Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 28th April 2011.

There's an old saying to the effect that the public will believe almost any bullish story as long as the price is rising. For example, as a result of the spectacular rise in the prices of tech and internet shares during the late 1990s, the investing public came to believe that traditional valuation metrics did not apply to these shares and that technology-driven increases in productivity would cause seemingly-crazy valuations to become even crazier over the decade ahead. For another example, when the oil price went parabolic during the final few months of 2007 and the first six months of 2008, the public got caught-up in the idea that the world was running out of oil even though the spectacular price rise was accompanied by an increase in oil supply relative to commercial demand. For a third example, one of the bullish stories that has recently been embraced in response to silver's massive price advance is that silver is all but guaranteed to make additional large price gains relative to gold because the world's aboveground silver supply is less than the world's aboveground gold supply.

As discussed in a very sensible article by Bob Moriarty at http://www.321gold.com/editorials/moriarty/moriarty042511.html, the assertion that the supply of silver is less than the supply of gold is probably way off the mark. In any case, arguing for silver over gold on the basis of the relative aboveground supplies of the two metals and/or the relative rarities of these metals in the ground misses the point.

Although there is probably a lot more aboveground silver in the world than gold, there is almost certainly a lot more aboveground gold in readily saleable form (bars, coins, 24-carat jewellery held for store-of-value purposes) than there is silver in similar form. In fact, there is a lot more gold in readily saleable form than there is any other commodity. So, if it's correct to argue that silver should continue rising against gold because there is less aboveground silver than gold in the world, then it is also correct to argue that every commodity known to man should rise against gold.

The aboveground supply of gold in readily saleable form is, today, vastly greater than the aboveground supply of any other commodity. This was also the case 10 years ago, and 20 years ago, and 30 years ago, and 40 years ago, etc. And yet, gold is the only major commodity to rise in price during each of the past 10 years, and, as evidenced by the performance of the gold/CRB ratio, gold has been in a very long-term upward trend against commodities in general since 1971. It is obvious, then, that there is a fatal flaw in the argument that gold should perform worse than other commodities due to its vastly greater aboveground supply.

To understand why gold's relatively large aboveground supply is not a negative you need to understand that there are certain characteristics a commodity must have in order to be highly successful in the role of money. Throughout much of recorded history both gold and silver possessed all of these characteristics, but there is now one important characteristic that gold possesses and silver does not. We are referring to the requirement that the amount of the commodity used in industrial/commercial applications be trivial compared to the amount of the commodity used as money (the general medium of exchange). This is to prevent large changes in industrial/commercial demand from causing large changes in money purchasing power.

Now, we aren't arguing that gold is money today (it isn't). Nor are we arguing that silver will not out-perform gold over the course of the long-term bull market that encompasses both gold and silver (we have always maintained that silver's reward potential was greater than gold's, but that the additional reward potential was offset by greater risk). What we are arguing is that gold is now a long way ahead of any other commodity (including silver) in terms of ability to fulfill the monetary role, an implication of which is that gold will very likely continue to out-perform silver by a wide margin during those periods when there is a surge in the demand for the safety/liquidity of "money" (2001-2003 and 2008, for example) and under-perform silver during those periods when there is a general shift towards riskier ventures.

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