the people are willing to part with, I think there could be a great recycling market that actually does come up.
But also, too, the higher prices go, the more likely we are to see substitution. I don’t know if that will affect quality. So much of our lives rely on a strong digital signal that we can’t sacrifice that quality, but I do think that substitution will come into play or we’ll get better at using what we’ve got.
BS It is very interesting to me that the manner in which silver scrap and silver recycling can arrive at the right price ultimately. Like with gold, for example, it’s quite well known just the manner in which how much gold is out there because it very rarely gets actually destroyed. And the manner in which jewellery can end up being melted down for bars and bullion and vice versa depending on the price action.
But from my perspective, it seems the recycling and the scrap market for silver is a lot different. It does seem like a lot of silver does get destroyed or is somehow irretrievable after it’s been used in various bits of tech because with the low silver price and even with a high silver price, some scrap is really hard to retrieve. How big do you actually think that supply could be that comes to market with a high silver price, or do we even know how big that recycling supply, that scrap supply could be?
SR The scrap silver market now is about one-fifth of total supply as it stands. Back in 2010, the example I gave to you, it was about a quarter of supply back then, so back when the price was elevated it managed to suck out 200 million ounces. If we wanted to get to that sort of level again, I wouldn’t be surprised to see that the silver price had to be consistently around US$50-$60 per ounce.
However, as you did mention, getting silver out of electronics is actually a labour-intensive business. So for that to be a viable way to continually access silver and also to incentivise people to scrap their silver properly or hand in their electronic devices, we need elevated silver prices to do that. Because otherwise why bung them for $30? Again, incentive isn’t there to do it.
It might be a little bit bold of me but I think we will see silver over $100 per ounce this decade and I think that will be the drawcard that sees us having a reliable scrap market that doesn’t see us relying on a mine production as much.
BS If we do imagine a $100 silver price, what in that scenario is the price of gold would you say? Because some people think the gold/silver ratio is something that will stay fixed and will just see much higher gold prices and much higher silver prices. In theory, it could be at $100 silver and then, at the same time, $1,900 gold. What do you think would drive that silver price so high? And would it be silver supply squeeze or would it be more of the monetary dynamic?
SR Actually, I think it might be a combination of both and I think it will be a case of leapfrogging each other of which one’s in play. So we’ll first start with that, yes, I think that’s exactly what we’re going to see, it’ll be a case of both impacting the silver price. But when we wanted to get to where the gold price will be, if we took today’s gold price ratio, $100 silver price per ounce would mean that gold based on today’s silver ratio if you follow it closely would be around $8,000 an ounce. I think that’s a conservative figure for gold.
I maybe have been working on say general cards a bit too long, I think we’ll be easily looking at gold, in US dollar terms, over $10,000 per ounce even upwards to $15,000 per ounce by the mid to late part of the 2020s. And I do think we’re going to see a decoupling of the gold/silver ratio, that I don’t think a gold/silver ratio of 30 or 40 is what we’re going to go back to. I actually think, going forward, because of the commodity-based demand driving silver, I think we’re going to see a higher gold/silver ratio of 90/100 be the norm for the later half of this decade.
BS Well we’ve got a lot we could unpack there, that it does seem to me the gold/silver ratio, when people look at historical averages, it doesn’t strike me as quite so compelling as it could be. Because of course, as you described, with silver being mined as a by-product of base metals, it’s hard to imagine the silver price driving most of the supply to the market in a manner that would create a reflexive relationship between gold and silver. But of course, that’s an incredibly strong bullish claim on gold there.
SR Isn’t it? I know.
BS It would be remiss of me not to ask what do you think it is that could make gold get a US$10,000, even US$15,000 per ounce?
SR Again, that’s only five or six times higher gold’s price today and the reason why I say that is back in 1971 gold was US$31-$32 per ounce. By the end of that decade, it was $800 per ounce. There is not one single person in 1971 that said that was going to happen. It seemed unfathomable at the time, it just didn’t seem possible.
So I’m not putting $10,000, $15,000 an ounce to say that I’m the person who called that happening, it’s more a case of be prepared for the unpredictable because I don’t think we can actually predict where the gold price is going to end up. I think we might find out that my estimate is conservative. I just think it’s impossible to imagine that right now.
And my real reason for those prices going so high, it really does stem from the utter senseless and unending quantitative easing monetary and fiscal stimulus we’re seeing from governments around the world. We’re in a giant monetary experiment. We’ve decoupled from sound money, we’re moving into Modern Monetary Theory which isn’t my expertise. But governments are continually finding new ways to essentially add zeros into the monetary system, into the credit system, and I do think all of that will be very good for gold.
BS On that note, when you’re looking for really quite rapid advances, so if we’re talking about getting to $10,000 gold and of course sharp advances in silver as well. And that’s over the next decade so this is a never-before-seen sort of dynamic when it comes to bullion prices in fiat dollars ultimately.
What do you see as the big catalyst for that? Because I know a lot of people think of a grand reset. A lot of people look at Modern Monetary Theory and the sort of institutional adoption of Modern Monetary Theory. What for you is what will really hammer home that advance over the next decade?
SR I don’t actually think there’ll be one catalyst for it. One of the things I noticed in the last gold bull market was it was really just a slow creep. You didn’t suddenly wake up and it was $1,900 per ounce. That mania really only happened in the last eight months of the gold bull market. But there was this very steady rise from 2002 all the way into 2010. The gold price really just chugged along in the background on what was happening around the world.
I don’t think there will be one catalyst. I think that everything that I just mentioned and you just mentioned will just sort of meld together and drive more people to the metal.
I don’t think it will be a monetary reset. I know we do use that word. I know it’s being used at the moment. I don’t think that will be the decider of okay, now we’ve got an explosive gold price. I think by the time there is some sort of maybe a currency rerating, currency revaluing, that the gold price will already be elevated. It will simply be a case of matching a currency to the true value of the gold price at the time.
But we’re talking about something that’s really long term. We’re talking a five, a seven, ten-year time frame here, so I do think it will take a long time to play out.
BS Now moving somewhat or just changing the perspective of the conversation on to silver a bit more. Because of course, in such an environment it’s hard for me to imagine people seeing gold move so much, and not at the same time that the average punter or the everyman who sees this as too expensive. Not thinking, hey, silver has got to absorb some of that.
How do you think people’s perception of silver will change in the future? Because it’s something I’ve asked a few of our guests. After the demonetisation of silver, silver doesn’t have that institutional still sort of shimmer of monetisation where central banks are owning it and trading it, and increasing and decreasing their reserves. And it’s not being trapped within China the same way gold is where they’re just increasing their supply and they’re not letting any of it leave.
So silver, after its demonetisation, it’s still of course being used in industry but its monetary aspect, it’s almost part of our imagination. It doesn’t have an actual relationship to money supply in the same way that it ever did for millennia beforehand that it did.
It doesn’t have that any more, it’s completely untethered from that, and so it’s very interesting for me as a sort of mind experiment, but what will silver be in the future? What will we think of it as? Will it just become more of a commodity and we’ll just think of it much more of as maybe the thing that’s just lining all of our wires in the future? How do you think in general people and investors will see silver in the future?
SR Look, this is a really good question. At the moment, I’m coming at it from such a commodity point of view because I’m seeing its increasing demand in electronics and there’s no way of getting rid of it. And I say that as somebody, as I mentioned before, I’m very heavy physical silver. I have a lot of my wealth in silver as well. I think it will always have value. Even copper, you could buy a pound of copper and that’s still technically an asset just as well, it’s just silver has more so.
I think the ongoing demand for silver will crimp its importance as a monetary asset. Now I do say that with utter caution so the only thing that are worse than gold bugs are silver bugs. I’ve seen this in action myself. I’ve been to a couple of silver events and they are very proud, they’re very protective, and they will tell you all the stories you want about the Hunt brothers and how much undervalued silver is.
So I do understand how what I’m saying may upset that very small group of people but I just at the moment I think silver is going to be a very important commodity in our future so it will further decouple from money. And it has been doing that throughout history, the more abundant gold became the less we relied on silver, the more we valued gold over silver. We still accepted silver but we certainly preferred the gold and I think that trend is going to continue forward.
As I said before I made that bold call, to my detriment perhaps, that I do think silver will be over $100 per ounce at some point in the future. But that’s where I think we’re going to see any real gains in silver be crimped because we rely on it for technology essentially.
BS Yes, that’s very interesting. It’s both optimistic and pessimistic for stock in general.
SR It is.
BS It’s sort of a victim of its own success I suppose in that scenario. As you described you do see silver being used in technology much more and people have become much more aware of it and that silver is used in all manner of our modern technological lives effectively.
But in future, if this becomes even more present and at the same time supply squeezes in it take up more of the news and it becomes more spoken about regardless of what its price does, do you think that exposure will get it some kind of maybe not institutional but larger money being attracted to it when it comes to mining? And when it comes to the bullion just from a portfolio allocation perspective simply because there’s much more awareness of it than there was previously?
SR I wouldn’t be surprised to see companies investing heavily in an efficient scrap market. That’s where, as I said, a crucial supply of silver comes from right now and especially with all grades falling and obviously because of how they’re tied to base metals. I think smart money would be looking at companies that are extracting silver economically whether that’s from the mine or if it’s from companies that have got great strip methods.
A decade ago when copper went through the roof, I don’t know what you call them in the UK but we’ve got electricians here, we call them sparkies. They were basically taking the scrap copper home, stripping the rubber coating off it and then taking it to the local scrapyard and walking away with hundreds of dollars.
I wouldn’t be surprised to see institutional money look at ways of protecting the scrap silver market or investing in mines with really high-quality oil grade. But as I said earlier, that’s depleting so those are far and few in between. They would really be the only reasons I would see big money move into the silver market and that’s because of its use in technology.
BS I guess in that sort of investment perspective, you’re effectively looking at it as almost like a rent extraction business that you can find. There is that supply and through good refinement or get through good other extracting method, you can extract some rent from that. And in a world where returns are going lower and lower on safer investments, it’s the kind of thing you can easily imagine a private equity firm specialising in.
When it comes to the silver bullion side then, I’m interested to hear what you make of it? With the rise of apps like Robinhood, we didn’t even have Robinhood in the UK. And yet I end up writing about it a lot just because it’s such a fascinating development of where all this fast money, this millennial money, just ends up getting thrown in and these big hedge funds like Citadel are frontrunning all of the kids.
But when it comes to just how fast some money has moved around into whatever the flavour of the month is for whatever tech stock or bankrupt stock, as it may be, do you think that it’s almost like social media money or just the strength of narratives drawing capital into various investments? Do you think that will end up getting directed at silver at some point in the future where silver will just be this thing that everyone needs to own for a while?
SR I actually do. As I said, this has been a whole interview of contradictions. I actually do. I think in the short term we’re going to see more investors move to silver because I don’t think I’m talking about anything that’s a well-kept secret. The industry is well aware of the coming mismatch but also, too, you made the comment about millennial money which I really like by the way, I’m going to use that in my own writing.
Silver is cheaper. So when we talk about precious metals, a lot of people freak out of the idea of swapping $2,000 or in Australian money it’s nearly $3,000 these days for one ounce of gold. Now one ounce of gold is tiny, so you can feel a little bit ripped off. So I do think in the very short term and over the medium term that we are going to see that Robinhood market pull people towards silver because it’s cheap and it is also, too, a way to familiarise yourself with precious metals. And I think that will see a lot of new money move into the silver market in the short term.
BS And there’s one thing, you spoke earlier about the gold/silver ratio and how it might get almost rebased, there would be a new normal for the gold/silver ratio. The gold/silver ratio, everyone’s got their own take on it, but when you’re thinking of that with silver becoming much more of an industrial commodity, do you have a ratio in your mind when you’re thinking of that?
SR I do, and I think I might be at risk of alienating everybody. I actually think we’re going to see a gold/silver ratio of over 100 as the new normal. Again, not right now, I’m talking a mid-decade new normal. In saying that, I do think there will be dips back down to 40 to 35, but I think that will be a once-off and then as the gold price continues to rise I do actually think it’s going to leave silver’s gains in its dust.
But over the long term, we will be looking at a gold/silver ratio over 100. Maybe it will oscillate between 90 to 110 as sort of a going forward, a normal level, but I do think we’re seeing a rerating of it.
If you look back through history, it’s interesting, one of the things that everybody seems to think that when Newton came up with the gold-to-silver ratio that 16 would be the normal. But then you look at the Bretton Woods Agreement and the average is anything between 35 and 45 I think it is, and then post 1970s when gold was decoupled from the US dollar, we ended up looking at a much higher average of around 70/80.
So I do think there is this continual ongoing rerating of what silver is worth compared to gold and that’s why I’ve presented the idea that a gold-to-silver ratio over 100 is probably going to be a new normal.
BS That’s really interesting because most of the time when people want to talk about the gold/silver ratio in general, it means that they generally are already very into precious metals and they want to make an argument that this is out of whack. But it’s out of whack and it’s going to go back down, right, so it’s fascinating to find somebody who is talking about the gold/silver ratio but actually talking about it going the other way.
It’s of a contrarian view ultimately but you make a great argument for that. If gold is the asset that everyone is treating as a monetary asset, it seems almost that gold’s industrial capacity, which it does have but it’s very small, it’s only going to get smaller when it’s got a higher price and that’s all being driven from the monetary side. So I guess in this view, gold is just becoming much more of a monetary asset than it was and silver is becoming much more of an industrial commodity than it was, am I reading that right?
SR You certainly are and, as I said, I write to a lot of silver bugs each day and I just know the hate mail that I’ll get as I continue to bring up this topic. It is definitely a contrarian view. It doesn’t necessarily mean I’m right, it’s just based on my own analysis of where I think silver is going and silver’s importance.
And again I just want to reiterate I am very heavy physical silver, so it’s not that I’m doing this to bite my own foot. I am using silver to increase my allocations for gold going forward and take advantage of short-term volatility in the gold/silver ratio. But long term I look to only be holding really nice numismatic silver coins as opposed to chunky bullion bars.
BS Now we are getting on for time somewhat, but just in terms of what you think, what do you think is often overlooked on silver? Because silver is somewhat already an overlooked metal, but for silver investors, what do you think that is often overlooked about it in general other than what we’ve already spoken about when it comes to the industrial usage and the like? Is there anything that you would say to somebody who is new to silver, something that they should know which is rarely written?
SR Oh, silver is boring until it’s not, then it’s absolutely explosive and then it goes back to boring again. This is the problem with silver, you buy it and it does nothing for a very long period of time and that’s in comparison for gold which has these incredible wild price swings. Owning gold is exciting. Owning silver is boring.
The thing is then when we saw back in June and July, silver rallied something crazy like 20% in seven days. That’s quite normal for silver to do that so this is one of the things that I think is overlooked when it comes to silver. When you buy silver you need to be prepared to have a long wait to see those incredibly explosive gains, and they will come, it does happen. It’s just they’re unpredictable.
The only thing that’s predictable about them is that they take a long time to come, so that would be my suggestion, too, my sort of unique insight, is that silver does get exciting, it’s just not as exciting as gold.
BS So when you’re waiting for the excitement it’s good to buy it outside of the exciting areas and just to go for it when it’s much more calm?
SR Yes, pretty much. If you see silver going straight up in parabolic line on a silver chart, that’s not the time to buy. It will likely fall not long after it’s done that big shoot up.
BS And just one last thing, Shae, in terms of course with Australia being such a big commodity exporter, we’ve seen just from Covid, sort of the fallout from it, it’s messed around with a lot of solid supply and demand for all manner of things. Australia is a huge gold exporter. It does export a fair amount of silver as well. It’s maybe not as much as Mexico or Peru or anything but there is a fair amount of silver coming out of Australia.
It seems there’s a lot of strain when it comes to globalisation in general, the Second Cold War we’re in now and then, at the same time, we have these shutdowns of supply chains and things like that. And it makes me think that, especially for someone in the UK, this is a gold bullion, silver bullion, this is a very much a globalisation heavy asset in general. Because in the UK we don’t really have all that much of it and we have to rely on an awful lot of refinement and mining going on elsewhere to get any of these bars into vaults or anything like that.
So just on that kind of note, when you’re looking at Australia’s role in commodities and also just in terms of gold, do you think that this is going to get really disrupted in the future? Or do you think there’s just going to be new methods of shipping this product out of Australia and into all of the buyers’ hands?
SR Oh, that’s an interesting question. You’re referring to that mayhem in March where we couldn’t get the gold to settle at COMEX, aren’t you? Incidentally, Australia played quite an important role there. Just as an example, we couldn’t get the gold from South Africa to get it refined in Switzerland to get it to London to deliver to COMEX to settle bars good for delivery.
And I think gold for a very long time, in particular, has operated on a 48-hour supply chain and it’s been incredible that we’ve been able to do that. Based on my contacts of our two LBMA refineries here, we’re seeing a lot of precious metals shipping to the US now directly rather than going via the chain that it used to go simply because they don’t want that happening again. The arbitrage opportunities that presented themselves back in March. I don’t think any futures firm ever want to see that again which is unfortunate for the rest of us.
So I think going forward Australia is going to play a very important role in refining and settling goods for delivery over at COMEX in particular. Eventually, though we have a habit of we get lazy and we forget what problems are. So while right now we’re all worried about having a repeat of March, I wouldn’t be surprised if at some point we all get a little bit comfortable with how the supply chains are working. And think we can go back to the on-demand 48-hour gold, you know, refine, chip it out, deliver it method.
But I do think Australia’s position on this has certainly increased. I know it’s been very good for our two major LBMA refineries and to the point where silver demand in Australia, in particular, is actually quite hard to get at the moment. And it’s simply because it’s not that we’ve got a shortage of silver, I don’t want that to be how this conversation ends, it’s just that the machines can’t keep up with the internal silver demand as well as the external silver demand.
BS It does seem like an interesting dynamic. It has the shutdown in March and all of the associated mine closures, refinery closures, they seem to have revealed an awful lot about the industry that probably the industry didn’t really want us to know. It feels like it’s shown a lot of the weak spots and how that might change in future. But Shae, I think we have reached the end of our time here. Thank you so much for joining me. This has been a very stimulating conversation indeed.
SR No worries. Thank you very much for having me.
BS Well there you have it, folks, that was Shae Russell. I hope the internet quality wasn’t too bad for you there. It was very interesting listening to Shae’s thoughts on the gold/silver ratio, kind of a controversial topic depending on who you speak to, and of course how renewable energy is going to play into the silver story in the years to come. But I hope you enjoyed it and I hope you will tune in for the next one.