We have something special this week: the open market value of
silver, compared to gold, over a period of over three centuries. The
location is London.
For a long time, silver and gold were, in a sense, two versions of
the same thing, just like one dollar bills and twenty dollar bills
are today. Their ratio of value was not perfectly stable, like the
20:1 ratio of $1 bills and $20 bills, but it was quite stable
between about 16:1 and 15:1. Both silver and gold served as metallic
money side-by-side, with silver used for small scale transactions
and gold for larger. You couldn't use just gold, because you can
only make a gold coin so small. Even a tenth-ounce gold coin, which
is a very small coin, would have a value today of about $160.
Remember that people were poorer then too. Just as $160 is "a lot
more money" in El Salvador today than the same $160 in San
Francisco, compared to prices and wages and so forth, a tenth-ounce
gold coin was "a lot more money" in those pre-industrial days than
it is today for us living in the U.S.
This 15:1 or 16:1 silver:gold ratio goes waaaay back, to Roman times
Even a tenth-ounce silver coin (roughly the U.S. silver dime) was
quite valuable in those days, worth about $10 in today's money.
($160 for a tenth-ounce gold coin and a 16:1 silver:gold ratio works
out to $10.) Thus, we move on to copper coins.
Over time, particularly in the 1870s, banknotes, token coins and
bank deposits replaced silver for small-scale use. You didn't need
silver dollars anymore, because you had a $1 paper dollar bill, and
you could redeem $20 of these paper banknotes for a gold coin
containing nearly one ounce of gold. Silver was "demonetized" in the
1870s. This was apparently something that humans just did
collectively. Governments had to follow along, with official policy
catching up to market reality. This was true even though some large
countries, notably India and China, remained on silver-only monetary
systems up through the early 20th century. Humans have always wanted
their money to be as definite as possible, so when "bimetallism" was
no longer needed for practical reasons, it was dropped. Silver coins
still existed, but they had become "token coins," just like our
coins today, whose value is related to their exchangeability for
paper dollars and so forth, not the market value of contained
Because of the "demonetization of silver" in the 1870s, silver is
not useful today as the basis of monetary systems, although it was
in the past. You would end up with the same problems that China had
in the 1870-1940 period.
Note how the "silver bubble" of 1980 barely even shows up on this
chart. The "spike" you see is actually in the late 1960s, when
silver gained quite a bit of value vs. gold. The reason for this, I
think, is that in the U.S. (and perhaps elsewhere), people were not
able to own gold bullion. It had been banned in 1933. However, they
could see that the U.S. government was on a path toward devaluation
and a floating currency, which indeed happened in 1971. You could
acquire silver coins like dimes and quarters, a perfect hedge. There
was no downside because you would buy the quarter for $0.25 and it
would always be worth at least $0.25. No risk! However, there was
the upside that the silver quarter would be worth more than $0.25 in
the future, which in fact was the case. Because of this, the value
of silver rose and the U.S. government discontinued silver coins in
1964. The production cost exceeded $0.25. Apparently the bull market
in silver continued a few more years, especially as devaluation
loomed. In 1974, it became possible for U.S. citizens to own gold
again, so there was less need for silver.
Today, nickels are in a situation similar to silver quarters in
1960. They will always be worth at least $0.05. However, today's
nickel (75% copper, 25% nickel) is actually worth a bit more than
$0.05 in metal value alone.
Including minting costs, the cost of production is more than $0.05.
Probably, the penny and nickel will be discontinued soon, or the
nickel will become a steel/zinc coin. So, you could hoard nickels,
and have all the upside of currency debasement with no real
downside. However, it is a lot harder to hoard nickels than silver
quarters, due to their very small value. Some financial
sophisticates have indeed hoarded millions of dollars of nickels,
but even for them it is more of a stunt than real investing I think.
But, maybe $10,000 of nickels? Could make sense for a small
The red line in the chart is a 16:1 silver:gold ratio, and the green
line is a 15:1 ratio.