Decoupling Gold, Silver Experts Reassess Old Axiom About Metal Prices Always Moving In Lock Step

Central banks are selling their stockpiles of gold all over the world.

The financial press has started to refer to gold as a “slacker” and “that sulking yellow metal.”

For centuries gold has been a standard by which monetary worth was measured. But now, some wonder if this precious metal has seen better days. And they wonder if there is a silver lining in this saga.

When gold dipped below $300 on Nov. 14 to a 14-year low, something unusual happened in the silver market. Instead of tagging along downward, silver took its own course toward higher selling prices.

Like a railroad car that no longer agreed with where the locomotive was going, silver, long known as “the poor man’s gold” decoupled for a ride on its own track.

“There’s a lot of evidence that there is a decoupling going on,” said Laura Skaer, executive director for the Northwest Mining Association.

Ted Kavanagh, a mining association trustee and a vice president at the Denver office of Republic National Bank of New York, said silver’s strong showing this week leads him to believe it has charted a new course.

“It had another very big day today,” Kavanagh said Friday, adding that silver touched $5.52 at one point, closing at $5.40. Gold was up $1.20, closing at $303.90. “If gold and silver were still moving together, gold would be selling at just under $400 right now.”

“The traditional thinking has always been that silver follows gold,” said Ron Nicklas, broker for Pennaluna & Co. in Coeur d’Alene. “That’s beginning to change.”

The gospel of supply and demand is behind the ups and downs.

Silver boosters have been predicting a rally for years, pointing to huge increases in consumption and warehouse inventories that have been shrinking by as much as 23 million ounces per year since 1993. Recent data from Comex, a commodities exchange market in New York, shows inventory at a 12-year low of less than 129 million ounces.

To illustrate how little above-ground silver remains on hand, Nicklas crunched some quick numbers on his calculator.

“Let’s say there’s 125 million ounces in Comex at an average of $5 an ounce,” he said. “For about $625 million, you could buy all the silver in the warehouse. There are guys who could write a check for that much,” he said.

“If gold prices stay in the tank, there’s no reason why silver should be dragged down,” said Peter Ward, a gold analyst with Lehman Brothers in New York.

According to Ward, a constant stream of sell-off news from central banks worldwide has flooded the market with gold that once backed foreign currencies.

On Oct. 24, the Swiss bank tripped up the metals market by announcing it might unload 1,400 tons of gold. Three months earlier, gold plunged almost $12 on the news that the Australian Reserve Bank had sold 167 tons - two-thirds of its inventory - in the previous months.

“If gold is no longer part of the monetary system, that inventory could come back into the market and crush it,” Ward said.

Kurt Hoffman, a mining consultant and Silver Valley deal-maker, counts gold out as a benchmark for the value of currency. “It’s not a monetary unit anymore,” he said. “It’s a metal used in jewelry.”

Skaer said, “With the stock market having such a long run, gold has lost the role given to it by the Rothschilds of Europe. Gold is no longer the ‘currency of choice.”’

It’s not central bank selling, but the financial sentiment accompanying it that bothers Mitchell Krebs, manager of investor relations and business development for Coeur d’Alene Mines.

Coeur operates three silver mines and four gold properties, with gold production contributing about two-thirds of company income.

“The central banks are saying that gold is no longer a good investment,” Krebs said. “Those comments are as damaging, or more damaging, than the selling itself.”

Whether it’s fundamental changes in supply and demand or philosophical differences over inherent worth, something has driven a wedge in the traditional relationship between gold and silver. Krebs cited year-to-date price comparisons to prove that point.

As of Wednesday, gold was off nearly 17.5 percent, while silver was up almost 9.5 percent this year.

“Talk about decoupling - that’s the best statistic I know of,” Krebs said.

The same data generated a new line of questions for Hecla Mining Co. officials who were in New York last week for annual meetings with investors and fund managers.

“At least half of them were talking about the decoupling of gold and silver,” said Vicki Veltkamp, director of public relations. “That’s contrary to tradition.”

Hecla would profit from a surge in either gold or silver prices, Veltkamp added, because production at its properties is split fairly evenly. From its mines, Hecla generates 20 percent of revenues from silver, 35 percent from gold and 45 percent from industrial minerals.

“Our production profile for silver has been increasing dramatically,” Veltkamp said. “We did 3 million ounces in 1996; we should do 5 million ounces this year and about 7.5 million ounces in 1998.”

Sunshine Mining has experienced a similar increase, with production climbing from a low of 1 million ounces of silver in 1995 to a projected 5.5 million ounces next year.

Like Sunshine Mining and the Coeur/Asarco partnership of Silver Valley Resources Corp., Hecla has been positioning for a silver comeback by turning out more of the metal at a lower cash cost per ounce.

In a week where gold fell below $300 and Pegasus Gold Corp. took a $353.3 million write-down on its Mt. Todd gold mine in Australia because weak prices outstripped potential profits, silver producers have caught the eye of investors.

“People who have lost interest in the gold market are looking for something else,” Veltkamp said last week between conferences with New York financial experts. “And that something else appears to be silver.”

, DataTimes ILLUSTRATION: 2 Color Photos; Graphic: Silver outshines gold prices

MEMO: This sidebar appeared with the story: A MOVING TARGET The gold-silver price ratio is not a magic number, but you wouldn’t know it by talking to investors. The idea that a specific mathematical correlation should exist between the precious metals started in the 18th Century, when Sir Isaac Newton divided the price of gold by the price of silver and thus touted a 16 to 1 ratio as the basis for coinage in Great Britain. In 1979, the Hunt brothers from Texas attempted to move the ratio back to what they believed was Newton’s “normal” level of 16 to 1 by investing everything they had, literally spending their way to the ratio they desired. They made it happen, but went bankrupt in the process. “It’s true that you can make your predictions on the gold-silver ratio become a self-fulfilling prophecy,” said Jeff Christian, managing director of the CPM Group, which analyzes precious metals trends. “But the problem is, look what it cost the Hunts.” Many investors still buy or sell based on the theory of an ideal ratio. Those who do take aim at a constantly moving target. The silver-gold ratio hit 100 to 1 during the ‘30s Depression and jumped sharply after the Hunt debacle in the 1980s. The ratio averaged about 80 to 1 from 1987 through late-‘97. Following the drop in gold prices and advances in silver the past few weeks, the ratio now is closer to 60 to 1. “That’s significant,” said Mitchell Krebs, manager of investor relations for Coeur d’Alene Mines. “It hasn’t happened in a very long time and it doesn’t happen very often.” -David Gunter