The Baltic Dry Index, page-2

My apologies about the post yesterday. Those who read it would have no-doubt been left wondering why a post about the Baltic Dry Index didn't even include a chart of the relevant index.

My computer is the culprit here: it froze up just before I had finished the post, when I was about to add the charts and most of the links to the relevant sources. Anyway, I was left with the choice of either jettisoning the post, or just hitting the 'post' button, and I figured the latter was the least-worst option.

I'll give it another shot now. Here is the chart of the Baltic Dry Index, going back five years:



The index hit the high for the year on the 9th of May. Note that in each of the past five years, the index peaked in the second half of the year, between July and September, and this historical pattern would suggest that the cost of shipping will continue to increase over the next few months.

The correlation with the silver price is only evident over the very long term. This chart shows the long-term USD silver price and the Baltic Dry.


The evidence here suggests that the Baltic Dry is a lead indicator, which would make sense, as it would take time for the higher shipping costs to feed into a higher silver price.

The Baltic Dry Index only goes back so far, as it has only been continuously measured since 1985, however, I did find one research paper, published last year, that looked at bulk freight rates over a much longer time-frame.

This is the chart based on that research, which goes back to 1850:



There are two things about this chart that are particularly striking.

1) Note the huge spike in freight rates in WWI, peaking in 1919. Remember, the same year saw the gold/silver ratio plunge to 1:18.

2) Historically, extended periods of declining freight rates closely correlate with declines in the value of silver relative to gold. Over the past 150 years, there have been two extended phases during which silver lost its value relative to gold.

The first was the period from 1870 to around 1910. In 1870 one ounce of gold was worth around 15 ounces of silver, but by 1910, one ounce of gold would get you almonst 40 ounces of silver.

Note that the decline of the value of silver in relation to gold over that period occured against the backdrop of a significant decline in freight rates.

The second phase was from the mid-60s up until very recently, when the value of silver relative to gold gradually fell from around 27:1 in the mid 60s to around 85:1. Once again, freight rates were steadily falling over this time frame.

The reason I am highligting this is because a running question on these silver-related forums is why it is that the gold/silver ratio today is so 'out of whack' with the long term average.

What the chart above suggests is that the decline in shipping costs over the past 150 years has been a major factor in the decline in the value of silver relative to gold.

Incidently, this also explains why periods of war and instability tend to coincide with high silver prices: ship-owners are forced to puchase war-insurance and ships are forced to steer-clear of conflict zones which, which requires them to take longer, less efficient routes, all of which adds to the cost.

Currently, the terrible situation in Ukraine is already causing major disruptions to global shipping. Today, with Ukraine increasing looking like a quagmire, and escalating tensions between Russia and the west, you'd have to assume that this unfortunate situation is going to drag on for many months, resulting in higher shipping costs, and if so, a higher silver price is likely to follow.